Auditing Exam Review
Course Introduction
Auditing is a core course that introduces students to the principles, standards, and practices of auditing within the context of financial reporting. The course covers the objectives and procedures of external and internal audits, including risk assessment, planning and conducting audit tests, gathering and evaluating audit evidence, and forming audit opinions. Students will learn about ethical and legal considerations for auditors, the use of technology in auditing, and the importance of internal controls. The course also explores the regulatory environment, recent developments in auditing standards, and the auditors role in ensuring transparency and accountability in business organizations.
Recommended Textbook
Auditing and Assurance Services 7th Edition by Timothy J Louwers
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20 Chapters
1606 Verified Questions
1606 Flashcards
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Chapter 1: Auditing and Assurance Services
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62 Verified Questions
62 Flashcards
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Sample Questions
Q1) Which of the following is a management assertion regarding account balances at the period end?
A)Transactions and events that have been recorded have occurred and pertain to the entity.
B)Transactions and events have been recorded in the proper accounts.
C)The entity holds or controls the rights to assets,and liabilities are obligations of the entity.
D)Amounts and other data related to the transactions and events have been recorded appropriately.
Answer: C
Q2) What is information risk? What is business risk?
Answer: Information risk is the risk that financial statements will be materially false or misleading.Business risk is the risk an entity will fail to meet its objectives.
Q3) In performing an attestation engagement,a CPA typically
A)supplies litigation support services.
B)assesses control risk at a low level.
C)expresses a conclusion on an assertion about some type of subject matter.
D)provides management consulting advice.
Answer: C
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Page 3
Chapter 2: Professional Standards
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Sample Questions
Q1) Which of the following is not true with respect to the auditors' report for a public entity?
A)The report title should contain the word "independent".
B)The report provides a detailed listing of major auditing procedures performed during the examination.
C)The opinion assesses the financial statements against an applicable financial reporting framework.
D)The report specifically identifies the financial statements and years examined by the auditor.
Answer: B
Q2) Which of the following is most closely associated with the responsibilities principle?
A)Due care.
B)Planning.
C)Qualified audit opinion.
D)Risk of material misstatement.
Answer: A
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Chapter 3: Engagement Planning
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Sample Questions
Q1) Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?
A)Make inquiries of the client's lawyer concerning pending litigation.
B)Perform cutoff tests of cash receipts and disbursements.
C)Compare financial information with nonfinancial operating data.
D)Recalculate the prior year's accruals and deferrals.
Answer: C
Q2) Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
A)Trace test counts noted during the physical count of inventory to the summarization of quantities.
B)Inspect agreements for evidence of inventory held on consignment.
C)Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.
D)Inspect the open purchase order file for significant commitments to consider for disclosure.
Answer: B
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Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) The acceptable level of detection risk is inversely related to the A)assurance provided by substantive tests.
B)risk of misapplying audit procedures.
C)preliminary judgment about materiality levels.
D)risk of failing to discover material misstatements.
Q2) Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data.The primary purpose of analytical procedures conducted during the planning stages is to
A)identify the appropriate schedules to be prepared by the client.
B)identify the types of errors or frauds that can occur in transactions.
C)identify unusual conditions that deserve additional audit effort.
D)determine the existence of unrecorded liabilities or overstated assets.
Q3) Auditors use brainstorming
A)to heighten the audit team's awareness of fraud potential.
B)to heighten management's awareness of fraud potential.
C)to determine detection risk.
D)to set materiality.
Q4) Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.
Page 6
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Chapter 5: Risk Assessment: Internal Control Evaluation
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67 Verified Questions
67 Flashcards
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Sample Questions
Q1) Which of the following outcomes is a likely benefit of information technology used for internal control?
A)Processing of unusual or nonrecurring transactions
B)Enhanced timeliness of information
C)Potential loss of data
D)Recording of unauthorized transactions
Q2) If auditors assess control risk at the maximum level,they will tend to
A)perform a great deal of additional tests of controls.
B)perform a great deal of substantive testing during the audit.
C)perform substantive tests at an interim date.
D)perform more audit procedures using internal evidence.
Q3) Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
A)Require all employees to record arrival and departure by using the time clock.
B)Have a payroll clerk recalculate all time cards.
C)Require all employees to sign their time cards.
D)Require employees to have their direct supervisors approve their time cards.
Q4) Explain the different opinions that auditors can issue for an entity's internal control over financial reporting.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) Which of the following management policies would increase the probability of fraud in a company?
A)Diversifying authority throughout divisions and subsidiaries in the organization
B)Measuring performance and awarding bonuses based on short-term operating results
C)Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work
D)Establishing work teams that share responsibilities,performance,and bonuses based on collective efforts
Q2) The mail which includes payments should be opened by two people.This control is called
A)separation of duties.
B)joint custody.
C)anti-collusion.
D)lapping.
Q3) Describe how a lockbox works and indicate the advantages of such a system.
Q4) List,and briefly describe,the three factors that increase the probability of fraud.
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8
Chapter 7: Revenue and Collection Cycle
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) If control risk is assessed very low,the substantive audit procedures on account balances must be expanded.
Question also found in study guide
A)True
B)False
Q2) The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.
