Auditing Practice Questions
Course Introduction
Auditing is a comprehensive course that introduces students to the principles, practices, and procedures involved in the independent examination of financial statements and related operations. The course examines the roles, responsibilities, and ethical standards of auditors, as well as the legal and professional frameworks governing audits. Students will learn about audit planning, risk assessment, internal controls, evidence gathering, and audit reporting. Emphasis is placed on both theoretical underpinnings and practical applications, preparing students to understand audit methodologies and apply auditing standards in real-world scenarios.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 13th Canadian Edition by Alvin A. Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) A large PA firm has assessed evidence collected during an engagement. Criteria used to assess the financial statements were International Financial Reporting Standards (IFRS). A high level of assurance was obtained. The type of engagement conducted was
A) an audit.
B) a review.
C) management consulting.
D) a compilation.
Answer: A
Q2) Which of the following is not a cause of information risk?
A) simple exchange transactions
B) voluminous data
C) remoteness of information
D) biases and motives of the provider
Answer: A
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Page 3
Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) A PA firm has an organizational structure that assures the technical review of every engagement by a partner who has expertise in the client's industry. This is an example of good
A) entity-level controls.
B) adherence to professional standards.
C) business risk management.
D) quality controls.
Answer: D
Q2) What is one of the ways that high-profile business failures (such as Enron, WorldCom, and Nortel) have affected the auditing profession?
A) raised the cost of hiring accounting-firm professionals
B) resulted in a need for decreased paperwork on audits
C) lowered the number of professionals working on an audit engagement
D) created increased focus on standards and high-quality audits
Answer: D
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Chapter 3: Legal Liability
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Sample Questions
Q1) In rare cases, auditors have been held liable for criminal acts. A criminal conviction against an auditor can result only when it is demonstrated that the auditor
A) was negligent.
B) was grossly negligent.
C) knowingly issued an incorrect auditor's report.
D) caused a financial loss to an innocent third party.
Answer: C
Q2) Most of the major lawsuits against public accounting firms have dealt with A) audited or unaudited financial statements.
B) disputes over income-tax preparation services.
C) disputes arising in the performance of management consulting services contracts. D) unaudited financial statements.
Answer: A
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) The underlying reason for a high level of professional conduct, such as exemplified in a code of conduct, for any profession is
A) the need for public confidence in the quality of service of the profession.
B) that it provides a safeguard to keep unscrupulous people out.
C) that it is required by federal legislation.
D) that it allows licensing agencies to have a yardstick to measure deficient performance.
Q2) Each of the following situations involves a possible violation of the independence requirements of the provincial institutes Rules of Professional Conduct. For each situation, (1) decide whether the Rules have been violated, and (2) briefly explain how the situation violates (or does not violate) the Rules.
A) Mike Lednicky, public accountant, is a partner in the Oshawa office of Arthur & Thompson, public accountants. Mike's brother is employed as an inventory warehouse supervisor (an audit-sensitive position) by Sweeny Appliances, a publicly-held company in Manitoba. Sweeny Appliances is one of Arthur & Thompson's audit clients. Neither Mike nor the Oshawa office of Arthur & Thompson is involved in the audit of Sweeny Appliances.
Violation? Yes No
Q3) What are the qualities of professional skepticism?
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to
A) the auditor.
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.
Q2) Management assertions are
A) directly related to auditing standards.
B) directly related to accounting standards.
C) indirectly related to auditing standards.
D) indirectly related to accounting standards.
Q3) The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated. This imposes upon the auditor a duty to
A) be an insurer of the fairness in the statements.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial statements.
D) provide reasonable assurance that material misstatements will be detected.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) Risks associated with specific industries may affect the auditor's assessment of client business risk and acceptable audit risk, and even influence client acceptance decisions. Which of the following businesses would be the most risky for the auditor to accept as a new client?
A) a small manufacturer of metal and plastic parts that has steady profits and has been in business for 15 years
B) a client who is developing a computer game that is expected to be ready in three years and has no other products
C) a retail company in the clothing industry that has mid-range pricing and appeals to a large population sector
D) a firm consisting of a partnership of ten lawyers that operates out of three different cities in one province
Q2) Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt covenant requirements
C) management's practice of making overly achievable forecasts
D) high turnover of accounting, internal audit, and information technology staff
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8
Chapter 7: Materiality and Risk
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Sample Questions
Q1) PA is comparing the liabilities section of ABC Ltd. from last year to this year. Last year, ABC Ltd. had large loans due to major shareholders and officers and to one bank. This year, the debt has been reorganized so there are now two different banks used for loans. Instead of having debt to shareholders and officers, the company now owes notes to 25 different foreign investors, who are entitled to convert the debt to shares if interest is not paid or if principal installments are not paid on time. For this year's audit, how will the change in debt structure affect the audit risk model?
