Auditing Question
Bank
Course Introduction
Auditing is a comprehensive course that explores the principles and practices of auditing in the context of financial reporting and internal controls. The course covers topics such as audit planning, risk assessment, gathering audit evidence, internal control systems, and the ethical requirements for auditors. It emphasizes the standards and procedures used to evaluate an organizations financial records, ensuring accuracy, compliance, and integrity in financial statements. Through case studies and practical exercises, students will gain a thorough understanding of the auditors role, the legal and regulatory environment, and current challenges facing the auditing profession.
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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Q1) Which of the following is an advantage of a review engagement as compared to an audit engagement?
A) For the review engagement, information risk is reduced more than for an audit.
B) For the review engagement, the documentation to be provided by the client is greater.
C) For the review engagement, the financial statements assessed will have more detail.
D) The review engagement requires considerably less work, so is less costly.
Answer: D
Q2) The auditor and the entities should agree on the criteria to be used in the audit
A) before the audit starts.
B) after the audit planning has been done.
C) as they progress with the audit, as they can determine which criteria are most suitable.
D) at the end of the audit.
Answer: A
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3
Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) The risk response phases of conducting the financial statement audit using a risk assessment approach includes
A) conducting an independence threat analysis to evaluate independence.
B) preparation of the final auditor's report in response to audit findings.
C) identification of risks of material misstatement at the client.
D) gathering evidence to assess the likelihood of material misstatement.
Answer: D
Q2) Large accounting firm are often limited liability partnerships (LLPs) because of their audits are conducted in accordance with GAAS,
A) partners not on the engagement would not be liable on their personal assets.
B) improved quality control practices can be initiated using technical personnel.
C) more formal requirements are in place when reporting to federal tax authorities.
D) partners are liable for only a limited portion of their personal assets when sued.
Answer: A
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4
Chapter 3: Legal Liability
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Sample Questions
Q1) PA was engaged by Microcomputer Distributor Limited (MDL) to conduct a review engagement. The financial statements are used primarily by the shareholders, management, and by the bank. Recently, an employee was fired for stealing computer parts, primarily chips and boards that could easily be placed in a pocket. MDL is suing PA because they believed that audit procedures, such as counting inventory, would have detected this fraud. What is PA's best defence?
A) absence of causal connection
B) lack of negligence
C) contributory negligence
D) duty of care not required
Answer: D
Q2) There are a number of things that a practising auditor can do to reduce liability in lawsuits. One of them is to
A) lobby for changes in laws.
B) carry adequate insurance.
C) establish peer-review requirements.
D) revise auditing standards to meet the changing needs of society.
Answer: B
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Chapter 4: Professional Judgment and Ethics
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Q1) What in auditing is the application of relevant knowledge and experience, within the context provided by auditing and accounting standards and Rules of Professional Conduct, in reaching decisions where a choice must be made between alternative possible courses of action.
A) professional judgment
B) professional skepticism
C) professional behaviour
D) professional standard
Q2) In a code of conduct, the advantage of general statements of ideal conduct (as opposed to specific rules of behaviour) is
A) the emphasis on positive activities that encourage a high level of performance.
B) the ability to enforce the ideals.
C) the enforceability of minimum behaviour and performance standards.
D) the tendency to define the rules as maximum rather than minimum standards.
Q3) Generally, all of the rules of professional conduct for CPAs apply to
A) students in public practice.
B) students and members.
C) all members.
D) members in public practice.
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Q1) Jane's employer purchased a new calculator this month. When Jane added up the sales for the day, she was a bit confused with the new calculator and made numerous adding errors. The daily sales total for the next week were incorrectly posted to the general ledger. The general balance-related audit objective affected by this activity is A) cutoff.
B) accuracy (of allocation).
C) classification.
D) existence.
Q2) Bratlett Company has purchased all of the shares of another company but does not want to consolidate its financial statements. Management has drafted a rather long and confusing note to the financial statements that describes the transaction and states that debt has been acquired in a foreign currency. In your view, the transaction and its effect on the company and the accounts have not been properly disclosed. Required:
List the audit objectives about presentation and disclosure that have been affected and explain how they are affected.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) Vanovo Ltd. has purchased several companies in the retail sector. Recently, Vanovo purchased both a coffee and donut chain (that also owned bakeries) and a submarine sandwich chain. Unfortunately, the planned synergies between these two retail chains did not arise. What effect would this have on the financial statements of Vanovo Ltd., the parent company?
A) The financial statements will be incorrectly calculated and should be checked.
B) The fixed assets and goodwill recorded at acquisition could be impaired.
C) Risk of material misstatement for payroll expenses will increase.
