Audit and Assurance Exam Questions
Course Introduction
Audit and Assurance is a course that explores the principles, practices, and regulatory frameworks surrounding the examination and evaluation of financial statements and internal controls within organizations. The course covers key topics such as auditing standards, the audit process, risk assessment, evidence gathering, and ethical considerations for auditors. Students will learn about the role of assurance services in enhancing the reliability of financial information, as well as the responsibilities and professional skepticism required in the auditing profession. The course prepares students to understand and perform external and internal audits, and to appreciate the importance of effective assurance in fostering stakeholder confidence and compliance with legal and professional standards.
Recommended Textbook
Auditing and Assurance Services 15th 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) Most public companies' audited financial statements are available on the SEC's EDGAR database.
A)True
B)False
Answer: True
Q2) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called:
A)finance.
B)auditing.
C)accounting.
D)economics.
Answer: C
Q3) Which of the following is not a SysTrust Services principle as defined by the AICPA?
A)Online privacy
B)Availability
C)Processing integrity
D)Operational integrity
Answer: D
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Chapter 2: The Cpa Profession
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Sample Questions
Q1) All of the Big Four accounting firms and many of the smaller CPA firms now operate as Limited Liability Partnerships.
A)True
B)False
Answer: True
Q2) The AICPA has authority to establish standards and rules in all but which of the following areas?
A)Auditing standards applicable to financial statements of private companies
B)Compilation and review standards
C)Professional conduct
D)Auditing standards applicable to financial statements of private and public companies
Answer: D
Q3) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.
A)True
B)False
Answer: True
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Chapter 3: Audit Reports
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Sample Questions
Q1) William Gregory, CPA, is the principal auditor for a multi-national corporation.Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation.Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination.With respect to his report on the consolidated financial statements, taken as a whole, Gregory:
A)must not refer to the examination of the other auditor.
B)must refer to the examination of the other auditor.
C)may refer to the examination of the other auditor.
D)must refer to the examination of the other auditors along with the percentage off consolidated assets and revenue that they audited.
Answer: C
Q2) For the report containing a disclaimer for lack of independence, the disclaimer is in the:
A)second or scope paragraph.
B)third or opinion paragraph.
C)first and only paragraph.
D)fourth or explanatory paragraph.
Answer: C
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Chapter 4: Professional Ethics
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Sample Questions
Q1) Interpretations of rules of conduct in the Code of Professional Conduct are not officially enforceable and practitioners need not justify departure from them.
A)True
B)False
Q2) In which of the following circumstances would a CPA be ethically bound to refrain from disclosing any confidential client information?
A)The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information.
B)A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
C)Confidential client information is made available as part of a quality review of the CPA's practice by a peer review team authorized by the AICPA.
D)An inquiry by a disciplinary body of a state CPA society requests confidential client information.
Q3) Explain why there is a special need for ethical conduct in the auditing profession.
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Chapter 5: Legal Liability
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Sample Questions
Q1) Distinguish between constructive fraud and fraud.
Q2) In order to protect themselves from legal liability, it is important that CPAs:
A)are organized as sole-proprietors.
B)accept client representations.
C)understand the client's business.
D)use engagement letters, not representation letters.
Q3) The laws that have been developed through court decisions are called:
A)common laws.
B)criminal laws.
C)statutory laws.
D)civil laws.
Q4) Under common law, an individual or company that (1)does not have a contract with an auditor, (2)is known by the auditor in advance of the audit, and (3)will use the auditor's report to make decisions about the client company has:
A)no rights unless an auditor is grossly negligent.
B)no rights unless an auditor is fraudulent.
C)no rights against an auditor.
D)the same rights against an auditor as a client.
Q5) Discuss the sanctions the Securities and Exchange Commission can impose on auditors.
Page 7
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) The objective of an audit of the financial statements is an expression of an opinion on:
A)the fairness of the financial statements in all material respects.
B)the accuracy of the financial statements.
C)the accuracy of the annual report.
D)the accuracy of the balance sheet and income statement.
Q2) Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.
A)True
B)False
Q3) Discuss three reasons why auditors are responsible for "reasonable" but not "absolute" assurance.
Q4) Under the cycle approach, the only accounts that have two or more cycles associated with them are cash and accounts receivable.
A)True
B)False
Q5) Briefly explain each management assertion related to account balances at period end.
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Chapter 7: Audit Evidence
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Sample Questions
Q1) Audit documents:
A)are kept by the client for easy reference for their accounting staff.
