Audit and Assurance Test Bank
Course Introduction
Audit and Assurance is a course that explores the principles and practices of auditing, including the frameworks and standards governing the profession. Students learn about the audit process, internal controls, risk assessment, ethical responsibilities, and the preparation of audit reports. The course also covers assurance services beyond traditional financial statement audits and emphasizes the importance of professional skepticism, regulatory compliance, and effective communication with stakeholders. Practical case studies and real-world scenarios are used to provide insight into the auditors role in ensuring transparency and trust in financial reporting.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 10th Edition by William F Messier Jr
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1523 Verified Questions
1523 Flashcards
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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46 Verified Questions
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Sample Questions
Q1) Which of the following best describes the fundamental,underlying reason for why there is demand for an independent auditor to report on financial statements?
A) A management fraud may exist and it is more likely to be detected by auditors if they are independent.
B) Different interests may exist between the company preparing the statements and the parties using the statements.
C) A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated.
D) A poorly designed internal control system may be in place.
Answer: B
Q2) Testing all transactions that occurred during the period is cost prohibitive. A)True
B)False
Answer: True
Q3) Conflicts of interest often occur between absentee owners and managers. A)True
B)False
Answer: True
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) Who bears ultimate responsibility for the financial statements?
A) Management of the organization, equally with the external auditor that audits the statements.
B) Management and the shareholders of the organization.
C) The external auditor that audits the statements.
D) Management of the organization.
Answer: D
Q2) Which is not an attribute of an external auditor?
A) Independence.
B) Auditee advocacy.
C) Objectivity.
D) Concern for the public interest.
Answer: B
Q3) Forensic audits include all of the following except A) Criminal investigations.
B) Manufacturers' assertions about product quality.
C) Employee fraud.
D) Management fraud.
Answer: B
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Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) In the planning stages of an audit,what information does an auditor gain through analytical procedures?
Answer: An auditor is required to apply analytical procedures at the planning phase for all audits.In the planning phase,analytical procedures help the auditor to understand the client's business and transactions.Analytical procedures also guide the auditor towards financial statement accounts that are likely to contain errors.With this information,the auditor is able to plan the nature,timing,and extent of audit procedures.
Q2) Evaluating a prospective client requires which of the following steps?
A) Communicate with the SEC.
B) Preplan the audit.
C) Determine if the firm is independent of the client.
D) Communicate with the AICPA.
Answer: C
Q3) The audit committee is directly responsible for the appointment,compensation,and oversight of the work of any accounting firm employed by a public company.
A)True
B)False
Answer: True
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Chapter 4: Risk Assessment
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Sample Questions
Q1) All of the following represent an increased opportunity for management to commit fraud except:
A) Significant related party transactions.
B) The auditor's relationship with management is strained.
C) Management is dominated by a single person.
D) The financial statements include highly subjective estimates.
Q2) The components of the audit risk model include inherent risk,control risk,and detection risk.
A)True
B)False
Q3) Engagement risk can be eliminated by
A) Establishing policies for client acceptance and continuance.
B) Lowering audit risk.
C) Lowering materiality.
D) Engagement risk cannot be eliminated.
Q4) Your classmate asserts,"Accountants shouldn't need to take business courses besides accounting,because they are only interested in the financial statements of a company." Defend or refute this statement.
Q5) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Footing is an example of
A) Recalculation.
B) Confirmation.
C) Inquiries.
D) Analytical procedures.
Q2) Tracing is used primarily to test which of the following assertions about classes of transactions?
A) Occurrence.
B) Completeness.
C) Cutoff.
D) Classification.
Q3) For each of the following categories of analytical procedures,indicate (a)whether an auditor is required to use the procedure and (b)the purpose(s)of the procedure. Preliminary analytical procedures (risk assessment procedures)
Substantive analytical procedures
Final analytical procedures
Q4) Explain the occurrence and completeness assertions.How does failure to meet each assertion affect the financial statements?
Q5) For an auditor,how are management assertions useful?
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?
Q2) Describe the limitations of internal control.Why do limitations on internal control exist?
Q3) Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of
A) Authorization, execution, and payment.
B) Authorization, recording, and custody.
C) Custody, execution, and reporting.
D) Authorization, payment, and recording.
Q4) While performing an audit on the internal controls over financial reporting for AirWaves Corporation,your audit team finds what it considers to be a significant deficiency.AirWaves is a large,private company.What steps would you take to communicate this finding?
Q5) What are two potential benefits and two potential risks of using IT for an entity's internal control?
Q6) The auditor must understand internal control before assessing inherent risk. A)True B)False
Page 8
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) Which of the following is an advantage of generalized computer audit packages?
A) They are all written in one identical computer language.
B) They can be used for audits of entities that use differing IT equipment and file formats.
C) They have reduced the need for the auditor to study input controls for IT-related procedures.
D) Their use can be substituted for a relatively large part of the required compliance testing.
Q2) In a public company,management's report on internal control must be signed by the members of the audit committee.
