Advanced Auditing Final Exam
Course Introduction
Advanced Auditing is a comprehensive course that delves into the principles, techniques, and challenges of modern auditing beyond the introductory level. It covers advanced topics such as risk-based auditing, internal controls, audit evidence, fraud detection, audit sampling, and the integration of information technology in the audit process. The course also addresses current issues in regulatory environments, ethical considerations, and the practical application of International Standards on Auditing (ISAs). Through case studies and real-world scenarios, students will develop critical thinking and analytical skills required to conduct complex audits and deliver high-quality assurance services in diverse business contexts.
Recommended Textbook
Auditing and Assurance Services 5th Edition by Timothy J. Louwers
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Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) Expanded scope governmental auditing includes economy and efficiency and program results audits.
A)True
B)False
Answer: True
Q2) ______________________________________ is an auditor's tendency not to believe management assertions.
Answer: Professional skepticism
Q3) The PCAOB assertions made by management in financial statements do not include A) Existence.
B) Compliance.
C) Completeness.
D) Presentation.
Answer: B
Q4) The AICPA licenses CPAs to practice in the United States.
A)True
B)False
Answer: False
Q5) What are the four basic requirements for becoming a CPA?
Answer: Education,the CPA Examination,experience,and a state certificate.
Page 3
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Chapter 2: Professional Standards
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Sample Questions
Q1) Which of the following statements describes an appropriate relationship with respect to the reliability of audit evidence?
A) Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities.
B) Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers.
C) A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.
D) Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.
Answer: C
Q2) Evidence is considered appropriate when it is both valid and relevant.
A)True
B)False
Answer: True
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Chapter 3: Engagement Planning
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Sample Questions
Q1) The Code of Professional Conduct permits predecessor auditors to give information to the auditors without client consent.
A)True
B)False
Answer: False
Q2) When auditing the existence assertion for an asset,auditors proceed from the
A) Financial statement amounts back to the potentially unrecorded items.
B) Potentially unrecorded items forward to the financial statement amounts.
C) General ledger back to the supporting original transaction documents.
D) Supporting original transaction documents to the general ledger.
Answer: C
Q3) For continuing audits,specific information about the client is available in ____________________________________________________.
Answer: prior audit documentation
Q4) Auditors usually prepare an audit plan summarizing the preliminary analytical review and the materiality assessment.
A)True
B)False
Answer: False
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Chapter 4: Management Fraud and Audit Risk
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Q1) In the audit risk model,if an audit team wanted to keep audit risk at a low level but there was a great inherent risk of material misstatement and the internal control was ineffective,then procedures would need to be designed so that
A) Detection risk was at a low level.
B) Detection risk was at a high level.
C) Control risk was at a low level.
D) Inherent risk was at a high level.
Q2) The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is
A) Audit risk.
B) Inherent risk.
C) Control risk.
D) Detection risk.
Q3) _______________________________________ is the probability that material misstatements have occurred in transactions entering the accounting system.
Q4) Audit risk can be expressed in the following model: Audit risk = _____________________________ x
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Q1) Assessing control risk at below the maximum level most likely would involve
A) Performing more extensive substantive tests with larger sample sizes than originally planned.
B) Reducing inherent risk for most of the assertions relevant to significant account balances.
C) Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.
D) Identifying specific internal control activities that are relevant to specific financial statement assertions.
Q2) Auditors of public companies do not need to determine the quality of a client's internal control; they need to know only enough to plan the audit work.
A)True
B)False
Q3) The appropriate separation of duties does not include
A) Having authorization to execute transactions.
B) Recording transactions.
C) Having custody of assets involved in the transactions.
D) Preparing data.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) The auditors' information source for vouching the bank reconciliation items is the
A) Standard bank confirmation.
B) Bank statement at audit date.
C) Cutoff bank statement.
D) Accounting journal at year end.
Q2) Employee fraud generally involves people at the top executive level.
A)True
B)False
Q3) It is not necessary to send confirmations on accounts that a company represents as closed during the year to get the bank to confirm zero balances.
A)True
B)False
Q4) A code of ethics is an important element of a fraud prevention program.Which of the following would diminish the effectiveness of a company's code of conduct?
A) The establishment of a chief ethics officer.
B) The establishment of a hot line for reporting unethical behavior.
C) The violation of the code of ethics by senior management.
D) The posting of the code of ethics in the company workplace.
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Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) Custody of inventory is transferred to the shipping area upon authorization of
A) The customer order.
B) The shipping order.
C) The invoice.
D) The purchase order.
Q2) Cash receipts from sales on account have been misappropriated.Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
A) Understating the sales journal.
B) Overstating the accounts receivable control account.
C) Overstating the accounts receivable subsidiary ledger.
D) Understating the cash receipts journal.
Q3) Confirmation of individual accounts receivable balances directly with debtors will,of itself,normally provide the strongest evidence concerning the
A) Collectability of the balances confirmed.
