Advanced Auditing
Final Exam Questions
Course Introduction
Advanced Auditing provides an in-depth exploration of contemporary auditing practices, standards, and ethical considerations essential for professional auditors. The course builds on foundational auditing concepts, examining complex audit procedures, risk assessment, internal control evaluation, and fraud detection. Students will analyze case studies, apply audit techniques to various business scenarios, and engage with current regulatory and technological developments impacting the audit profession. Emphasis is placed on critical thinking, professional judgment, audit documentation, and effective communication with stakeholders. This course prepares students for advanced roles in auditing, assurance services, and related fields.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by Alvin A. Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) The No-Name Agency conducts an independent service for a company to determine if its suppliers have complied with health and safety regulations, child labour guidelines, and other employee welfare issues. What type of service is No-Name providing?
A) assurance
B) attest
C) review
D) compilation
Answer: A
Q2) To operate effectively, an internal auditor must be independent of the A) line functions of the organization.
B) entity that is being audited.
C) employer-employee relationship that exists for other employees in the organization.
D) outsourcing organizations used.
Answer: A
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) What are the staff levels and responsibilities at Public Accounting firms?
Answer: 1. Partner - Leads the engagement, reviews the overall audit work, and is involved in significant audit decisions. A partner has the ultimate responsibility for conducting the audit and maintaining client relations.
2. Senior manager - Leads the engagement and reviews the team''s work. Works directly with the partner and assists in client relationship.
3. Manager - Helps the in-charge plan and manage the audit, reviews the in-charges work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time.
4. Senior or in-charge auditor - Coordinates and is responsible for the audit field work, including supervising and reviewing staff work.
5. Staff accountant - Performs most of the detailed audit work.
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4
Chapter 3: Legal Liability
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Sample Questions
Q1) Which of the following lawsuits resulted in a decision that shareholders could not sue the auditors for the loss in the value of their shares?
A) Haig v. Bamford et al.(1976)
B) Hercules Management Ltd. v. Ernst & Young (1997)
C) Ultramers Corporation v. Touche (1931)
D) United States v. Anderson (2002)
Answer: B
Q2) There are a number of things that the CPA, representing the profession as a whole, can do to reduce the practitioner's exposure to lawsuits. One of them is to
A) sanction members for improper conduct and performance.
B) deal only with clients possessing integrity.
C) hire qualified auditors and train and supervise them.
D) perform quality audits.
Answer: A
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) The Rules of Professional Conduct require a successor auditor to communicate with the previous auditor. The primary concern in this communication is
A) to acquire information which will help the successor auditor determine whether the client management has integrity.
B) to learn about the client by examining the predecessor's working papers.
C) to enable the successor to perform a more efficient audit.
D) to save the successor auditor time and money in gathering data.
Q2) Xiao, PA, is the auditor of Minkle Credit Union, a medium-sized credit union. Xiao has prepared a management letter with several serious control weaknesses. Management agrees with the facts, but does not want to present the letter with the weaknesses to the audit committee or the board of directors. Management has implied that they will request a change of auditors if your firm presents the management letter to the board.
Required: Discuss the actions that Xiao should take. Justify your response.
Q3) Which portions of the code of professional conduct are enforceable?
A) principles and rules
B) the rules of conduct
C) interpretations
D) rules and interpretations
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) There is agreement within the auditing profession and the courts that the auditor is
A) not a guarantor or insurer of financial statements.
B) a guarantor but not an insurer of financial statements.
C) an insurer but not a guarantor of financial statements.
D) both a guarantor and an insurer of financial statements.
Q2) The objective of the audit of financial statements by the auditor is the expression of an opinion on
A) the accuracy of the financial statements.
B) the balance sheet and income statement.
C) the fairness of the financial statements.
D) the annual report.
Q3) Flagpole Company Limited recently upgraded its accounting software due to changes in the payroll income tax rates. Unfortunately, there was an error in the software, and income tax was calculated incorrectly. The general transaction-related audit objective affected by this error is
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
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Page 7
Chapter 6: Client Acceptance and Planning the Audit
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Q1) There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing the gross margin with prior years and looking for large fluctuations?
A) to understand the client's industry and business
B) to assess going concern
C) to identify possible misstatements
D) to reduce detailed tests
Q2) Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt covenant requirements
C) management's practice of making overly achievable forecasts
D) high turnover of accounting, internal audit, and information technology staff
Q3) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
Q4) Knowledge of the client's industry and external environment can be obtained in different ways. Discuss some of the ways that this knowledge can be obtained.
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8
Chapter 7: Materiality and Risk
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Q1) The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?
A) an error in accounts receivable cutoff of $50 000
B) an overstatement of accounts payable by $15 000
C) an error in allocation between accounts receivable and accounts payable by $75 000
D) an illegal payment of $15 000
Q2) When inherent risk is assessed as higher (i.e. more material errors are likely to exist) and control risk is assessed the same from one year to the next, what is the likely effect on detection risk?
