Auditing
Chapter Exam Questions
Course Introduction
This course offers an in-depth examination of auditing principles, standards, and practices within the context of financial reporting and internal control systems. Students will explore the objectives and responsibilities of auditors, gain familiarity with the regulatory environment, and learn methods for gathering audit evidence, assessing risk, and documenting procedures. Emphasis is placed on both internal and external auditing processes, ethical considerations, audit planning, sampling, and reporting. The course combines theoretical frameworks with case studies to help students understand the practical challenges faced by auditors in a dynamic business environment.
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Auditing and Assurance Services 5th edtion by Grant Gay
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Page 2
Chapter 1: Assurance and Auditing: An Overview
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Q1) Which of the following is not one of the fundamental principles of professional ethics underlying an audit?
A) Objectivity.
B) Integrity.
C) Knowledge.
D) Confidentiality.
Answer: C
Q2) It is very hard for auditors to remain independent of their clients, given that they are paid by their clients. Below are a number of possible mechanisms:
I.ethical rules.
II.auditing and other professional standards.
III.audit committees.Which of these mechanisms can help the auditor maintain their independence?
A) I and II only.
B) I and III only.
C) II and III only.
D) I, II and III.
Answer: D
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Chapter 2: The Structure of the Profession
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Q1) With respect to the quality control element concerning hiring, which policy will provide reasonable assurance that those employed possess the appropriate characteristics to enable them to work competently?
A) Establish qualifications and guidelines for evaluating potential hirees at each professional level.
B) Establish guidelines and requirements for the firm's professional development program and communicate them to personnel.
C) Establish qualifications deemed necessary for the various levels of responsibility.
D) Assign responsibility for making advancement decisions.
Answer: A
Q2) The mandatory continuing professional education (CPE) requirement for members of The Institute of Chartered Accountants in Australia is:
A) 120 CPE hours every year.
B) 120 CPE hours every three years.
C) 60 CPE hours every three years.
D) 60 CPE hours every year.
Answer: B
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Chapter 3: Ethics, Independence and Corporate Governance
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Q1) Which of the following statements is correct?
A) Ethics is concerned primarily with the well being of your client.
B) Ethics is principally an attitude of mind.
C) Ethics is principally concerned with having a set of rules that must be complied with.
D) Ethics is concerned with creating an environment that allows entities to make an equitable profit.
Answer: B
Q2) Which of the following statements would be considered a function of an audit committee?
A) Overseeing the application of appropriate accounting policies and procedures to ensure appropriate disclosure.
B) Appointing the external auditor.
C) Preparing the financial report for audit.
D) Making decisions regarding the purchase of company assets.
Answer: D
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Page 5
Chapter 4: The Legal Liability of Auditors Part Two: Planning
and Risk
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Q1) An auditor finds evidence that warehouse staff are fraudulently claiming overtime. The auditor should:
A) further investigate the matter and report it to management when concrete evidence has been obtained.
B) report the matter to management in the year-end management letter.
C) report the matter to management immediately if the expected financial effect of the fraud is material.
D) report the matter to management immediately.
Q2) An auditor discovers a likely fraud during an audit, but concludes that its effects, if any, could not be material enough to affect the auditor's opinion. The auditor should:
A) perform additional audit procedures to determine whether fraud has occurred and, if so, the amount thereof.
B) report the finding to the appropriate level of the client with the recommendation that it be pursued to a conclusion.
C) notify the proper authorities.
D) note in the working papers that the amount is immaterial and that no further action is required.
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Page 6
Chapter 5: Overview of Elements of the Financial Report
Audit Process
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Q1) Which of the following factors will least affect the independent auditor's judgment as to the quantity, type and content of working papers desirable for a particular engagement?
A) Nature of the auditor's report.
B) Nature of the financial report, schedules, or other information upon which the auditor is reporting.
C) Need for supervision and review.
D) Number of personnel assigned to the audit.
Q2) In testing the existence assertion for an asset, an auditor ordinarily works from the:
A) potentially unrecorded items to the financial report.
B) financial report to the potentially unrecorded items.
C) supporting evidence to the accounting records.
D) accounting records to the supporting evidence.
Q3) The audit trail includes all of the following except:
A) journals and journal files.