A) no effect on the audit risk model
B) higher control risk
C) lower audit risk
D) higher audit risk
Q2) An inherent risk (IR) of 40% and a control risk (CR) of 60% affect detection risk and planned evidence differently than an
A) IR of 60% and CR of 40%.
B) IR of 100% and CR of 24%.
C) IR of 80% and CR of 30%.
D) IR of 70% and CR of 30%.
Q3) Discuss three factors that affect client business risk and therefore audit risk.
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) The control environment consists of actions, policies, and procedures that
A) reflect the overall attitudes of top management, the directors, and the owners of an entity about control and its importance.
B) govern access to particular applications, such as how employees use passwords to change master file payroll rates.
C) are recorded on the web site (for example, access policies to data).
D) help implement the ethical attitudes at the organization, such as a computer usage policy.
Q2) The chart of accounts is an important control because it provides the framework for determining the information presented to management and other financial statement users. What type of error is the chart of accounts helpful in preventing?
A) errors of occurrence
B) errors of completeness
C) errors of accuracy
D) errors of classification
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) When a higher than normal ratio of long-term debt to net worth is coupled with a lower than average ratio of profits to total assets, the company
A) is highly successful.
B) is comparable with industry standards.
C) has a high risk of financial failure.
D) has a liquidity problem.
Q2) Each working paper should include enough information to fulfill the objectives for which it was designed. For example, if a working paper is designed to list the detail and show the verification of support of a balance sheet account such as prepaid insurance, it is essential that the detail on the working paper
A) reconcile the change in costs from last year to this year.
B) use analytical review to consider the reasonableness of the account.
C) reconcile with the associated general ledger account.
D) use observation to identify controls in place over the transactions.
Q3) An important benefit of industry comparisons is as
A) an aid to understanding the client's performance.
B) an indicator of errors.
C) an indicator of irregularities.
D) a least-cost indicator for audit procedures.
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Page 11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) A substantive procedure is used to
A) assess the likelihood of material misstatement in the financial statements.
B) obtain an understanding of internal controls.
C) analyze the account balance to see if there are potential errors.
D) quantify the amount of potential error in an account or transaction stream.
Q2) The auditor would like to design a test of control to test that shipping documents are issued in numerical order by the computer and are accounted for weekly. Which of the following typical tests of controls would be suitable?
A) Trace sales documents issued to the sales journal and trace the daily total to the general ledger.
B) Ask the shipping department about the process they use to issue shipping documents, paying particular attention to continuity of numerical sequence.
C) Use computer-assisted audit testing to determine whether there are any numbers missing in the sequence (gap detection).
D) Match shipments to the associated sales invoices.
Q3) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) You have just been given the approval to conduct statistical sampling for the audit of capital assets acquisitions. Previously, this work was completed using a judgmental sample.
Required:
Explain the key areas where decisions need to be made when conducting audit work using a statistical sample.
Q2) The occurrence rate or exception rate for attribute sampling is defined as the A) exception rate that the auditor will permit in the population and still be willing to use the assessed control risk.
B) risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than materiality.
C) exception rate that the auditor expects to find in the population before testing begins. D) ratio of the items containing a specific attribute to the total number of population items.
Q3) Kyle is performing a test of detail using a non-statistical sample.
A) Can Kyle formally measure sampling error?
B) What should Kyle consider in determining the sampling error?
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13
Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) Before goods are shipped on account to a new customer, a properly authorized person must
A) prepare the sales invoice.
B) approve the journal entry.
C) approve credit.
D) verify that the unit price is accurate.
Q2) As part of the audit testing, the auditor is conducting substantive analytical review over time (trend analysis) of bad debts to evaluate the quality of the accounts receivable. Which audit assertion is this associated with?
A) valuation
B) classification
C) rights and obligations
D) occurrence
Q3) What is one of the advantages of converting procedures from a design to a performance format?
A) obtain audit evidence of better quality
B) help the auditor select the procedures to be performed
C) eliminate duplicate procedures
D) ensure compliance with Canadian Auditing Standards
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit area to use
A) attributes sampling. B) variables sampling.
C) probability-proportional-to-size sampling.
D) block sampling.
Q2) The most common fraud in the acquisitions area is for the perpetrator to A) alter the cheque payment file before it is printed so that the payee name is changed. B) issue payments to fictitious vendors and deposit the cheques to a fictitious account.
C) change the optical characters at the bottom of a cheque to alter the account to be credited.
D) issue duplicate payments for invoices and then pocket the second cheque.
Q3) State six specific balance-related audit objectives for accounts payable and for each objective describe one common test of details of balances.
