Auditing Theory and Practice
Exam Questions
Course Introduction
Auditing Theory and Practice introduces students to the foundational principles, concepts, and methodologies of auditing within the context of contemporary business environments. The course covers the audit process from planning to reporting, emphasizing the professional standards, ethical responsibilities, and legal requirements governing auditors. Students examine internal controls, risk assessment, evidence gathering, audit sampling, and various audit procedures. Real-world case studies and practical assignments equip learners with essential skills to evaluate financial statements and ensure compliance with regulatory frameworks. By the end of the course, students gain a comprehensive understanding of the auditors role in enhancing the transparency, reliability, and integrity of financial information.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 10th Edition by William F Messier Jr
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Page 2
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Sample Questions
Q1) Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"?
A) All audits involve obtaining the same evidence.
B) All audits involve evaluating evidence in the same manner.
C) There should be a well-planned approach for obtaining and evaluating evidence.
D) All assertions are equally important for all audits.
Answer: C
Q2) Which of the following statements best describes a relationship between sample size and other elements of auditing?
A) If materiality increases, so will the sample size.
B) If the desired level of assurance increases, sample sizes can be smaller.
C) If materiality decreases, sample size will need to increase.
D) There is no relationship between sample size and materiality or the desired level of assurance.
Answer: C
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3
Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) Due professional care requires auditors to
A) Obtain independent, third party (non-auditee) documentation as evidence for all information presented in the financial statements.
B) Exercise professional skepticism during the audit.
C) Disregard any evidence generated by the auditee during the audit.
D) Find every error contained in the financial statements prepared by management.
Answer: B
Q2) A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in determining
A) The nature of the CPA's report qualification.
B) The scope of the CPA's auditing procedures.
C) Requirements for the review of the entity and its environment.
D) Whether the CPA should undertake an audit engagement.
Answer: D
Q3) One of the five basic business processes is the warehousing cycle.
A)True
B)False
Answer: False
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) The first phase of audit planning is risk assessment. A)True
B)False Answer: False
Q2) The audit committee is directly responsible for the appointment,compensation,and oversight of the work of any accounting firm employed by a public company.
A)True
B)False Answer: True
Q3) In order to properly preplan the audit,the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm. A)True
B)False Answer: True
Q4) 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.
Page 5
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Chapter 4: Risk Assessment
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Sample Questions
Q1) Which of the following is a source of detection risk?
A) Unstable business environment.
B) Poor client controls.
C) A nonrepresentative sample.
D) Inherent risk assessed too high.
Q2) In general,material frauds perpetrated by which of the following are most difficult to detect?
A) Internal audit function.
B) Keypunch operator.
C) Cashier.
D) Controller.
Q3) Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A) Inability to generate cash flows from operations while reporting substantial earnings growth.
B) Management's lack of interest in increasing the entity's earnings trend.
C) Large amounts of liquid assets that are easily converted into cash.
D) Inability to borrow necessary capital without granting debt covenants.
Q4) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Analytical procedures are
A) Never required.
B) Required for planning, substantive testing, and overall review of the financial statements.
C) Required for planning and overall review of the financial statements.
D) Required during planning only.
Q2) Which set of assertions is tested when,during completion of the audit,the audit partner conducts a final review of the format of the entity's balance sheet?
A) Assertions about classes of transactions and events.
B) Assertions about account balances at the period end.
C) Assertions about presentation and disclosure.
D) None of these.
Q3) Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must
A) Be well documented and cross-referenced in the audit documents.
B) Be based on sources that are considered reliable.
C) Bear a direct relationship to the audit assertion.
D) Be persuasive enough to enable the auditor to form an opinion.
Q4) According to the text,what are the two functions of working papers?
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) The independent auditor selects several transactions in each functional area and traces them through the entire system,paying special attention to evidence about whether or not the control activities are in operation.This is an example of a(n)
A) Analytical procedure.
B) Test of controls.
C) Substantive procedure.
D) Functional test.
Q2) For certain controls,such as segregation of duties,documentary evidence may not exist.An auditor would most likely test the procedures by
A) Reperformance and corroboration.
B) Observation and inquiry.
C) Inspection and vouching.
D) Confirmation and recomputation.
Q3) A well-prepared flowchart should make it easier for the auditor to A) Prepare audit procedure manuals.
B) Prepare detailed job descriptions.
C) Perform walkthroughs.
D) Assess the degree of accuracy of financial data.
Q4) Why might an auditor decide to test controls at an interim date?
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) In order for an external auditor to complete an audit of a public company,the entity's management must comply with all of the following except:
A) Accept responsibility for the effectiveness of the entity's internal control over financial reporting.
B) Evaluate the effectiveness of the entity's internal control over financial reporting using suitable control criteria.
C) Support its evaluation with sufficient evidence, including documentation.
D) Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.
Q2) An auditor performing an audit of internal control over financial reporting would be required to
A) Rely on the work of internal auditors.
B) Test all of the entity's internal controls.
C) Form an opinion on the effectiveness of internal control.
D) Randomly identify accounts for an audit of internal control.
Q3) The likelihood of an event is "more than remote" when it is "highly possible."
A)True
B)False
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) In nonstatistical sampling for tests of controls,increasing the desired confidence level results in a
A) higher tolerable deviation rate.
B) lower expected deviation rate.
C) larger sample size.
D) smaller sample size.
Q2) Auditing standards permit both statistical and nonstatistical methods of audit sampling.
A)True
B)False
Q3) For attributes sampling,of the three factors that enter into sample size determination,which two factors can the auditor adjust to reflect the importance of the control?
A) Tolerable deviation rate and confidence level.
B) Expected deviation rate and confidence level.
C) Population size and tolerable deviation rate.
D) Tolerable deviation rate and expected deviation rate.