B) segregation of duties.
C) ledgers and ledger files.
D) source documents and transaction files.
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Chapter 6: Planning, Understanding the Entity and Evaluating Business Risk
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Q1) Engagement letters include all of the following except:
A) a list of additional services that will be provided.
B) a list of adjusting journal entries.
C) information about the audit fee.
D) arrangements involving the use of experts.
Q2) One reason why the independent auditor performs analytical procedures of the client's operations is to identify:
A) deficiencies of a material nature in the internal control.
B) unusual transactions.
C) non-compliance with prescribed control procedures.
D) improper separation of accounting and other financial duties.
Q3) Because of the risk of material misstatement, an audit of a financial report in accordance with the auditing standards should be planned and performed with an attitude of:
A) objective judgment.
B) independent integrity.
C) professional scepticism.
D) impartial conservatism.
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Chapter 7: Assessing Specific Business Risk
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Q1) If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the engagement, the auditor should:
A) notify all parties who may rely upon the company's illegal act.
B) consult with legal counsel as to what other action, if any, should be taken.
C) return all incriminating evidence and working papers to the client's audit committee for follow-up.
D) contact the successor auditor to make the successor aware of the possible consequences of relying on management's representations.
Q2) Which of the following inventory items is likely to have high inherent risk?
A) Internet computer software.
B) Cement.
C) Washing machines.
D) Office furniture.
Q3) Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
A) Potential for fraud.
B) The entity is close to violating loan covenants.
C) Firm policy sets materiality at five per cent of pre-tax income.
D) A small misstatement would interrupt an earnings trend.
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Page 9
Chapter 8: Understanding and Assessing Internal Control
Part Three: Tests of Control and Tests of Details
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Q1) Assessing control risk as less than high would most likely involve:
A) changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
B) identifying specific internal controls relevant to specific assertions.
C) performing more extensive substantive tests with larger sample sizes than originally planned.
D) reducing inherent risk for most of the assertions relevant to significant account balances.
Q2) An effective internal control for the payroll function would generally include which of the following?
A) Total time recorded on time-clock cards should be reconciled to job reports by employees responsible for those specific jobs.
B) Payroll department employees should be supervised by the management of the personnel department.
C) Payroll department employees should be responsible for maintaining employee personnel records.
D) Total time spent on jobs should be compared with total time indicated on time-clock cards.
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Chapter 9: Tests of Controls
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Q1) Which is not a key segregation of duties for the revenue process? Different parties should:
A) prepare shipping orders and prepare bills of landing.
B) perform the credit and billing functions.
C) perform the shipping and billing functions.
D) receive cash and adjust accounts receivable.
Q2) Tests of controls of an advanced IT system:
A) can be performed using actual transactions or simulated transactions.
B) can be performed using only actual transactions since testing of simulated transactions is of no consequence.
C) is inadvisable because it may distort the evidence in master files.
D) is impractical since many procedures within the CIS activity leave no visible evidence of having been performed.
Q3) Which of the following control activities is not usually performed in the vouchers payable department?
A) Controlling the mailing of the cheque and remittance advice.
B) Matching the receiving report with the purchase order.
C) Determining the mathematical accuracy of the vendor's invoice.
D) Having an authorised person approve the voucher.
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Page 11
Chapter 10: Substantive Tests of Transactions and Balances
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Q1) An auditor analyses repairs and maintenance accounts primarily to obtain evidence that:
A) expenditures for property, plant and equipment have been recorded in the proper period.
B) non-capitalisable expenditures for repairs and maintenance have been recorded in the proper period.
C) expenditures for property, plant and equipment have not been charged to expenses.
D) non-capitalisable expenditures for repairs and maintenance have been properly charged to expenses.
Q2) The auditor is most likely to verify the liability account 'accrued commissions payable' in conjunction with the:
A) verification of contingent liabilities.
B) review of sales transactions.
C) examination of trade accounts payable.
D) review of disbursements after year-end.
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Chapter 11: Audit Sampling Part Four: Completion and Communication
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Q1) Which of the following best describes the distinguishing feature of statistical sampling compared with non-statistical sampling?
A) It provides a means for measuring mathematically the degree of uncertainty that results from examining only part of a population.