Question also found in study guide
A)True
B)False
Q3) In the audit of accounts receivable,the most important emphasis should be on the A)completeness assertion.
B)existence assertion.
C)rights and obligations assertion.
D)presentation and disclosure assertion.
Q4) Internal control assessment is important because it governs the ________________________________,____________________________
_____ and _________________________________ of substantive procedures.
Question also found in study guide
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Chapter 8: Acquisition and Expenditure Cycle
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
A)Human resources function from the controllership function.
B)Administrative controls from the internal accounting controls.
C)Authorization of transactions from the custody of related assets.
D)Operational responsibility from the record keeping responsibility.
Q2) Which of the following situations represents an internal control weakness in the payroll department?
A)Payroll department personnel are rotated in their duties.
B)Paychecks are distributed by the employees' immediate supervisor.
C)Payroll records are reconciled with quarterly tax reports.
D)The timekeeping function is independent of the payroll department.
Q3) Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?
A)Depreciation expense.
B)Gain on disposal of equipment.
C)Accounts payable.
D)Repairs and maintenance expense.
Q4) ...
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Chapter 9: Production Cycle
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97 Flashcards
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Sample Questions
Q1) If control risk is assessed high,cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory.
A)True
B)False
Q2) Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
A)Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.
B)Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.
C)Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.
D)Require a manager's signature for the removal of any inventory item with a value above $50.
Q3) Prepare an audit plan for the observation of an inventory count.
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Chapter 10: Finance and Investment Cycle
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116 Verified Questions
116 Flashcards
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Sample Questions
Q1) Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for A)accounting.
B)valuation or allocation.
C)completeness.
D)existence or occurrence.
Q2) In auditing for unrecorded long-term bonds payable,an audit team most likely will
A)perform analytical procedures on the bond premium and discount accounts.
B)examine documentation of assets purchased with bond proceeds for liens.
C)compare interest expense with the bond payable amount for reasonableness.
D)confirm the existence of individual bondholders at year-end.
Q3) Loan covenants are used for which of the following reasons?
A)To protect the lender from the borrower substantially weakening the borrower's financial position.
B)To protect the borrower from the lender calling the loan early.
C)To protect the auditors from false information by the borrower.
D)To protect shareholders from management taking on too much debt.
Q4) ...
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Page 12
Chapter 11: Completing the Audit
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59 Verified Questions
59 Flashcards
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Sample Questions
Q1) Analytical procedures performed near the end of an audit generally include
A)Considering unusual or unexpected account balances that were not previously identified.
B)Performing tests of transactions to corroborate management's financial statement assertions.
C)Gathering evidence concerning account balances that have not changed from the prior year.
D)Retesting control activities that appeared to be ineffective during the assessment of control risk.
Q2) Explain briefly auditors' responsibility for subsequently discovered facts existing at the date of the auditors' reports.
Q3) Interim testing normally occurs between the ____ and the ____.
A)Beginning of the year under audit; audit report release date.
B)Date of the financial statements; audit report release date.
C)Beginning of the year under audit; date of the financial statements.
D)End of the year under audit; date of the auditors' report.
Q4) Define what is meant by the term "subsequent event".In addition,identify the two types of subsequent events and indicate how auditors should modify the engagement for the discovery of subsequent events.
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Chapter 12: Reports on Audited Financial Statements
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91 Flashcards
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Sample Questions
Q1) How do auditors make the following representations when issuing the standard (unmodified)auditors' report?
\[\begin{array} { c c c }
& \text { } & \text { Use of judgrnent ir } \\
&\text { Consistent application of} & \text { selecting audit } \\
&\text { accounting principles } & \text { procedures} \\
\text { A } & \text { Irmplicitly } & \text { Explicitly } \\
\text { B. } & \text { Explicitly } & \text { Irmplicitly } \\
\text { C. } & \text { Implicitly } & \text { Explicitly } \\
\text { D. } & \text { Explicitly } & \text { Explicitly } \end{array}\]
Q2) When there has been a change in accounting principles,but the effect of the change on the comparability of the financial statements is not material,the auditors should
A)Refer to the change in an emphasis-of-matter paragraph.
B)Explicitly concur that the change is preferred.
C)Not refer to consistency in the report.
D)Refer to the change in the opinion paragraph.
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Chapter 13: Other Public Accounting Services
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54 Verified Questions
54 Flashcards
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Sample Questions
Q1) Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company?
A)An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure
B)An audit engagement to render an opinion on the entity's internal control structure
C)A prospective engagement to project,for a period of time not to exceed one year,and report on the expected benefits of the entity's internal control structure
D)A consulting engagement to provide constructive advice to the entity on its internal control structure
Q2) Which of the following is NOT a principle of Trust Service engagements?
A)Security from unauthorized use
B)Availability of the system,products,or services
C)Proficiency in preparing transactions
D)Confidentiality of information
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Chapter 14: Professional Ethics
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Sample Questions
Q1) An interpretation of the Independence Rule allows members to
A)Hold a material indirect interest in a client.
B)Have loans from a client that are collateralized by cash deposits held by the client.
C)Have home mortgages with a client even if they are on the engagement.