B) Ownership of the balances confirmed.
C) Existence of the balances confirmed.
D) Internal control over balances confirmed.
Q4) What is dual direction testing?
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Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) The _____________________________________ inspects the goods received for _____________________________ and _____________________________ and then puts them in the hands of other responsible persons.
Q2) Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of
A) Clock cards.
B) The voucher system.
C) Cash in bank.
D) Accrued payroll.
Q3) Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?
A) Legal expense.
B) Miscellaneous expense.
C) Repairs and Maintenance.
D) Payroll expense.
Q4) Explain why auditors must put more emphasis on the completeness and obligation assertion when auditing payables and contrast this with the audit of asset accounts.
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Chapter 9: Production Cycle
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Sample Questions
Q1) Prepare an audit plan for the observation of an inventory count.
Q2) A retailer's physical count of inventory was higher than that shown by the perpetual records.Which of the following could explain the difference?
A) Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets.
B) Credit memos for several items returned by customers had not been recorded.
C) No journal entry had been made on the retailer's books for several items returned to its suppliers.
D) An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
Q3) An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and A) Trace additions to the general ledger.
B) Vouch additions to receiving reports.
C) Vouch additions to sales invoices.
D) Trace receipts to receiving reports.
Q4) Prepare an audit plan for inventory pricing and compilation.
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11
Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) In connection with the audit of an issue of long-term bonds payable,the audit team should
A) Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond.
B) Calculate the effective interest rate to see if it is substantially the same as the rates for similar issues.
C) Decide whether the bond issue was made without violating state or local law.
D) Ascertain that the client has obtained the opinion of counsel on the legality of the issue.
Q2) Loan covenants
A) Describe the collateral of the loan.
B) Require the borrower to maintain certain financial characteristics.
C) Describe the lender's responsibilities.
D) Include all the above.
Q3) All corporate capital stock transactions should ultimately be traced to the
A) Minutes of the meetings of the board of directors.
B) Cash receipts journal.
C) Cash disbursements journal.
D) Numbered stock certificates.
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Chapter 11: Completing the Audit
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Sample Questions
Q1) Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern:
A) Default on a loan due in the previous year.
B) Failure to meet forecasted earnings per share.
C) Legal proceedings that may have a significant negative impact on the entity.
D) Negative cash flow from operations for each of the last three years.
Q2) A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation.This review usually focuses on
A) The fair presentation of the financial statements in conformity with GAAP.
B) Irregularities involving the client's management and its employees.
C) The materiality of the adjusting entries proposed by the audit staff.
D) The communication of internal control deficiencies to the client's audit committee (or those charged with governance).
Q3) Interim testing is ordinarily done prior to the date of the financial statements.
A)True
B)False
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Chapter 12: Reports on Audited Financial Statements
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Q1) The auditors conclude that an entity's illegal act,which has a material effect on the financial statements,has not been properly accounted for or disclosed.Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements,the auditors should express either a(n)
A) Adverse opinion or a disclaimer of opinion.
B) Qualified opinion or adverse opinion.
C) Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
D) Unqualified opinion with a separate explanatory paragraph or a qualified opinion.
Q2) If a justified departure from GAAP exists,auditors would issue an unqualified opinion but would modify the scope paragraph to describe the departure and its monetary effects.
A)True
B)False
Q3) The introductory paragraph of the auditors' report identifies management's responsibility for the financial statements.
A)True
B)False
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Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) Engagements to perform ______________ - ______________ procedures are not considered audits because they have a ______________________________.
Q2) Industry trade associations and regulatory agencies often use __________________________________ to specify the ____________________________ and _____________________________ of accounting information required for special purposes.
Q3) An accountant could not issue compiled financial statements that would include a report
A) Mentioning that the management has elected to omit substantively all footnote disclosures, and if they were included they might influence users' conclusions about the business.
B) Attesting to the overall fairness of the financial statements.
C) Stating that the accountant is not independent.
D) Stating that the objective of a compilation is to assist management in presenting financial information.
Q4) When the current-year service is being performed by a new accountant,the _____________________________ can be asked to ___________________________ the prior report.
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Chapter 14: Professional Ethics
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Sample Questions
Q1) According to Rule 203,Accounting Principles,requires the auditor to adhere to official pronouncements except when
A) Complying would violate client confidentiality.
B) Pending legislation may change the reporting requirements of the client.
C) Adherence to a pronouncement would be misleading.
D) It has been established that financial statement users prefer an alternative presentation of information.
Q2) Which of the following agencies issues independence rules for the auditors of public companies?
A) Financial Accounting Standards Board (FASB).
B) Government Accountability Office (GAO).
C) Public Company Accounting Oversight Board (PCAOB).
D) AICPA Accounting and Review Services Committee (ARSC).
Q3)
advertising is not in the public interest and is prohibited.