D) Costs of goods sold will likely be overstated for both of the new chains.
Q2) Which of the following is an important purpose of an organizational code of ethics and the associated processes to ensure adherence?
A) to ensure that there are no fraudulent or illegal transactions at the company
B) to train employees in acceptable conduct at the organization
C) to prevent unethical employees from acting in unacceptable ways
D) to provide a powerful signal of acceptable organizational conduct
Q3) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
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Chapter 7: Materiality and Risk
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Q1) The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?
A) $45 000
B) $50 000
C) $55 000
D) $90 000
Q2) CAS 320 (materiality in planning and performing an audit) defines materiality in terms of three key concepts. The first and second concepts are that a material misstatement should be considered in the context of knowledgeable users and the effect on decision making; and that material is relative to circumstances surrounding the decision and nature of the information. The third concept is
A) that the auditor should consider users of financial statements as a group.
B) that the auditor should consider users of financial statements individually.
C) that the users should be informed and approve of the materiality used by the auditor. D) that the auditor should be conservative in setting the materiality level.
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) When the auditor identifies opportunities for the client to make operational improvements in the internal control system, it will be communicated to the client's audit committee in the
A) management letter.
B) reportable conditions letter.
C) engagement letter.
D) audit report.
Q2) Narratives, flowcharts, and internal control questionnaires are three commonly used methods of
A) documenting the auditor's understanding of internal controls.
B) testing internal controls.
C) designing the audit manual and procedures.
D) documenting the auditor's understanding of client's organizational structure.
Q3) To comply with auditing standards, the auditor need not be concerned with all areas of internal control that apply to management. The auditor's primary concerns are with the system's ability to
A) maintain reliable control systems pertaining to financial transactions.
B) promote efficiency and encourage adherence to policy.
C) prevent and detect financial statement fraud and error.
D) provide reliable data and safeguard assets.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) The PA is having a discussion with his client about the outcome of several lawsuits that are presently in progress. The client has requested that the comments during the discussion be removed from the audit file. The client would like the only documentation in the audit file to be the legal letter from the client and brief comments regarding the auditor's judgments with respect to the quality of disclosure in the financial statements. The client is concerned that
A) only high-quality audit working papers be included in the working paper files.
B) auditors may breach confidentiality and disclose information about the client.
C) the auditor's working paper files may be subpoenaed by the courts.
D) the audit firm does not have adequate quality control procedures.
Q2) Confirmations from outside organizations such as banks and law firms are
A) a highly regarded and often-used type of evidence.
B) expensive and rarely used during the audit.
C) difficult to obtain and infrequently required.
D) internal documents that provide low-quality evidence.
Q3) Identify and explain the three determinants of the persuasiveness of evidence.
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11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Materiality is used to help decide the scope of testing, determine the sample size, and
A) develop the audit report.
B) decide which analytical review calculations to use.
C) evaluate the results of testing.
D) conduct understanding of business tests.
Q2) The auditor verifies the summarizing, accuracy, and posting of entries by performing A) analytical procedures.
B) tests of controls.
C) dual-purpose tests.
D) procedures to gain an understanding of internal control.
Q3) When the auditor has determined that there is a significant risk of misstatement for a particular assertion (for example, completeness of revenue), what type of audit testing does CAS 330 require?
A) tests of risk assessment
B) tests of understanding of internal control
C) control tests
D) substantive tests
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER to sample size is
A) direct (larger TER = larger sample).
B) inverse (larger TER = smaller sample).
C) variable (sometimes larger, sometimes smaller).
D) not determinable.
Q2) Assume that the client's internal controls require a clerk to attach a shipping document to every duplicate sales invoice but this procedure is not followed exactly 3 percent of the time. If the auditor selects a sample of 200 duplicate sales invoices, which of the following sample results is most representative of the population?
A) three shipping documents are missing
B) six shipping documents are missing
C) five shipping document are missing
D) there were no shipping documents missing
Q3) One of the ways to eliminate nonsampling risk is through
A) proper supervision and instruction of the client's employees.
B) proper supervision and instruction of the audit team.
C) the use of attribute sampling rather than variables sampling.
D) controls that ensure the sample drawn is random and representative.
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Page 13
Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) Frag Jones Company has a December year end with a tight reporting deadline, so the auditors confirmed the accounts receivable as of November 30 using positive confirmations. In addition to following up confirmation discrepancies, the auditor should A) test December transactions.
B) send negative confirmations as of the end of December.
C) test November transactions.
D) do cutoff testing for the month of October.
Q2) The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is
A) cutoff.
B) valuation.
C) accuracy.
