Auditing Exam Review
Course Introduction
Auditing is a course designed to provide students with a thorough understanding of the principles, procedures, and standards of auditing in both the public and private sectors. The course covers the entire audit process, from planning and evidence gathering to final reporting, emphasizing the ethical and legal responsibilities of auditors. Students learn about internal controls, risk assessment, audit sampling, and the application of generally accepted auditing standards (GAAS). Through case studies and practical exercises, the course also explores contemporary issues in auditing, including fraud detection, technological advancements, and regulatory changes, preparing students for professional roles in assurance services and audit engagement.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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26 Chapters
3526 Verified Questions
3526 Flashcards
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Chapter 1: The Demand for Audit and Other Assurance Services
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) A high, but not absolute, level of assurance is called
A) probable assurance.
B) reasonable assurance.
C) limited assurance.
D) incomplete assurance.
Answer: B
Q2) Auditing can have a significant effect on both information risk and business risk.
A)True
B)False
Answer: False
Q3) Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period.
A)True
B)False
Answer: True
Q4) Financial statement users do not confuse auditing with accounting any longer.
A)True
B)False
Answer: False
Page 3
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Chapter 2: The CPA Profession
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Which of the following statements about Generally Accepted Audit Standards are true?
I. They serve as broad guidelines to auditors for conducting an audit engagement.
II. They are sufficiently specific to provide a meaningful guide to practitioners.
III. They represent a framework upon which the AICPA can provide interpretations.
A) I and II
B) I and III
C) II and III
D) I, II and III
Answer: B
Q2) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 Act requires audited financial statements.
A)True
B)False
Answer: False
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Chapter 3: Audit Reports
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170 Verified Questions
170 Flashcards
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Sample Questions
Q1) When a qualified or adverse opinion is issued, the qualifying paragraph is inserted A) between the introductory and scope paragraphs.
B) between the scope and opinion paragraphs.
C) after the opinion paragraph, as a fourth paragraph.
D) immediately after the address, as the first paragraph.
Answer: B
Q2) When there is a lack of consistent application in accounting principles, A) the nature and impact of the change should be adequately disclosed.
B) the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change.
C) the materiality of the change is evaluated based on the current year effect of the change.
D) all of the above.
Answer: D
Q3) A pervasive exception is one that affects different parts of the financial statements. A)True
B)False
Answer: True
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5
Chapter 4: Professional Ethics
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Sample Questions
Q1) A direct financial interest violates independence in which of the following circumstances?
A) when close relatives such as nondependent children, brothers, and sisters have a significant financial interest in the client
B) when close relatives such as nondependent children, brothers, and sisters have any financial interest in the client
C) when the CPA owns shares in a mutual fund that has an ownership interest in the client
D) when close relatives such as a brother, sister, or in-laws are employed by the client in their engineering department
Q2) Most people define unethical behavior as conduct that differs from what they believe is appropriate given the circumstances.
A)True
B)False
Q3) If an action is considered legal, it must also be considered ethical.
A)True
B)False
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Chapter 5: Legal Liability
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) Which of the following statements about the Securities Act of 1933 is not true?
A) A third party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements.
B) A third-party user does not have the burden of proof that he/she relied on the financial statements.
C) A third-party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit.
D) A third-party user does not have the burden of proof that the loss was caused by the misleading statements.
Q2) The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called
A) separate and proportionate liability.
B) shared liability.
C) unitary liability.
D) joint and several liability.
Q3) Discuss at least three specific actions which practicing auditors can take to minimize their legal liability.
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Chapter 6: Audit Responsibilities and Objectives
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180 Verified Questions
180 Flashcards
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Sample Questions
Q1) The general balance-related audit objective that deals with determining that details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total in the general ledger is the detail tie-in objective.
A)True
B)False
Q2) Overconfidence is the tendency to put more weight on information that is consistent with the initial beliefs or preferences.
A)True
B)False
Q3) If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct,
A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically practical.
Q4) The Sarbanes-Oxley Act provides for criminal penalties.
A)True
B)False
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Chapter 7: Audit Evidence
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164 Verified Questions
164 Flashcards
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Sample Questions
Q1) Evidence is generally considered appropriate when
A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
C) it is relevant to the audit objective being tested.
D) it consists of written statements made by managers of the company under audit.
Q2) A company's long-term solvency
A) can be measured by the gross profit percentage.