B) It requires the examination of a smaller number of supporting documents.
C) It is evaluated in terms of two parameters: statistical mean and random selection.
D) It reduces the problems associated with the auditor's judgment concerning materiality.
Q2) Sarah Jones, an auditor, believes the industry-wide occurrence rate of client billing errors is three per cent and has established a tolerable deviation rate of five per cent. In the review of client invoices to test that the invoice is properly checked and authorised, Jones should use:
A) attribute sampling.
B) discovery sampling.
C) variable sampling.
D) stratified sampling.
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13
Chapter 12: Completion and Review
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Q1) As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should:
A) express an opinion that is modified due to the inability of the client company to continue as a going concern.
B) evaluate management's performance in causing this decline.
C) require footnote disclosure.
D) consider the possibility of an error in the financial report.
Q2) A representation letter issued by a client:
A) is essential for the preparation of the audit program.
B) is a substitute for testing.
C) does not reduce the auditor's responsibility.
D) reduces the auditor's responsibility only to the extent that it is relied upon.
Q3) Which of the following auditing procedures is ordinarily performed last?
A) Reading the mins of the directors' meetings.
B) Confirming accounts payable.
C) Obtaining a management representation letter.
D) Testing the purchasing function.
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Chapter 13: The Auditors Reporting Obligations Part Five:
Other Assurance Services
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Q1) An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision (it is the other information which is inconsistent with the auditor's knowledge), but the client refuses to revise or Eliminate the material inconsistency, the auditor may:
A) issue a qualified opinion after discussing the matter with the client's board of directors.
B) consider the matter closed since the other information is not in the audited financial statements.
C) revise the auditor's report to include an Emphasis of Matter paragraph describing the material inconsistency.
D) revise the auditor's report to include an Other Matter paragraph describing the material inconsistency.
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Chapter 14: Internal Auditing
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Q1) The purpose of an internal auditor's review for effectiveness of the internal control structure is to ascertain if:
A) the system is functioning efficiently and economically.
B) the system is functioning as intended.
C) financial and operating data are reliable.
D) the entity's goals and objectives have been achieved.
Q2) Which of the following statements best describes internal auditing?
A) An activity located within an entity, primarily to detect fraud.
B) An accounting function located within an entity.
C) An activity located within an entity that determines the fiscal integrity of a financial report.
D) An independent and objective assurance activity within an entity.
Q3) Factors currently driving change in internal audit include all of the following, except for:
A) the ability of internal audit to demonstrate its value-adding nature to an organisation.
B) the provision of a broader range of assurance services by the external auditor.
C) increased emphasis on corporate governance and business risk management.
D) the increased ability to benchmark against internal audit best practice.
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Chapter 15: Auditing and Assurance Services in the Public Sector
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Q1) A typical objective of a performance audit is for the auditor to:
A) determine whether the financial report presents the entity's operations fairly.
B) evaluate the feasibility of attaining the entity's operational objectives.
C) make recommendations for improving performance.
D) report on the entity's relative success in attaining profit maximisation.
Q2) The proposed annual expenditures of the Commonwealth Government are authorised by:
A) the Auditor-General.
B) the Treasurer.
C) the Department of Finance.
D) the Parliament.
Q3) In reporting performance audit findings, why does an auditor evaluate evidence against criteria?
A) To ensure reasonable criteria have been established.
B) To develop conclusions relative to the audit objectives.
C) To develop the audit scope.
D) To determine risk.
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Page 17
Chapter 16: Other Assurance Services and Advanced Topics
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Q1) Which of the following is not a major difference between integrated reporting and existing reporting frameworks?
A) The variety of financial and non-financial metrics covered.
B) The emphasis on internal control.
C) The emphasis on forward-looking information.
D) The reflection of company strategy.
Q2) In which of the following scenarios is it more likely that the information provided will be continuously assured?
A) An entity decides to assure its environmental and sustainability report.
B) An entity has to provide a compliance report with regards whether there has been a breach of the rules with regards how confidential credit card details for electronic commerce transactions are stored.
C) An identity identifies that there is a risk that financial investments are not being written down to market value in the financial statements, as is required by accounting standards.
D) Financial information where a client determines to assure the quarterly financial reports as well as the half-yearly financial reports.
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