D) completeness.
Q3) A) State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for sales.
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14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The analytical procedure that requires the auditor to "inspect the list of accounts payable for unusual or non-vendor payables" would have the best chance of discovering which possible error?
A) misstatement of accounts payable and expenses
B) classification error for non-trade liabilities
C) unrecorded accounts or misstatements
D) invalid accounts or misstatements
Q2) ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances have been converted to the vendor master file (completeness), the auditor would
A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.
Q3) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
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Page 15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
A) all goods purchased before year-end are received before the physical inventory count.
B) no goods held on consignment for customers are included in the inventory balance.
C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the current period inventory balance.
Q2) What is the first step that the auditor takes when auditing the valuation of inventory?
A) Conduct analytical review, comparing gross margin for the current year to the prior year.
B) Do an industry analysis to determine whether there is a potential for technology-induced obsolescence.
C) Ask the client about the level of obsolete inventory that was on hand and counted during the inventory count.
D) Clearly establish the valuation method used and how the calculations are being performed.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) The human resources department would likely provide which of the following internal controls for the human resources and payroll cycle?
A) recalculation of net pay for every pay
B) independent verification of wage rate
C) account for the continuity of employee numbers
D) account for the continuity of payroll check numbers
Q2) "Existing payroll transactions are recorded" is the control objective of
A) authorization.
B) completeness.
C) existence.
D) accuracy.
Q3) Which of the following internal control tests would assist in satisfying the occurrence transaction-related audit objective for payroll?
A) examining payroll records for evidence of approval
B) proving the payroll bank reconciliation
C) reviewing the chart of accounts
D) accounting for a sequence of payroll cheques
Q4) Discuss the two most common ways in which employees can defraud a company in the payroll area.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) If a company employs a capital stock registrar and/or transfer agent, the registrar or agent (or both) should be requested to confirm directly to the auditor the number of shares of each class of stock
A) surrendered and cancelled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) authorized, issued, and outstanding during the year.
Q2) State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.
Q3) The audit objective requiring that existing notes payable are included in the notes payable schedule (completeness) is satisfied by performing the following audit procedure.
A) Recalculate accrued interest.
B) Examine duplicate copies of notes for details.
C) Review the notes payable schedule to determine whether any are related parties.
D) Obtain confirmations from creditors who have held notes from the client in the past and are not currently included in the notes payable schedule.
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Page 18
Chapter 17: Audit of Cash Balances
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Q1) What type of audit test is a proof of cash?
A) test of control
B) test of details
C) dual-purpose
D) analytical review
Q2) Which of the following audit tests pertains to the accuracy assertion?
A) prepare proof of cash
B) test a cutoff bank statement
C) examine minutes and loan agreements
D) read the notes to the financial statements
Q3) From an audit perspective, an imprest bank account at a client can
A) require less time for the audit of general cash.
B) increase audit risk.
C) result in an increase in control risk.
D) improve client internal controls.
Q4) Electronic data interchange (EDI) represents the electronic transfer of A) funds.
B) business documents.
C) data between accounting systems of the company's entities.
D) information between the bank and the company.
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Chapter 18: Completing the Audit
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Sample Questions
Q1) State the three conditions required for a contingent liability to exist.
Q2) An agreement that commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole is a definition of a A) contingent liability.
B) potentially hazardous agreement.
C) commitment.
D) conditional contract.
Q3) 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.
Q4) List four specific matters that should be included in a client representation letter.
Q5) Discuss the purpose of a management letter.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) When a misstatement in the financial statements exists but is unlikely to affect the decisions of a reasonable user, it would be appropriate to issue
A) an unqualified opinion.
B) a qualified opinion.
C) a disclaimer of opinion.
D) an adverse opinion.
Q2) 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.
Q3) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) Sean Clem has done a review engagement and prepared the tax return for your web design business for the last five years. The books and records have always been well organized, although year-end adjusting entries have been required. You do some of the accounting yourself and the rest of the accounting records are handled by your spouse, who is also an employee of the business.
This year, you would like to expand your business to provide ISP (internet service provider) services to your clients. This would involve purchasing additional computer equipment and software. You are also considering hiring an additional employee (you currently have three), and you are looking at obtaining a loan for $100 000 from the bank. The bank says that you should have your records audited, but you are not sure what this will mean.
Required:
What would Sean say to you about the differences between an audit and a review?
Q2) A review engagement includes
A) obtaining an understanding of the internal controls.
B) tests of controls or transactions.
C) inquiry, analytical procedures, and discussion.
D) independent confirmation or physical examination.
Q3) Define "assurance engagements."
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Page 22