A)True
B)False
Q3) You are performing an audit on North South Natural Gas (NSNG).Alana,an NSNG employee,has responsibility for reconciling bank statements with the entity's cash accounts.You determine,however,that Alana has never been taught how to reconcile statements.In effect,the statements have not been properly reconciled for two years.How would you judge the significance of this control deficiency? How would you classify this deficiency?
Q4) Discuss entity-level controls and provide examples of these types of controls.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) Which of the following combinations guarantees a larger sample size?
A) Decrease the desired confidence level and decrease the tolerable deviation rate.
B) Increase the desired confidence level and decrease the tolerable deviation rate.
C) Decrease the desired confidence level and increase the expected deviation rate.
D) Increase the tolerable deviation rate and increase the expected deviation rate.
Q2) Auditors who prefer statistical sampling to nonstatistical sampling may do so because statistical sampling helps the auditor
A) measure the sufficiency of the evidential matter obtained.
B) eliminate subjectivity in the evaluation of sampling results.
C) reduce the level of tolerable misstatement to a relatively low amount.
D) minimize the failure to detect a material misstatement due to nonsampling risk.
Q3) Define sampling risk and nonsampling risk.
Q4) When determining the sample size of accounts receivable to test,what are three factors that are important for you to consider?
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) In nonstatistical sampling,describe the two methods auditors use to project sample results to the population.How does an auditor determine which method to use?
Q2) A number of factors influence the sample size for a substantive test of details of an account balance.All other factors being equal,which of the following would lead to a larger sample size?
A) Greater reliance on internal controls.
B) Greater reliance on analytical procedures.
C) Smaller expected frequency of misstatements.
D) Smaller measure of tolerable misstatements.
Q3) When auditing accounts payable using classical variables sampling,Sue finds evidence indicating that the account may be materially misstated.What are Sue's options?
Q4) In statistical or nonstatistical sampling methods used in substantive testing,an auditor most likely would stratify a population into meaningful groups if A) monetary-unit sampling (MUS) is used.
B) the population contains both very high and very low recorded amounts.
C) the auditor's estimated tolerable misstatement is extremely small.
D) the standard deviation of recorded amounts is relatively small.
Page 11
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) Which of the following control activities may prevent the failure to bill customers for some shipments?
A) Each shipment should be supported by a prenumbered sales invoice that is accounted for.
B) Each sales order should be approved by authorized personnel.
C) Sales journal entries should be reconciled to daily sales summaries.
D) Each sales invoice should be supported by a shipping document.
Q2) An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also
A) records the journal entry to recognize the cash receipt.
B) prepares the monthly bank reconciliation.
C) prepares the daily deposit slip.
D) approves customer discounts.
Q3) According to the Association of Certified Fraud Examiners,there are eight common methods for committing financial statement fraud.List 4 of the 8 methods.
Q4) Explain how revenue recognition is important to the audit of the revenue process.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) The authority to accept incoming goods in receiving should be based on a(an)
A) vendor's invoice.
B) materials requisition.
C) bill of lading.
D) approved purchase order.
Q2) In assessing control risk for purchases,an auditor vouches a sample of entries in the voucher register to the supporting documents.Which assertion would this test of controls most likely support?
A) Completeness.
B) Occurrence.
C) Accuracy.
D) Classification.
Q3) Which of the following describes a temporary difference?
A) A difference that will be corrected in an amended tax return.
B) A difference arising from an uncertain tax position.
C) A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes.
D) A timing difference between the recognition of revenue or expense under GAAP and tax purposes.
Q4) Describe three categories of expenses outlined in FASB Concept Statement No.5.
Page 13
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Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) An auditor most likely would extend substantive tests of payroll when A) payroll is extensively audited by the state government.
B) payroll expense is substantially higher than in the prior year due to company growth.
C) overpayments are discovered in performing tests of details.
D) employees complain to management about too much overtime.
Q2) A surprise observation by an auditor of an entity's regular distribution of paychecks is primarily designed to satisfy the auditor that
A) all unclaimed payroll checks are properly returned to the cashier.
B) the paymaster is not involved in the distribution of payroll checks.
C) all employees have in their possession proper employee identification.
D) names on the company payroll are those of bona fide employees presently on the job.
Q3) When an auditor sets control risk low,sufficient evidence can be obtained for most payroll accounts through an understanding of internal controls,substantive analytical procedures,and tests of details of transactions.However,there are several accounts in the payroll cycle that may require more attention.Name the accounts and explain why the additional testing is necessary.
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Page 14
Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) Which of the following control activities would most likely be used to maintain accurate perpetual inventory records?
A) Independent storeroom count of goods received.
B) Periodic independent reconciliation of control and subsidiary records.
C) Periodic independent comparison of records with goods on hands.
D) Independent matching of purchase orders, receiving reports, and vendors' invoices.
Q2) To gain assurance that all inventory items in an entity's inventory listing schedule are valid,an auditor most likely would trace
A) inventory tags noted during the auditor's observation to items listed in the inventory listing schedule.
B) inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.
C) items listed in the inventory listing schedule to inventory tags and the count sheets.
