Auditing Test Questions
Course Introduction
Auditing is a comprehensive course that explores the principles, standards, and procedures utilized in the independent examination of financial statements. The course covers the auditors role in verifying the accuracy and fairness of financial reports, the ethical and professional responsibilities involved, and the legal environment governing audit engagements. Students learn about the audit process, including planning, evidence gathering, risk assessment, internal control evaluation, and the formulation of audit opinions. Through case studies and practical exercises, the course prepares students to understand both external and internal auditing practices, fostering analytical skills and critical thinking essential for ensuring accountability and transparency in financial reporting.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 10th Edition by William F
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Messier Jr
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Q1) Which of the following would best be described as an assurance service?
A) Preparing a report representing a client's position during an IRS audit.
B) Working with a company to develop a more efficient method of processing financial transactions.
C) Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies.
D) Assisting a company in identifying potential sources of capital for potential acquisitions.
Answer: C
Q2) Independence standards are required for audits of public companies,but not for audits of private companies.
A)True
B)False
Answer: False
Q3) Conflicts of interest often occur between absentee owners and managers.
A)True
B)False
Answer: True
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Chapter 2: The Financial Statement Auditing Environment
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Q1) The Public Company Accounting Oversight Board's role is to
A) Conduct the final review of auditors' work before the auditor's opinion is issued.
B) Oversee the auditors of public companies in order to protect the interests of investors.
C) Conduct audits of governmental entities.
D) Sanction auditors who fail to follow GAAS.
Answer: B
Q2) The first PCAOB general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and
A) Independence with respect to the financial statements and supplementary disclosures.
B) Exercising professional care as judged by peer reviewers.
C) Proficiency as an auditor, which likely has been acquired from previous experience.
D) Objectivity as an auditor as verified by proper supervision.
Answer: C
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Q1) The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.
A)True
B)False
Answer: True
Q2) Which element(s)is/are pervasive to the application of generally accepted auditing standards,particularly the standards of fieldwork and reporting?
A) The elements of materiality and audit risk.
B) The element of internal control.
C) The element of corroborating evidence.
D) The element of reasonable assurance.
Answer: A
Q3) Define the engagement letter and discuss its importance.
Answer: An engagement letter formalizes the arrangement reached between the auditor and the client.This letter serves as a contract,outlining the responsibilities of both parties and preventing misunderstandings between the two parties.
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Chapter 4: Risk Assessment
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Q1) The risk of material misstatement includes which of the following?
A) Detection risk.
B) Audit risk.
C) Inherent risk.
D) Nonsampling risk.
Q2) Which of the following audit risk components may be assessed in qualitative terms?
A) Risk of material misstatement.
B) Detection risk.
C) Neither risk of material misstatement nor detection risk.
D) Both risk of material misstatement and detection risk.
Q3) The risk that an auditor will conclude,based on substantive procedures,that a material error does not exist in an account balance when,in fact,such an error does exist is referred to as
A) Sampling risk.
B) Detection risk.
C) Nonsampling risk.
D) Inherent risk.
Q4) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Q1) Analytical procedures used in planning an audit should focus on identifying A) Material weaknesses in internal control.
B) The predictability of financial data from individual transactions.
C) The various assertions that are embodied in the financial statements.
D) Areas that may represent specific risks relevant to the audit.
Q2) Auditors obtain evidence about the inventory account through,among other procedures,observing the counting of inventory.What are some limitations "observation" has as an audit procedure?
Q3) All of the following are typically in the current file except:
A) Adjusting journal entries.
B) Copies of the audit report.
C) Chart of accounts.
D) Lead schedules.
Q4) The auditor gathers audit evidence to test management's assertions.
A)True
B)False
Q5) The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
A)True
B)False
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Chapter 6: Internal Control in a Financial Statement Audit
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Q1) Before applying substantive procedures to the details of accounts at an interim date (a date prior to the balance sheet date),an auditor should
A) Assess control risk at high for the assertions embodied in the accounts selected for interim testing.
B) Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
C) Consider the availability of information at a later date that will be necessary for the auditor's procedures (e.g., electronic data).
D) Obtain written representations from management that all financial records and related data will be made available.
Q2) Internal controls are not designed to provide reasonable assurance that
A) Transactions are executed in accordance with management's authorization.
B) Embezzlement will be eliminated.
C) Access to assets is permitted only in accordance with management's authorization.
D) Amounts recorded for assets are compared with the actual existing assets at reasonable intervals.
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Q1) An "integrated audit"
A) Will, in most cases, lead to a substantive audit strategy.
B) Denies the auditor access to information about the entity's controls.
C) May be performed by two separate audit firms.
D) Is comprised of audits of internal control over financial reporting and of financial statements.
Q2) When auditing a public company,the auditor must form an opinion on the effectiveness of internal control over financial reporting,or issue a disclaimer in the event of a scope limitation.
A)True
B)False
Q3) Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following?
A) Reasonable assurance on the financial statements, absolute assurance on internal control.
B) Reasonable assurance on internal control, absolute assurance on the financial statements.