B) depends on the success of its operations and on its ability to raise capital for expansion.
C) can be measured by the days to collect receivables ratio.
D) depends on its ability to generate cash for the payment of dividends.
Q3) When the auditor uses supporting evidence for amounts posted to account balances with documentary evidence, that process is called A) inquiry.
B) confirmation.
C) vouching.
D) physical examination.
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9
Chapter 8: Audit Planning and Materiality
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172 Verified Questions
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Sample Questions
Q1) Given the extensive use of third-party vendors for a variety of information technology-related services, management must obtain greater knowledge regarding these suppliers, not the auditor, when performing their risk assessment procedures.
A)True
B)False
Q2) The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is
A) they got lucky the landlord hasn't noticed the lack of payments.
B) the landlord has weak internal controls over billings.
C) a related party transaction in which a major shareholder owns the office tower.
D) Matthews Company is engaging in fraudulent activities.
Q3) Which is a liquidity activity ratio?
A) profit margin
B) inventory turnover
C) return on assets
D) times interest earned
Q4) List the five steps in applying materiality in an audit.
Q5) Discuss the essential activities involved in the initial planning of an audit.
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Chapter 9: Assessing the Risk of Material Misstatement
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Sample Questions
Q1) A high detection risk equates to a low amount of audit evidence needed.
A)True
B)False
Q2) Overall assessment of acceptable audit risk is highly subjective.
A)True
B)False
Q3) Accounts that require considerable judgment have a higher inherent risk.
A)True
B)False
Q4) Which of the following is not a primary consideration when assessing inherent risk?
A) nature of client's business
B) existence of related parties
C) effectiveness of internal controls
D) susceptibility to misappropriation of assets
Q5) Inherent risk and control risk exist independent of the audit of the financial statements.
A)True
B)False
Q6) Why do auditors use the audit risk model when planning an audit?
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Chapter 10: Fraud Auditing
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139 Verified Questions
139 Flashcards
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Sample Questions
Q1) Upon discovering information that indicates a material misstatement due to fraud, the auditor must assume that the misstatement is an isolated incident.
A)True
B)False
Q2) According to the Association of Certified Fraud Examiners (ACFE), the average company loses ________ percent of its revenues to fraud.
A) one
B) five C) ten D) fifteen
Q3) List and briefly describe cases and examples of fraudulent financial reporting.
Q4) The auditor has a responsibility to notify law enforcement when fraud is suspected. A)True
B)False
Q5) List and briefly describe the three conditions for fraud.
Q6) Interrogative inquiry is often confrontational.
A)True B)False
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Chapter 11: Internal Control and Coso Framework
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151 Verified Questions
151 Flashcards
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Sample Questions
Q1) Which of the following is not a general control?
A) Computer performed validation tests of input accuracy.
B) Equipment failure causes error messages on monitor.
C) There is a separation of duties between programmer and operators.
D) There are adequate program run instructions for operating the computer.
Q2) ________ is the information technology and internal control processes an organization has in place to protect computers, networks, programs, and data from unauthorized access.
A) Encryption
B) A firewall
C) Cybersecurity
D) A processing control
Q3) Discuss the four areas of responsibility under the IT function that should be segregated in large companies.
Q4) Describe each of the three broad objectives management typically has for internal control. With which of these objectives is the auditor primarily concerned?
Q5) Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) Which of the following is not seen as an advantage to using generalized audit software (GAS)?
A) Auditors can learn the software in a short period of time.
B) It can be applied to a variety of clients after detailed customization.
C) It can be applied to a variety of clients with minimal adjustments to the software.
D) It greatly accelerates audit testing over manual procedures.
Q2) The two disadvantages of using questionnaires are their inability to provide an overview of the system and their inapplicability for some audits, especially smaller ones.
A)True
B)False
Q3) Narratives, flowcharts, and internal control questionnaires are three common methods of
A) testing the internal controls.
B) documenting the auditor's understanding of internal controls.
C) designing the audit manual and procedures.
D) documenting the auditor's understanding of a client's organizational structure.
Q4) Describe three computer auditing techniques available to the auditor.
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Chapter 13: Overall Audit Strategy and Audit Program
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119 Verified Questions
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Sample Questions
Q1) In phase IV of the audit, complete the audit and issue an audit report, there are five activities required. List below the activities.