Q4) State each of the five specific transaction-related audit objectives for acquisitions and, for each objective, describe one common test of transactions.
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Page 15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) The controls over purchase requisitions and the related purchase orders are evaluated and tested as part of the
A) inventory and distribution cycle.
B) acquisitions and payments cycle.
C) human resources and payroll cycle.
D) capital acquisitions cycle.
Q2) What are inventory price tests and inventory compilation tests? Provide an example of each.
Q3) Obtaining an adequate understanding of the client's business is important in physical observation of inventory because
A) it is required by GAAP.
B) it will help the auditor in assessing the risk of theft of inventory.
C) inventory is normally a significant item.
D) inventory varies significantly for different companies.
Q4) Shipping of finished goods is an integral part of the A) acquisitions and payments cycle.
B) inventory and distribution cycle.
C) sales and collections cycle.
D) human resources and payroll cycle.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) Which of the following best describes proper internal control over payroll?
A) Preparation of the payroll must be under the control of the personnel department.
B) Confidentiality of employee payroll data should be carefully protected to prevent fraud.
C) Duties of hiring, payroll computation, and payment to employees should be segregated.
D) Payment by cheque to employees should be replaced with payment by automatic deposits.
Q2) Which of the following internal control tests would be used in assessing that recorded payroll transactions are for the amount of time actually worked and at the proper pay rate, and that withholdings are properly calculated?
A) Foot the payroll journal and trace to the general ledger.
B) Prove the bank reconciliation.
C) Recompute gross pay.
D) Review the payroll journal for large or unusual amounts.
Q3) Discuss the two most common ways in which employees can defraud a company in the payroll area.
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Page 17
Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) The exclusion of a single transaction of the capital acquisition and repayment cycle could be material in itself. This means that the following audit assertion is a major audit concern:
A) completeness.
B) existence.
C) accuracy.
D) rights and obligations.
Q2) When the auditor examines the board of directors' minutes for dividends declared, the auditor should be alert to the possibility of unrecorded dividends declared, particularly shortly before the balance sheet date. Which audit assertion does this address?
A) valuation
B) existence
C) completeness
D) understandability
Q3) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q4) Describe the audit procedures and related audit assertions for the audit of dividends.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) A four-column proof of cash can be performed for
A) one or more interim months.
B) the entire year.
C) the last month of the year.
D) any specified time period for which bank statements are available and which the auditor chooses to designate.
Q2) The test of balances procedure that requires the auditor to trace the unadjusted book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.
Q3) Which of the following is an essential internal control in the cash cycle?
A) use of two signatures on payroll cheques and payables cheques
B) independent receipt of the bank statement from the bank
C) careful accounting of the continuity of cheques returned from the bank
D) independent preparation of bank reconciliations
Q4) Outline the audit procedures that would be performed when testing electronic receipts and payments.
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Chapter 18: Completing the Audit
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Sample Questions
Q1) The initial review of the working papers prepared by any given auditor is normally done by the
A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.
Q2) A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor's fieldwork. The auditor should
A) advise management to adjust the balance sheet to reflect the acquisition.
B) issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end.
C) advise management to disclose the acquisition in the notes to the financial statements.
D) disclose the acquisition in the opinion paragraph of the auditor's report.
Q3) There are two categories of lawsuits: outstanding (or asserted) claims, and
A) possible or unasserted claims.
B) disputed claims among several parties.
C) settled claims.
D) claims that could result in material misstatements.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Q1) Your client has experienced a major data breach with lawsuits and fines pending of significant and uncertain amounts. These events are disclosed in the client's financial statements and are clearly explained in the notes. How do these events affect the independent auditor's report?
A) The auditor would use a standard unqualified auditor's report.
B) The auditor would use an emphasis of matter paragraph titled "Data Breach" to highlight the events.
C) The auditor would use an "other matters" paragraph titled "Data Breach" to highlight the amounts.
D) The auditor would use a qualified audit opinion due to the size of the uncertainty.
Q2) When the auditor knows that the financial statements may be misleading because they were not prepared in accordance with an acceptable financial reporting framework, he or she must issue
A) a qualified opinion.
B) an adverse opinion.
C) a disclaimer of opinion.
D) a qualified or an adverse opinion, depending on the materiality of the item in question.
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Chapter 20: Other Assurance and Nonassurance Services
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Q1) Before performing a review of an entity's financial statements, an accountant should A) complete a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions.
B) apply analytical procedures to provide limited assurance that no material modifications should be made to the financial statements.
C) obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
D) inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.
Q2) What is the title of a compilation report?
A) Opinion
B) Criteria Schedule
C) Engagement Report
D) Notice to Reader
Q3) Describe the professional standards that must be followed when undertaking a compilation engagement as specified by the CICA Handbook.
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