D)Be a trustee of a client pension or profit sharing trust.
Q2) Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead?
A)All owners must be members.
B)The owners whose names appear in the firm name must be members.
C)At least one of the owners must be a member.
D)The firm must be a dues-paying member.
Q3) Which of the following is NOT a key element of the definition of ethics?
A)Reflective choice
B)Moral principles
C)Definitive conclusions
D)Consequences of decisions
Q4) What are (a)the AICPA Principles of Professional Conduct,(b)Rules of Conduct,and (c)Interpretation of Rules of Conduct?
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Page 16
Chapter 15: Legal Liability
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Sample Questions
Q1) Which of the following statements is true concerning auditors' responsibilities during the audit?
A)Auditors must exercise the level of care,skill,and judgment expected of a reasonably prudent auditor under the circumstances.
B)Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements.
C)Auditors are strictly liable for failures to discover client fraud.
D)Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards.
Q2) A principle that may reduce or eliminates auditors' liability to clients is:
A)Client's constructive negligence.
B)Client's contributory negligence.
C)Auditors' ordinary negligence.
D)Auditors' gross negligence.
Q3) What are the legal liabilities of auditors under common law?
Q4) Briefly explain the concept of proportionate liability.Why is the adoption of proportionate liability important to the accounting profession?
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17
Chapter 16: Internal Audits, Governmental Audits, and Fraud Examinations
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109 Verified Questions
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Sample Questions
Q1) The Standards for the Professional Practice of Internal Audit of the Institute of Internal Auditors (IIA)is classified in three major categories.Which of the following is not one of these categories?
A)Attribute standards.
B)Performance standards.
C)Governance standards.
D)Implementation standards.
Q2) Prosecution of fraud perpetrators is advisable because if not prosecuted,they _______________________________,and failure to do so
Question also found in study guide
Q3) The federal law that established uniform requirements for audits of federal assistance provided to state and local governments is called
A)the Single Audit Act of 1984.
B)the Uniform Requirements Act of 1992.
C)the Sarbanes-Oxley Act or 2002.
D)the Audit Reduction Act of 1985.
Q4) How do government auditors achieve objectivity?
Q5) What are the different types of government audits?
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) While performing an audit of accounts receivable,Allen,CPA,found that the sample results supported the conclusion that the accounts receivable balance was materially misstated.However,the balance was,in fact,not materially misstated.This situation illustrates the risk of:
A)Incorrect rejection.
B)Incorrect acceptance.
C)Overreliance.
D)Underreliance.
Q2) The set of items about which a conclusion is made in a sampling application is referred to as a (n):
A)Sampling unit.
B)Sample.
C)Population unit.
D)Population.
Q3) Which of the following does not affect the sample size in an attributes sampling application?
A)Expected population deviation rate.
B)Upper limit rate of deviation.
C)Sampling risk.
D)Tolerable rate of deviation.
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Chapter 18: Attributes Sampling
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Sample
Questions
Q1) When testing internal controls,which of the following statements is not true with respect to the use of nonstatistical sampling?
A)Nonstatistical sampling is permitted in the audits of both public and nonpublic entities.
B)Nonstatistical sampling does not require the use of random selection techniques.
C)When using nonstatistical sampling,auditors are required to quantify the parameters used to determine sample size.
D)Auditors are required to use professional judgment in evaluating the sample results in a nonstatistical sampling application.
Q2) In the study of internal control,the auditor uses sampling to compare the ____ to the _____.
A)Error; overall materiality level.
B)Sampling risk; precision.
C)Deviation rate; tolerable rate of deviation.
D)Precision interval; upper limit on misstatement.
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20
Chapter 19: Variables Sampling
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Sample Questions
Q1) _____ sampling methods use normal distribution theory and the central limit theorem to provide a range estimate of the account balance or class of transactions or the misstatement in the account balance or class of transactions.
A)Attributes.
B)Classical variables.
C)Nonstatistical.
D)Monetary unit sampling (MUS).
Q2) The risk of incorrect acceptance relates to the:
A)Effectiveness of the audit.
B)Efficiency of the audit.
C)Preliminary estimate of materiality.
D)Allowable risk of tolerable misstatement.
Q3) Which component of the expanded audit risk model is most closely associated with the risk of incorrect acceptance?
A)Analytical procedures risk.
B)Risk of material misstatement.
C)Nonsampling risk.
D)Test of details risk.
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21
Chapter 20: Auditing and Information Technology
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Sample Questions
Q1) Which of the following is a category of general controls?
A)Detective controls.
B)Input controls.
C)Processing controls.
D)Program change controls.
Q2) The effectiveness of general controls is an important consideration for audit teams when assessing control risk on an audit.Which management assertions are primarily affected by general controls?
A)Completeness and Accuracy.
B)Occurrence and Rights and Obligations.
C)Accuracy and Occurrence.
D)Completeness and Occurrence.
Q3) Which of the following is a general control that would most likely assist an organization whose systems analyst resigned during the development of a major project?
A)Grandfather-father-son file retention.
B)Input and output validation routines.
C)Systems documentation.
D)Check digit verification.
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Page 22