Q2) Auditors must perform tests of controls separately from substantive tests of transactions.
A)True
B)False
Q3) Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances.
A)True
B)False
Q4) The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency.
A)True
B)False
Q5) Discuss the major activities and procedures performed by the auditor in the plan and design of the audit approach.
Q6) List each of the five types of audit tests.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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139 Verified Questions
139 Flashcards
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Sample Questions
Q1) The accurate recording of sales transactions concerns all of the following except for A) proper credit authorization.
B) shipping the amount of goods ordered.
C) accurately billing for the amount of goods shipped.
D) accurately recording the amount billed in the accounting records.
Q2) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the A) existence objective.
B) completeness objective.
C) ownership objective.
D) valuation objective.
Q3) The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on A) bad debt expense.
B) the analytical tests to be performed.
C) the confirmation of accounts receivable.
D) the impact of processing cash receipts.
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Page 16
Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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151 Verified Questions
151 Flashcards
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Sample Questions
Q1) One of the causes of nonsampling risk is
A) choosing the wrong sample size.
B) effective audit procedures.
C) inadequate sample size.
D) failure to recognize exceptions.
Q2) If the auditor concludes that the computer upper exception rate (CUER) is 5% at an 8% sampling risk, this means that the exception rate in the population is no greater than 5% with an 8% risk of the exception rate exceeding 5%.
A)True
B)False
Q3) The exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the
A) tolerable exception rate.
B) estimated population exception rate.
C) acceptable risk of overreliance.
D) sample exception rate.
Q4) If an auditor does a test in the wrong direction, sampling risk will increase.
A)True
B)False
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Chapter 16: Completing the Tests in the Sales and Collection Cycle:
Accounts Receivable
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130 Verified Questions
130 Flashcards
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Sample Questions
Q1) Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.
A)True
B)False
Q2) To determine if the client has rights to the accounts receivable on the trial balance, the auditor should inquire of management if any receivables are pledged or factored.
A)True
B)False
Q3) Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.
Q4) Confirmation of accounts receivable balances normally provides evidence concerning the A) valuation of the balances.
B) rights of the balances.
C) existence of the balances.
D) completeness of the balances.
Q5) Describe how the auditor tests the accuracy objective for accounts receivable.
Page 18
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Chapter 17: Audit Sampling for Tests of Details of Balances
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129 Verified Questions
129 Flashcards
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Sample Questions
Q1) ARIA measures the auditor's desired assurance for an account balance.
A)True
B)False
Q2) While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. Which of the following is the least likely auditor reaction to this discovery?
A) perform expanded audit tests in the relevant areas
B) increase detection risk in the relevant areas
C) increase the sample size
D) take no action until tests of other audit areas are completed
Q3) An auditor using nonstatistical sampling cannot formally measure sampling error. A)True
B)False
Q4) To calculate the sample size using difference estimation sampling, it is not necessary for the auditors to have an advance population standard deviation estimate. A)True
B)False
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19
Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
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Sample Questions
Q1) When auditing accounts payable, the auditor is more concerned about the possibility of understatements than overstatements.
A)True
B)False
Q2) A document received from the vendor indicating such things as the description and quantity of goods and services received, price including freight, cash discount terms, and date of billing is called the voucher.
A)True
B)False
Q3) When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus?
A) auditors' legal liability
B) GAAP
C) GAAS requirements
D) all of the above
20
Q4) Discuss each of the four business functions that comprise the acquisition and payment cycle.
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Chapter 19: Completing the Tests in the Acquisition and Payment Cycle:
Verification of Selected Accounts
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Sample Questions
Q1) The types of assets, expenses, and liabilities associated with the acquisition and payment cycle will differ by company.
A)True
B)False
Q2) When auditing acquisitions of property, plant, and equipment, the auditor's review of lease and rental agreements most closely relate to the cutoff objective.
A)True
B)False
Q3) Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expense account will have an effect on which of the following financial statements until the asset would normally have been depreciated?
A) the balance sheet
B) the income statement
C) the cash flow statement
D) both the income statement and the balance sheet
Q4) State four of the seven specific balance-related audit objectives which the auditor should use as a frame of reference for tests of property, plant, and equipment acquisitions.
21
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) When labor is a material part of inventory valuation, auditors should emphasize testing internal controls over proper classification of payroll transactions.