A) Detection risk will increase.
B) Detection risk will decrease.
C) Detection risk will stay the same.
D) Detection risk will need less documentation.
Q3) If audit risk is increased, what happens to detection risk?
A) It stays the same.
B) It increases.
C) It changes based upon the audit procedures conducted.
D) It decreases.
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) Management's objectives with respect to internal control include
A) having reasonable assurance that the financial statements are in accordance with IFRS or ASPE.
B) ensuring that all policies and procedures are clearly documented to reduce employee training costs.
C) preventing fraud and illegal activities at all costs.
D) providing reasonable assurance that the goals and objectives important to the entity have been met.
Q2) To comply with auditing standards, the auditor need not be concerned with all areas of internal control that apply to management. The auditor's primary concerns are with the system's ability to
A) maintain reliable control systems pertaining to financial transactions.
B) promote efficiency and encourage adherence to policy.
C) prevent and detect financial statement fraud and error.
D) provide reliable data and safeguard assets.
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) There are six factors that affect the reliability of audit evidence. One factor is the independence of the provider (i.e., evidence obtained from a source outside the client company is more reliable than that obtained within). Identify and discuss the remaining five factors that affect the reliability of evidence.
Q2) Which of the following is the best example of objective evidence?
A) a letter written by a client's lawyer discussing the likely outcome of outstanding lawsuits
B) the physical count of securities and cash by the auditor
C) inquiries of the credit manager about the collectability of noncurrent accounts receivable
D) observation of cobwebs on some inventory bins
Q3) At the first day of work at a PA firm, staff are given their own laptop computer for use in working with clients and other data.
Required:
A) What is the typical structure of client working paper files?
B) How is client data protected from unauthorized change?
Q4) Identify and explain the three determinants of the persuasiveness of evidence.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) After finishing the procedures to obtain an understanding of internal control in an audit engagement, the auditor should perform tests of controls on
A) those controls that the auditor plans to rely upon.
B) those controls in which material weaknesses were identified.
C) those controls that have a material effect upon the financial statement balances.
D) a random sample of the controls that were reviewed.
Q2) Eleonora is inspecting a sample of "Code of Conduct Acknowledgement" forms that must be signed by all employees to indicate that they have read and understood the company's code of conduct. Eleonora is ensuring that they have been signed by the employees. Eleonora is performing
A) a test of controls.
B) an analytical procedure.
C) a substantive procedure.
D) a procedure to obtain an understanding of internal controls.
Q3) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) When the auditor intends to evaluate a sample statistically, the only acceptable selection method is
A) probabilistic selection.
B) judgmental selection.
C) haphazard selection.
D) block selection.
Q2) A common use of block testing is testing
A) cutoff.
B) existence.
C) authorization.
D) valuation.
Q3) To ensure that all the population items will be properly subjected to the sample selection process, the auditor should
A) use a random number generator for sample selection.
B) use monetary unit sample selection methods.
C) document the range of document numbers in use by the client.
D) test the population for completeness.
Q4) Kyle is performing a test of detail using a non-statistical sample.
A) Can Kyle formally measure sampling error?
B) What should Kyle consider in determining the sampling error?
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Chapter 12: Audit of the Revenue Cycle
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Q1) Proper accounting requires that an account receivable must be written off by the client when
A) the client company concludes that an amount is no longer collectible.
B) the customer files for bankruptcy.
C) a collection agency cannot inspire the customer to pay the debt.
D) the account is at least six months old.
Q2) Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.
Q3) It is common to test sales for proper classification as part of testing for A) cutoff.
B) accuracy.
C) valuation.
D) completeness.
Q4) A document prepared for shipment of the goods sold using a trucking company is called the
A) sales order.
B) bill of lading.
C) sales invoice.
D) customer order.
Page 14
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
Q2) State each of the five specific transaction-related audit objectives for acquisitions and, for each objective, describe one common test of transactions.
Q3) State each of the six specific balance-related audit objectives for manufacturing equipment additions and describe one common test of details of balances for each objective.
Q4) To ensure that goods and services acquired are for authorized company purposes, and to help acquire only needed items
A) receiving reports should be independently signed and reconciled to the purchase order.
B) proper authorization for acquisitions and changes to the master file should take place.
C) purchase requisitions should be approved and matched to purchase orders.
D) account allocations of vendor invoices should be carefully checked.
Q5) Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
A) all goods purchased before year-end are received before the physical inventory count.
B) no goods held on consignment for customers are included in the inventory balance.
C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the current period inventory balance.
Q2) The auditor has determined that the perpetual inventory master files are high quality, assessing control risk related to physical observation of inventory as low. How does this affect audit testing? The auditor may
A) reduce the extent of control tests over data entry to the master file.