Q4) The cornerstone of the public accounting profession is the concept of
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Chapter 15: Legal Liability
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Sample Questions
Q1) The Ernst & Ernst v.___________________ case concluded that auditors might be liable for gross negligence under the Securities Exchange Act of 1934 even in the absence of scienter.
Q2) The Rosenblum,Inc.v.Adler decision allows potential auditor liability for ordinary negligence to third parties who are reasonably _____________________________ users of auditors' opinions and financial statements.
Q3) Which of the following statements concerning the Ultramares Corp.v.Touche case is not true?
A) This case was brought under common law liability.
B) This case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence.
C) This case established the rights of third parties to bring suits against auditors under common law liability.
D) This case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud.
Q4) Briefly explain the concept of proportionate liability.Why is the adoption of proportionate liability important to the accounting profession?
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Chapter 16: Internal Governmental and Fraud Audits
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Sample Questions
Q1) The GAO standards go beyond the AICPA's GAAS in a number of respects.
A)True
B)False
Q2) Which of the following statements is true?
A) External auditors must consider the internal audit function as part of obtaining an understanding of a company's internal control structure.
B) External auditors must review all work performed by internal auditors.
C) External auditors must investigate the competence and objectivity of internal auditors.
D) External auditors must share responsibility for the work of internal auditors if it is used for evidence for the financial statement audit.
Q3) Internal auditors are always employed by the organization that they audit such as a bank,hospital,or industrial company.
A)True
B)False
Q4) Internal audit reports are usually considered " ____________________ " until a _________________________ is performed.
Q5) How do government auditors achieve objectivity?
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) Which of the following is an advantage of nonstatistical sampling?
A) It measures the audit team's exposure to sampling risk.
B) It is required by generally accepted auditing standards.
C) It ensures that samples are randomly selected.
D) It is typically less complex than statistical sampling.
Q2) Which of the following most closely represents an unrestricted random selection procedure?
A) Identifying a starting point within the population and bypassing a fixed number of items.
B) Matching items in the population to a series of randomly selected numbers.
C) Randomly selecting invoices to customers whose last names start with W.
D) Randomly picking items from an accounts receivable file.
Q3) The ______________________ (or confidence)is the likelihood of achieving a given level of precision.
Q4) Statistical sampling plans ensure that samples are selected randomly from the population.
A)True
B)False
Q5) ______________ selection involves selecting a series of contiguous (or adjacent)items from the population.
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Chapter 18: Attributes Sampling
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Sample Questions
Q1) An important control for sales on account is that the client mathematically verifies all sales invoices.Which of the following would be the most appropriate population from which to select sample items?
A) Entries in the general journal.
B) Entries in the sales journal.
C) Sales invoices.
D) Shipping documents.
Q2) Which of the following is not true with regard to the relationship among control risk,the risk of overreliance,and the tolerable rate of deviation?
A) Lower levels of control risk result in a higher level of the risk of overreliance.
B) Lower levels of the risk of overreliance result in lower tolerable rate of deviations.
C) Lower levels of control risk result in lower tolerable rate of deviations.
D) All of the above are true.
Q3) The upper limit rate of deviation is equal to the sample rate of deviation minus the allowance for sampling risk.
A)True
B)False
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Chapter 19: Variables Sampling
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Sample Questions
Q1) Which of the following components of the upper limit on misstatement is determined by multiplying the sampling interval by the reliability factor for the acceptable risk of incorrect acceptance?
A) Basic allowance for sampling risk.
B) Incremental allowance for sampling risk.
C) Projected misstatement.
D) Sampling interval.
Q2) K.Samantha,CPA,used stratified random selection in the statistical sampling plan.Which of the following is the most likely reason this approach was used?
A) It eliminates the need for random selection.
B) The population is relatively homogenous in terms of the dollar amount of components or transactions.
C) It reduces the expected sample size.
D) It eliminates the need for calculating the projected misstatement in the account being examined.
Q3) Two methods of variables sampling are _______________________ sampling and classical variables sampling.
Q4) Expected misstatement has a(n)_______________ relationship with sample size.
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Chapter 20: Auditing in a Computerized Environment
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Sample Questions
Q1) The evaluation of computer controls with simulated data processed through the client's computer programs is referred to as
A) Parallel simulation.
B) Test data.
C) Integrated test facility.
D) Database.
Q2) The major disadvantage of an integrated test facility is that
A) Data processed through the client's system must be "backed out" very carefully.
B) The cost of setting up the facility adds to overhead of the system.
C) Audit teams need extensive knowledge of computer programming.
D) It is a costly use of computer resources.
Q3) Which of the following controls most likely would ensure that an organization can reconstruct its financial records?
A) Hardware controls are built into the computer by the computer manufacturer.
B) Backup files are stored in a location separate from original copies.
C) Personnel who are independent of data input perform parallel simulations.
D) System flowcharts provide accurate descriptions of computer operations.
Q4) What is the difference between the use of test data and parallel simulation?
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