A)True
B)False
Q2) To minimize the opportunity for fraud, unclaimed salary checks should be
A) redeposited.
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department.
Q3) Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees?
A) general accounting department
B) human resources department
C) treasurer
D) controller
Q4) Discuss each of the following primary documents and records used in the personnel and employment function in the payroll and personnel cycle: human resource records, deduction authorization form, and the rate authorization form.
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) The audit procedure "Foot the inventory listing schedules for raw materials, work-in-process, and finished goods" provides assurance mainly for the accuracy objective for inventory pricing and compilation.
A)True
B)False
Q2) The most important part of the observation of inventory is to determine whether A) all counts are accurate.
B) the inventory-takers are qualified.
C) obsolete inventory has been identified.
D) the physical count is being taken in accordance with the client's instructions.
Q3) McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory?
A) The company recorded nonexistent inventory.
B) The auditor did not perform any audit tests of the inventory.
C) The auditor and company colluded to overstate inventory balances.
D) The company counted inventory three months prior to year-end.
Q4) What are two factors affecting the complexity of the audit of inventory?
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Page 23
Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) If a legal relationship exists between the client and the holder of bonds, the auditor must determine if the client has met the requirements of the bondholder agreement.
A)True
B)False
Q2) What is the difference between an independent registrar and a stock transfer agent?
Q3) The emphasis in the audit of dividends is on the ending balance rather than the transactions.
A)True
B)False
Q4) Which of the following would generally not need to be approved by the board of directors?
A) issuing capital stock
B) repurchasing capital stock
C) declaration of a dividend
D) payment of a dividend
Q5) Discuss the internal controls related to owners' equity that are of concern to the auditor.
Q6) Discuss the four key controls over notes payable.
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) An imprest petty cash fund would least likely be used to pay for which of the following items?
A) minor office supplies
B) monthly interest expense
C) stamps for small mailings
D) small contributions to a local charity
Q2) Companies may purchase marketable securities as a way to temporarily invest excess cash.
A)True
B)False
Q3) Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation?
A) duplicate payment of a vendor's invoice
B) billing a customer at a lower price than indicated by company policy
C) failure to record a collection of a note receivable by the bank on the client's behalf
D) payment to an employee for more than the hours actually worked
Q4) Explain kiting, and discuss how it is performed.
Q5) What should be audited on an interbank transfer schedule?
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Chapter 24: Completing the Audit
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Sample Questions
Q1) Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?
A) merger or acquisition activities
B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
C) issuance of common stock
D) an uninsured loss of inventories due to a fire
Q2) The auditor's responsibility for reviewing subsequent events is normally limited to thirty days after the balance sheet date.
A)True
B)False
Q3) List the four principal purposes of the required communication with the audit committee regarding certain additional information obtained during the audit.
Q4) An independent review must be performed of all audits.
A)True
B)False
Q5) Distinguish between contingent liabilities and commitments.
Q6) State the three purposes of the management representation letter.
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) Each page of the financial statements reviewed for a nonpublic entity should include the reference
A) "These financial statements are unaudited."
B) "We express no assurance on these financial statements."
C) "See independent accountant's review report."
D) "See the audit opinion for the review procedures performed."
Q2) Which of the following statements is not correct?
A) Forecasts can be provided for general use.
B) Forecasts can be provided for limited use.
C) Projections can be provided for general use.
D) Projections can be provided for limited use.
Q3) CPAs must be independent to issue a review report.
A)True
B)False
Q4) The standards for preparation, compilation, and review engagements of financial statements are the
A) AICPA's Code of Professional Conduct.
B) Statements on Auditing Standards (SASs).
C) Statements of Standards on Attestation Engagements (SSAEs).
D) Statements on Standards for Accounting and Review Services (SSARS).
Page 27
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Sample Questions
Q1) Efficiency refers to the degree to which costs are reduced without changing effectiveness.
A)True
B)False
Q2) An operational auditor may use "engineered standards" as an evaluation criterion.
A)True
B)False
Q3) Operational audits may be performed by internal auditors and government auditors, but not by external auditors.
A)True
B)False
Q4) How do the risk and materiality thresholds change in a government audit compared to a financial statement audit of a public company?
Q5) Under the International Standards for the Professional Practice of Internal Auditing, the performance standards deal with the education requirements of the internal auditor. A)True
B)False
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