B)should be considered as a substitute for the clients accounting records.
C)are designed to facilitate the review and supervision of the work performed by the audit team by a reviewing partner.
D)prepared during the engagement are the property of the client once the audit bill is paid.
Q2) Which of the following is a correct statement regarding confirmations?
A)Confirmations can be in oral or written form.
B)Electronic confirmations are not acceptable under generally accepted auditing standards.
C)Confirmations are generally used in the audit of fixed asset additions.
D)Auditors consider alternative evidence available when determining if confirmations should be used.
Q3) Auditing standards require that records for audits of private companies be retained for a minimum of seven years.
A)True
B)False
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Chapter 8: Audit Planning and Analytical Procedures
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Sample Questions
Q1) Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.
A)True
B)False
Q2) Before accepting a new client, most CPA firms investigate the company to determine its acceptability.However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties-namely the company's attorneys and bankers-during this investigation.
A)True
B)False
Q3) When using financial ratios, the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.
A)True
B)False
Q4) Sarbanes-Oxley encourages management to certify that it has informed the auditor and audit committee of any significant deficiencies in internal control.
A)True
B)False
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) In applying the audit risk model, auditors are concerned about overstatements, not understatements.
A)True
B)False
Q2) Auditor's allocate the preliminary judgment about materiality to financial statement segments rather than by financial statements as a whole.What is the term for the auditor's allocation of preliminary misstatement to account balances? What are three difficulties auditor's face when allocating materiality to balance sheet accounts?
Q3) When the auditor is attempting to determine the extent to which external users rely on a client's financial statements, they may consider several factors except for:
A)client size.
B)concentration of ownership.
C)nature and amounts of liabilities.
D)assessment of detection risk.
Q4) Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.List these steps in the order in which they occur.
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Chapter 10: Internal Control, Control Risk, and Section 404
Audits
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Q1) If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.
A)True
B)False
Q2) If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment.
A)a lower
B)the same
C)a higher
D)either a lower or higher
Q3) A company's size should have no impact on the nature of internal control and the controls that are implemented.
A)True
B)False
Q4) In evaluating the operational effectiveness of internal controls the auditor is likely to use four types of audit procedures.List the procedures below.
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Chapter 11: Fraud Auditing
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Sample Questions
Q1) The "tone at the top" provides a foundation upon which a more detailed code of conduct can be developed to provide specific guidance for the organization and its employees.Components of a code of conduct may include sections on 1)general employee conduct, 2)relationships with clients and suppliers and 3)conflicts of interest.Give a narrative description of what might be included in each of the above components of a code of conduct.
Q2) Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain:
A)adequate separation of duties.
B)adequate compensation.
C)adequate financial reporting standards.
D)adequate supervisory boards.
Q3) The two main categories of fraud are fraudulent financial reporting and misappropriation of assets.
A)True
B)False
Q4) Financial statements of all companies are potentially subject to manipulation.
A)True
B)False
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Chapter 12: The Impact of Information Technology on the Audit Process
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Sample Questions
Q1) Which of the following is least likely to be used in obtaining an understanding of client general controls?
A)Examination of system documentation
B)Inquiry of key users
C)Walk through of a sales transaction
D)Reviews of questionnaires completed by client IT personnel
Q2) Auditors usually obtain information about general and application controls through:
A)interviews with IT personnel.
B)examination of systems documentation.
C)reading program change requests.
D)all of the above methods.
Q3) A large portion of errors in IT systems result from data entry errors.
A)True
B)False
Q4) Discuss how the integration of IT into accounting systems enhances internal control.
Q5) Parallel testing is more expensive than pilot testing.
A)True
B)False
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Chapter 13: Overall Audit Strategy and Audit Program
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Q1) The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk.
A)True
B)False
Q2) When testing details of balances, most audit procedures satisfy only one balance-related objective, but more than one audit procedure should be used to test each objective.
A)True
B)False
Q3) The primary emphasis in most tests of details of balances is on the:
A)balance sheet accounts.
B)revenue accounts.
C)cash flow statement accounts.
D)expense accounts.
Q4) Only tests of details of balances involve physical examination and confirmation. A)True
B)False
Q5) In accumulating final evidence upon which to base an audit opinion, the auditor should perform four activities.List the activities below.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of
Controls and Substantive Tests of Transactions
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Q1) A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.
A)True
B)False
Q2) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.