B) reduce the extent of the tests of physical inventory.
C) reduce the extent of control tests with respect to program change controls.
D) increase assessed inherent risks over the tests of physical inventory.
Q3) State six specific balance-related audit objectives for physical inventory observation and, for each objective, describe one common test of details of balances related to that objective.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) In auditing the imprest payroll account, which of the following procedures will take the least amount of auditor time?
A) tests of controls
B) risk analysis and obtaining an understanding of controls
C) analytical procedures
D) tests of details of balances
Q2) "Existing payroll transactions are recorded" is the control objective of A) authorization.
B) completeness.
C) existence.
D) accuracy.
Q3) The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the A) payroll master file.
B) payroll transaction file.
C) payroll journal.
D) job time ticket.
Q4) Discuss the two most common ways in which employees can defraud a company in the payroll area.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) The normal starting point for the audit of notes payable is
A) a discussion with management of any new notes payable for the year.
B) a schedule of notes payable and accrued interest obtained from the client.
C) the assessment of materiality.
D) the minutes of the board of directors.
Q2) The tests of details of balances procedure that requires the auditor to trace the totals of the notes payable list to the general ledger satisfies the objective of A) existence.
B) completeness.
C) accuracy.
D) rights and obligations.
Q3) A primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is
A) correct calculation of the net income or loss for the year.
B) correct calculation of dividend payments for the year.
C) whether adjustments to retained earnings have been made correctly.
D) whether there are any restrictions on the payment of dividends.
Q4) Describe the three objectives of the auditor's examination of owners' equity.
Q5) Describe the risks of error and fraud in the debt or equity accounts.
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Chapter 17: Audit of Cash Balances
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Q1) A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) material internal control weaknesses.
Q2) After testing the bank reconciliation and inspecting the cutoff bank statement received from the bank, the auditor has determined that there are two outstanding cheques from the list on the bank reconciliation that have still not cleared the bank. The auditor's next step should be to
A) trace the details of the two cheques to the cash disbursements journal.
B) trace the details of the two cheques to their associated expense accounts.
C) reperform the calculations in the bank reconciliation.
D) compare the total of the bank reconciliation to the bank confirmation.
Q3) A) Explain what is meant by kiting and discuss how it is performed.
B) Discuss how an auditor can test for kiting.
Q4) Outline the audit procedures that would be performed when testing electronic receipts and payments.
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Chapter 18: Completing the Audit
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Q1) If a potential loss on a contingent liability is likely and the amount of the loss can be reasonably estimated, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
Q2) What action will a lawyer likely take if they have information about a lawsuit that was not mentioned by the client?
A) They will tell the auditor the number of suits and request the auditor to contact the client.
B) They will request the client to notify the auditor about the lawsuit.
C) They will not mention the lawsuits since they are confidential.
D) They will refuse to answer the legal letter, since it is incorrect.
Q3) The auditor's responsibility with regards to contingent liabilities is to
A) identify the appropriate accounting treatment.
B) decide on the appropriate accounting treatment.
C) prepare note disclosure.
D) evaluate the accounting treatment of known contingent liabilities.
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Chapter 19: Audit Reports on Financial Statements
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Q1) The "unqualified report with explanatory paragraph" or the "unqualified report with modified wording"
A) arise as a result of an incomplete audit.
B) arise when the financial statements are not quite "presented fairly."
C) meet the criteria of a complete audit with satisfactory results but further explanation is required.
D) meet the criteria of a complete audit but with unsatisfactory results.
Q2) A deviation from the standard unqualified report will cause knowledgeable users of financial statements to recognize that the
A) auditor intends to communicate additional or limiting information.
B) financial statements contain a material error.
C) financial statements contain an error.
D) Canadian Auditing Standards were not followed.
Q3) According to CAS 700, the standard unqualified report's title should be
A) "Unqualified Report of the Auditor."
B) "Audited Financial Statements."
C) "Auditor's Report."
D) "Independent Auditor's Report."
Q4) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) Thermos Inc. is having its financial statements audited by Pilott & Levy, a PA firm. Leon Levy is the auditor in charge of the audit. The accountable party in this assurance engagement is
A) Leon Levy.
B) Pilott & Levy.
C) management of Thermos Inc.
D) the board of directors of Thermos Inc.
Q2) Outline the three performance standards of CICA Handbook section 5025, "Standards for Assurance Engagements."
Q3) Which of the following engagements would most likely be a compilation engagement?
A) An engagement with respect to financial statements attached to a personal tax return.
B) An engagement with respect to financial statements for a large public company.
C) An engagement with respect to financial statements for a company that has a large bank loan.
D) An engagement with respect to financial statements that accompany future-oriented information to obtain financing.
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