C) Absolute assurance on both the financial statements and internal control.
D) Reasonable assurance on both the financial statements and internal control.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Q1) An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the A) sample deviation rate plus the allowance for sampling risk equals the tolerable deviation rate.
B) sample deviation rate is less than the expected population deviation rate used in planning the sample.
C) tolerable deviation rate less the allowance for sampling risk exceeds the sample deviation rate.
D) sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
Q2) An underlying feature of random-based selection of items is that each A) stratum of the accounting population be given equal representation in the sample.
B) item in the accounting population be randomly ordered.
C) item in the accounting population should have an opportunity to be selected.
D) item must be systematically selected using replacement.
Q3) Define Type I and Type II errors.
Q4) Define sampling risk and nonsampling risk.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) In statistical or nonstatistical sampling methods used in substantive testing,an auditor most likely would stratify a population into meaningful groups if A) monetary-unit sampling (MUS) is used.
B) the population contains both very high and very low recorded amounts.
C) the auditor's estimated tolerable misstatement is extremely small.
D) the standard deviation of recorded amounts is relatively small.
Q2) An auditor is preparing to sample an entity's customer receivables for overstatement.A statistical sampling method that automatically provides stratification when using systematic selection is
A) attribute sampling.
B) ratio-estimation sampling.
C) monetary-unit sampling.
D) mean-per-unit sampling.
Q3) The size of the upper limit on misstatement is largely dependent on the sample size,which is inversely related to the desired confidence level.
A)True
B)False
Q4) Describe two advantages and two disadvantages of monetary-unit sampling (MUS).
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Chapter 10: Auditing the Revenue Process
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Q1) Smith is engaged in the audit of a cable TV firm that services a rural community.All receivable balances are small,customers are billed monthly,and internal control is effective.To determine the existence of the accounts receivable balances at the balance sheet date,Smith would most likely
A) send positive confirmation requests.
B) send negative confirmation requests.
C) examine evidence of subsequent cash receipts instead of sending confirmation requests.
D) use statistical sampling instead of sending confirmation requests.
Q2) Explain how revenue recognition is important to the audit of the revenue process.
Q3) Which of the following is a test of controls for the transaction assertion of completeness for revenue?
A) Test a sample of sales invoices for authorized customer orders.
B) Review sales orders for proper credit approval.
C) Trace shipping documents to sales invoices and the sales journal.
D) Examine reconciliation of subsidiary ledger to general ledger control account.
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Chapter 11: Auditing the Purchasing Process
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Q1) To determine whether accounts payable are complete,an auditor performs a test to verify that all merchandise received is recorded.The population of documents for this test consists of all
A) payment vouchers.
B) receiving reports.
C) purchase requisitions.
D) vendors' invoices.
Q2) An entity's internal control requires that for every check request there be an approved voucher,supported by a prenumbered purchase order and a prenumbered receiving report.To determine whether checks are being issued for unauthorized expenditures,an auditor most likely would select items for testing from the population of all
A) purchase orders.
B) canceled checks.
C) receiving reports.
D) approved vouchers.
Q3) Which type of confirmation is used more frequently by auditors accounts receivable confirmations or accounts payable confirmations? Why?
Q4) Describe three categories of expenses outlined in FASB Concept Statement No.5.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) When examining payroll transactions,an auditor is primarily concerned with the possibility of
A) underpayments and properly authorized payments.
B) posting of gross payroll amounts to incorrect salary expense accounts.
C) misfootings of employee time records.
D) excess withholding of amounts required to be withheld.
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Q2) An effective system of internal control over the payroll function would include
A) verification of agreement of job time tickets with employee clock card hours by a payroll department employee.
B) reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.
C) custody of rate authorization records by the supervisor of the payroll department.
D) preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resource department.
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Chapter 13: Auditing the Inventory Management Process
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Q1) The audit of year-end physical inventories should include steps to verify that the entity's purchases and sales cutoffs were adequate.The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a
A) sale in the subsequent period.
B) purchase in the current period.
C) sale in the current period.
D) purchase return in the subsequent period.
Q2) An entity maintains perpetual inventory records in both quantities and dollars.If the assessed level of control risk is high,an auditor would probably
A) increase the extent of tests of controls for the inventory cycle.
B) request that the entity schedule the physical inventory count at the end of the year.
C) insist that the entity perform physical counts of inventory items several times during the year.
D) apply gross profit tests to ascertain the reasonableness of the physical counts.
Q3) List five things an auditor should do during the observation of the physical count of inventory.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Disposition of capital assets through sale,exchange,retirement,or abandonment are transactions that occur in the property management process.
A)True
B)False
Q2) In performing a search for unrecorded retirements of fixed assets,an auditor most likely would
A) inspect the property ledger and the insurance and tax records and then tour the entity's facilities.
B) tour the entity's facilities and then inspect the property records and the insurance and tax records.
C) analyze the repair and maintenance account and then tour the entity's facilities.
D) tour the entity's facilities and then analyze the repair and maintenance account.