A)accuracy
B)existence
C)completeness
D)none of the above
Q3) Some companies have customers send payments directly to an address maintained by a bank.This is called a(n)________ system.
A)direct deposit
B)funds transfer
C)lockbox
D)interbank transfer
Q4) A sales invoice is a document that usually indicates credit approval.
A)True
B)False
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Q1) Which of the following statements is most correct with concerning the quantification of sampling risk?
A)Sampling risk cannot be quantified.
B)Sampling risk can be quantified only when nonprobabilistic selection techniques are used to select the sample.
C)Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample.
D)None of the above.
Q2) Whenever auditors use sampling, they risk making incorrect conclusions about the population.The risk that the auditor concludes that controls are nore effective than they actually are is known as the:
A)risk of overreliance.
B)risk of underreliance.
C)risk that the sample is not representative of the population.
D)risk that the sample conclusions cannot be useful because of nonprobability sampling.
Q3) It is virtually impossible to reduce sampling risk to zero.
A)True
B)False
Page 17
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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Q1) Which of the following most likely would be detected by a review of a client's sales cutoff?
A)Excessive sales discounts
B)Unrecorded sales for the year
C)Unauthorized goods returned for credit
D)Lapping of year-end accounts receivable
Q2) The net realizable value of accounts receivable is equal to:
A)gross accounts receivable less allowance for uncollectible accounts.
B)gross accounts receivable less bad debt expense.
C)gross accounts receivable less returns and allowances.
D)gross accounts receivable less sales discounts.
Q3) If auditors consider confirmations of accounts receivable to be ineffective evidence because response rates will be very low, they need not confirm accounts receivable.
A)True
B)False
Q4) Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.
Page 18
Q5) Describe how the auditor tests the accuracy objective for accounts receivable.
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Q1) In monetary unit sampling, the likelihood of high dollar items from the population being included in the sample is lower than the likelihood for small dollar items.
A)True
B)False
Q2) In monetary unit sampling, the relationship between tolerable misstatement size and required sample size is:
A)direct.
B)inverse.
C)varied.
D)indeterminable.
Q3) ARIA measures the auditor's desired assurance for an account balance.
A)True
B)False
Q4) In estimating the population misstatement, the first step in projecting from the sample to the population is to:
A)make a point estimate.
B)revise the upper error bound.
C)calculate the precision interval.
D)determine the population mean.
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Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
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Q1) Which one of the following duties should not be assigned the purchases department?
A)Finding the lowest cost vendor
B)Reviewing vendors' catalog descriptions and prices for standardized items
C)Designing the purchase order form
D)Authorizing the acquisition of goods
Q2) Which of the following business functions is not considered to be part of the acquisitions class of transactions?
A)Processing purchase orders
B)Recognizing liabilities
C)Receiving goods and services
D)Processing cash disbursements
Q3) When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate.The controls over the acquisitions included in the records are normally tested as a part of the:
A)tests of controls for acquisitions.
B)tests of controls and substantive tests of transactions for acquisitions.
Page 20
C)tests of details of balances for acquisitions.
D)analytical procedures and tests of controls for acquisitions.
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Chapter 19: Completing the Tests in the Acquisition and Payment
Cycle: Verification of Selected Accounts
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Q1) Describe the two tests auditors can perform to test for the existence and omissions of insurance policies in force.
Q2) Tests of controls provide an indication of the likelihood of misstatements in both the income statement and the balance sheet, simultaneously.
A)True
B)False
Q3) Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file?
A)Examine vendor invoices and receiving reports.
B)Review transactions near the balance sheet date.
C)Recalculate vendor invoices.
D)Examine vendor invoices for correct accounting treatment.
Q4) The estimated unpaid obligations for services or benefits that have been received before the balance sheet date are:
A)accounts payable.
B)accounts receivable.
C)unearned liabilities.
D)accrued liabilities.
Page 22
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Q1) The total of the individual employee earnings in the payroll master file should equal the total:
A)balance of gross payroll in general ledger accounts.
B)of the checks drawn to employees for payroll.
C)gross payroll plus the total contributed by the employer for payroll taxes.
D)gross pay for the current week's payroll.
Q2) An auditor traces a sample of electronic time cards before and after the bi-weekly payroll report and then traces to the payroll master file to determine that payroll transactions are reported in the correct period.The auditor is gathering evidence for which audit objective?