D) items listed in receiving reports and vendors' invoices to the inventory listing schedule.
Q3) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Sample Questions
Q1) Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property,plant,and equipment are not understated?
A) Depreciation expense.
B) Accounts payable.
C) Cash.
D) Repairs and maintenance expense.
Q2) In testing plant and equipment balances,an auditor examines new additions listed on an analysis of plant and equipment.This procedure most likely obtains evidence concerning management's assertion of A) completeness.
B) occurrence.
C) classification.
D) accuracy.
Q3) Generally,auditors rely on controls when auditing the property management function and therefore less substantive testing is used.
A)True
B)False
Page 16
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Sample Questions
Q1) In the audit of a medium-sized manufacturing concern,which one of the following areas can be expected to require the least amount of audit time?
A) Retained earnings.
B) Revenue.
C) Assets.
D) Liabilities.
Q2) The auditor is concerned with establishing that dividends are paid to stockholders of the entity owning stock as of the
A) issue date.
B) declaration date.
C) record date.
D) payment date.
Q3) Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?
A) Changing from one method of depreciation to another.
B) Adjusting the percentage used to estimate the allowance for doubtful accounts.
C) Changing from the FIFO to LIFO method of inventory valuation.
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D) Correcting an error in depreciation in a prior year.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) What should an auditor look for when testing for proper classification of securities?
Q2) Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?
A) Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name.
B) The internal auditor compares the securities in the bank safe-deposit box with recorded investments.
C) The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.
D) The controller compares the current market prices of recorded investments with the brokers' advices on file.
Q3) Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.
A)True
B)False
Q4) Explain how cash plays a role in all business processes.
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) After fieldwork audit procedures are completed,a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the working papers.This second review usually focuses on
A) the audit report, financial statements, and footnotes for consistency.
B) irregularities involving the entity's management and its employees.
C) the materiality of the adjusting entries proposed by the audit staff.
D) the communication of internal control weaknesses to those charged with governance.
Q2) A written representation from an entity's management that,among other matters,acknowledges responsibility for the fair presentation of financial statements should normally be signed by the
A) chief executive officer and the chief financial officer.
B) chief financial officer and the chairman of the board of directors.
C) chairman of the audit committee of the board of directors.
D) chief executive officer, the chairman of the board of directors and the entity's lawyer.
Q3) An example of a contingent liability is an income tax dispute.
A)True
B)False
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except:
A) an opinion as to whether the basis of accounting used is appropriate under the circumstances.
B) an opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting.
C) reference to the note to the financial statements that describes the basis of presentation.
D) a statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.
Q2) A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.
A)True
B)False
Q3) An auditor must disclaim an opinion when the auditor lacks independence.
A)True
B)False
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Chapter 19: Professsional Conduct,Independence,and Quality Control
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Sample Questions
Q1) A violation of the profession's ethical standards would most likely have occurred when a CPA
A) purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period.
B) made arrangements with a bank to collect notes issued by a client in payment of fees due.
C) named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name.
D) issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.
Q2) The SEC's rules with respect to services provided by auditors are predicated on three basic principles of auditor objectivity and independence.What are the three basic principles?
Q3) Professionalism refers to the conduct,aims,or qualities that characterize a given profession.
A)True
B)False
Q4) When can a CPA disclose confidential information without the client's consent?
Page 21
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Chapter 20: Legal Liability
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Sample Questions
Q1) An auditor can be sued by a client for negligence under common law.
A)True
B)False
Q2) Under the Rusch Factors doctrine,to which of the following parties will an accountant be liable for negligence?
A) Only parties in privity and not those reasonably foreseeable third parties.
B) Both parties in privity and reasonably foreseeable third parties.
C) Only reasonably foreseeable third parties and not those parties in privity.
D) Neither reasonably foreseeable third parties nor parties in privity.
Q3) Which of the following is not within the class of foreseen users of an accountant's work product?
A) A prospective shareholder of the client.
B) A lender bank when the accountant knows only that the client will use the financial statements to obtain a loan from an unspecified source.
C) A bank when the accountant knows the client will rely on the financial statements as the basis for a loan from the bank.
D) An investor if the accountant knows that the client is seeking capital from a select group of investors.
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Chapter 21: Assurance,Attestation,amd Internal Auditing
Services-professional Judgement Module
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Sample Questions
Q1) The expectation that an internal auditor does not accept gifts that may impair judgment is based on the principle of A) integrity.
B) objectivity.
C) confidentiality.
D) competency.
Q2) In providing PrimePlus services,a CPA is likely to perform all of the following functions except:
A) Observe and report on the quality of care provided to older individuals.
B) Directly receive income and pay bills and provide an accounting for these transactions.
C) Directly evaluate the quality of health care services provided by physicians and other medical caregivers.
D) Perform assurance-related procedures by inspecting logs or other evidence to support that contracted services have been provided.
Q3) Electronic commerce is an example of a category of assurance services. A)True B)False
Q4) Explain each of the three PrimePlus Services typically offered by practitioners.
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