Q3) If an entity has few capital asset purchases,it will generally not have a formal control system over such transactions.
A)True
B)False
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Q1) If recorded interest expense is higher than the auditor's expectation calculated using recorded debt,all of the following are potential explanations except that
A) the entity failed to record debt.
B) debt was recorded as equity.
C) the entity used the face interest rate to calculate interest expense on a bond issued at a discount.
D) the entity used the face interest rate to calculate interest expense on a bond issued at a premium.
Q2) For most companies,stockholders' equity includes the following three accounts: preferred stock,paid-in capital,and retained earnings.
A)True
B)False
Q3) The dividend-disbursing agent prepares and mails dividends checks to the stockholders as of the date of declaration.
A)True
B)False
Q4) Identify the three major types of transactions that occur in stockholders' equity.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
A) An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
B) The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.
C) The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger.
D) A designated member of the board of directors controls the securities in a bank safe-deposit box.
Q2) An imprest cash account is
A) used for investing in marketable securities.
B) the principal cash account for an entity.
C) one that contains a stipulated amount of money and is used for limited purposes.
D) the principal checking account for a branch of an entity.
Q3) What should an auditor look for when testing for proper classification of securities?
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Chapter 17: Completing the Audit Engagement
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Q1) Which of the following situations would require adjustment to or disclosure in the financial statements?
A) A merger discussion.
B) The application for a patent on a new production process.
C) Discussions with a customer that could lead to a 40 percent increase in the entity's sales if agreement is successful.
D) The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
Q2) While auditing other business processes,an auditor may identify information about contingent liabilities.What specific audit procedures relating to other business processes could uncover these liabilities?
Q3) What is an unasserted claim and why would an attorney and/or entity be reluctant to disclose an unasserted claim in the financial statements?
Q4) An auditor will ordinarily examine invoices from lawyers primarily in order to A) substantiate accruals.
B) assess the legal ramifications of litigation in progress.
C) estimate the dollar amount of contingent liabilities.
D) identify possible unasserted litigation, claims, and assessments.
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Chapter 18: Reports on Audited Financial Statements
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Q1) Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.
A)True
B)False
Q2) For which of the following events would an auditor issue a report that does not include any reference to consistency?
A) A change in the method of accounting for inventories.
B) A change from an accounting principle that is not generally accepted to one that is generally accepted.
C) A change in the service life used to calculate depreciation expense.
D) A change in accounting principle without reasonable justification from management.
Q3) Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
A) Cash flows from operating activities are negative.
B) Research and development projects are postponed.
C) Significant related party transactions are pervasive.
D) Stock dividends replace annual cash dividends.
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Chapter 19: Professsional Conduct,Independence,and Quality Control
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Q1) A basic objective of a CPA firm is to provide professional services that conform to professional standards.Reasonable assurance of achieving this basic objective is provided through
A) compliance with generally accepted reporting standards.
B) a system of quality control.
C) a system of peer review.
D) continuing professional education.
Q2) A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner of the interest but has a right to some or all of the underlying benefits of ownership.
A)True
B)False
Q3) Professionalism refers to the conduct,aims,or qualities that characterize a given profession.
A)True
B)False
Q4) Identify the primary purposes of the General Standards Rule,the Compliance with Standards Rule and the Accounting Principles Rule of the Rules of Conduct.
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Q5) When can a CPA disclose confidential information without the client's consent?
Chapter 20: Legal Liability
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Q1) The Securities Exchange Act of 1934
A) established a voluntary disclosure mechanism for issuers of publicly traded securities.
B) primarily relates to initial sales of securities to the public.
C) regulates all sales of securities.
D) regulates trading of securities subsequent to issuance.
Q2) An audit client loses a lawsuit and the judgment is for an amount in excess of the contingent liability the client had recorded in the audited financial statements.The auditor,using the typical degree of due care as other members of the profession,determined that the amount of contingent liability recorded by the client in the financial statements for the pending lawsuit was reasonable,given the facts at the time of the audit.This judgment by the auditor is likely to result in
A) sanctions by the PCAOB levied against the individual auditor as well as the accounting firm.
B) a successful lawsuit claiming auditor negligence.
C) a successful lawsuit claiming breach of contract.
D) no legal action whatsoever since due care was exercised.
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Chapter 21: Assurance,Attestation,amd Internal Auditing
Services-professional Judgement Module
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Q1) Which of the following is not an attestation standard?
A) Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report.
B) The report shall identify the subject matter or assertion being reported on and state the character of the engagement.
C) The work shall be adequately planned and assistants, if any, shall be properly supervised.
D) A sufficient understanding of internal controls shall be obtained to plan the engagement.
Q2) Which of the following is the authoritative body designated to promulgate attestation standards for nonpublic entities?
A) AICPA (Auditing Standards Board).
B) Governmental Accounting Standards Board.
C) Financial Accounting Standards Board.
D) General Accounting Office.
Q3) Electronic commerce is an example of a category of assurance services.
A)True
B)False
Q4) How has the advancement in technology led to the creation of the Trust Services?
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