A)Completeness
B)Existence
C)Cut-off
D)Accuracy
Q3) The two major balance-related audit objectives in testing payroll liabilities are accuracy and cutoff.
A)True
B)False
Q4) What events initiate and terminate the payroll and personnel cycle?
Q5) How do auditors commonly verify sales commission expense?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Q1) Which one of the following analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?
A)Compare gross margin percentage with previous years'.
B)Compare unit costs of inventory with previous years'.
C)Compare inventory turnover ratio with previous years'.
D)Compare current year manufacturing costs with previous years'.
Q2) The audit procedure "Account for unused tag numbers shown in the auditor's working papers to make sure no tags have been added" provides assurance mainly for the existence objective for inventory pricing and compilation.
A)True
B)False
Q3) Inventory is a complex area to audit for all but which of the following reasons?
A)Inventory is often in different locations.
B)There are several acceptable valuation methods and some entities use different methods for different types of inventory.
C)Inventory is often the largest account on the balance sheet.
D)Inventory valuation includes few estimates.
Q4) What are two factors affecting the complexity of the audit of inventory?
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Q1) The two most important balance related audit objectives for notes payable are:
A)completeness and detail tie-in.
B)completeness and valuation.
C)accuracy and valuation.
D)accuracy and completeness.
Q2) Notes payable are generally for a period of sixty days or less.
A)True
B)False
Q3) Which of the following audit tests would provide evidence regarding the balance-related audit objective of existence for an audit of notes payable?
A)Examine due dates on duplicate copies of notes.
B)Examine balance sheet for proper presentation and disclosure of notes payable.
C)Examine corporate minutes for loan approval.
D)Foot the notes payable list for notes payable and accrued interest.
Q4) Examining the minutes of the board of directors' meetings for proper authorization ordinarily tests the occurrence objective for capital stock transactions.
A)True
B)False
Q5) Discuss the overall objectives of the audit of notes payable.
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Chapter 23: Audit of Cash and Financial Instruments
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Q1) Tests for kiting are performed using only a schedule of intrabank transfers.
A)True
B)False
Q2) Which of the following cycles does not affect cash in bank?
A)Capital acquisitions cycle
B)Inventory and warehousing
C)Payroll and personnel cycle
D)Acquisitions and disbursements
Q3) Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash?
A)Existence
B)Cutoff
C)Detail tie-in
D)Presentation and disclosure
Q4) A proof of cash is effective at identifying which of the following misstatements?
A)Checks written for incorrect amounts
B)Checks issued to invalid vendors
C)Fraudulent checks
D)Checks recorded in the books for an amount different from that on the check
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Chapter 24: Completing the Audit
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Q1) At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities.This statement would appear in the:
A)management letter.
B)letter of inquiry.
C)letters testamentary.
D)management letter of representation.
Q2) Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance?
A)The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
B)Any significant matter reported to those charged with governance must also be communicated to management.
C)Communication is required before the audit report is issued.
D)Auditor does not have any requirement to communicate with anyone other than the company's senior management.
Q3) Discuss three audit procedures commonly used to search for contingent liabilities.
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Chapter 25: Other Assurance Services
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Q1) Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity?
A)A statement that the review was in accordance with generally accepted auditing standards
B)A statement that all information included in the financial statements is the representation of management
C)A statement describing the principal procedures performed
D)A statement describing the auditor's conclusions based upon the results of the review
Q2) Which of the following results in a conclusion that represents positive assurance?
A)Review
B)Compilation
C)Examination
D)Agreed upon procedure engagement
Q3) Discuss the six SSARS requirements that must be met when an accountant is performing a compilation of financial statements.
Q4) Briefly describe a SysTrust engagement.
Q5) Briefly describe each of the five Trust Services principles.
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Q1) Which of the following is most correct with regard to the comparison of the financial auditing standards of the Yellow Book with the principles of the AICPA auditing standards?
A)The same as
B)Quite different from
C)Incompatible with
D)Consistent with
Q2) What are three similarities between internal and external auditors?
Q3) Operational audits are primarily geared towards improving a company's operational efficiency and effectiveness.
A)True
B)False
Q4) Effective internal controls are designed to help organizations achieve which of the following objectives?
A)Reliability of financial reporting
B)Efficiency and effectiveness of operations
C)Compliance with applicable laws and regulations
D)All of the above
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Q5) Discuss each of the three broad categories (types)of operational audits.
Q6) List the three purposes of a program audit.
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