Q4) Define Type I and Type II errors.
Q5) Define sampling risk and nonsampling risk.
Page 10
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) Haphazard selection allows the auditor to select items judgmentally.
A)True
B)False
Q2) Classical variables sampling uses normal distribution theory to evaluate the characteristics of a population based on sample data.
A)True
B)False
Q3) For monetary-unit sampling,a sampling interval of 400 means that
A) every 400<sup>th</sup> item in the account will be selected in the sample.
B) the average size of items in the account is 400.
C) every 400<sup>th</sup> dollar in the account will be included in the sample.
D) the average misstatement in sample items is $400.
Q4) In statistical sampling,setting the appropriate confidence level and desired sample precision are decisions made by the auditor that will affect sample size for a substantive procedure.Which of the following should not be a factor in the choice of desired precision?
A) The sampling risk.
B) The size of an account balance misstatement considered material.
C) The audit resources available for execution of the sampling plan.
D) The objectives of the audit test being conducted.
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting
A) opening and closing inventory balances.
B) cash receipts and accounts receivable.
C) shipping and receiving activities.
D) cutoffs of sales and purchases.
Q2) What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?
Q3) Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?
A) Daily sales summaries are compared to daily postings to the accounts receivable ledger.
B) Each sales invoice is supported by a prenumbered shipping document.
C) The accounts receivable ledger is reconciled daily to the control account in the general ledger.
D) Each shipment on credit is supported by a prenumbered sales invoice.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) Which of the following control activities is not usually performed in the accounts payable department?
A) Determining the mathematical accuracy of the vendor's invoice.
B) Having an authorized person approve the voucher.
C) Controlling the mailing of the check and remittance advice.
D) Matching the receiving report with the purchase order.
Q2) Assertions about classes of transactions and events for the period under audit include
A) existence, completeness, and accuracy.
B) existence, completeness, and classification.
C) occurrence, completeness, and cutoff.
D) occurrence, completeness, and valuation and allocation.
Q3) An entity erroneously recorded a large purchase twice.Which of the following internal controls would be most likely to detect this error in a timely and efficient manner?
A) Footing the purchases journal.
B) Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
C) Tracing totals from the purchases journal to the ledger accounts.
D) Sending written quarterly confirmations to all vendors.
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Page 13
Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) Comparing selected items from the payroll register to employee time records that have been approved by supervisory personnel tests which of the following assertions for payroll expense?
A) Occurrence.
B) Completeness.
C) Authorization.
D) Cutoff.
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Q2) The Hamster Stop has $93,650 in the Accrued Payroll account.Hamster's weekly payroll is $156,000 and the accrual represents payroll for 3 days.If controls are strong,determine whether additional audit work should be performed on this account.
Q3) Which of the following is required of an auditor who is testing the fair value of options in share-based compensation?
A) Using a specialist.
B) Testing the inputs used in the valuation model.
C) Becoming an expert in option-pricing.
D) Using the work of the internal audit function.
Page 14
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Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) An auditor selected items for test counts while observing an entity's physical inventory.The auditor then traced the test counts to the entity's inventory listing.This procedure most likely provided evidence concerning management's assertion of A) rights and obligations.
B) completeness.
C) existence.
D) valuation.
Q2) Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities?
A) Inventory cutoff errors.
B) Misapplication of LIFO.
C) Unreported scrap or spoilage.
D) Theft.
Q3) An auditor generally tests physical security controls over inventory by A) test counts and cutoff procedures.
B) examination and reconciliation.
C) inspection and recomputation.
D) inquiry and observation.
Q4) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Sample Questions
Q1) List two ways an auditor can test the existence and completeness of insurance policies.
Q2) Testing a sample of repairs and maintenance expense items to ensure that they were properly classified as repairs as opposed to property,plant,and equipment tests which of the following assertions for the repairs and maintenance expense account?
A) Occurrence.
B) Completeness.
C) Cutoff.
D) Authorization.
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
Q4) The auditor is least likely to learn of retirement of equipment through which of the following?
A) Reviewing the purchase return and allowance account.
B) Reviewing depreciation.
Page 16
C) Analyzing debits to the accumulated depreciation account.
D) Reviewing insurance policy riders.
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Sample Questions
Q1) A control which ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion of A) occurrence.
B) authorization.
C) completeness.
D) valuation.
Q2) For each of the following substantive procedures,first note whether it is a test of details of transactions or a test of details of account balances.Then decide for which assertion the test provides the best evidence.
1.Trace large cash receipts and payments to the source documents and the general ledger.
2.Examine copies of note and bond agreements.
3.Recompute accrued interest payable.
4.Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period.
5.Examine due dates on notes and bonds for proper classification between current and long term debt.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) 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.
Q2) The auditor's use of analytical procedures for auditing cash is limited.
A)True
B)False
Q3) In confirming with an outside agent,such as a financial institution,that the agent is holding investment securities in the entity's name,an auditor most likely gathers evidence in support of management's financial statement assertions regarding A) existence.
B) rights and obligations.
C) completeness.
D) existence, rights and obligations, and completeness.
Q4) The first step in auditing petty cash is to gain an understanding of the entity's controls over petty cash.Describe some important controls an entity should have over its petty cash fund.
Page 18
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) An attorney is responding to an independent auditor as a result of the entity's letter of inquiry.The attorney may appropriately limit the response to
A) asserted claims and litigation.
B) matters to which the attorney has given substantive attention in the form of legal consultation or representation.
C) asserted, overtly threatened, or pending claims and litigation.
D) items that have an extremely high probability of being resolved to the entity's detriment.
Q2) Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
A) An analysis of related party transactions for the discovery of possible irregularities.
B) A review of the cut-off bank statements for the period after the year-end.
C) An inquiry of the entity's legal counsel concerning litigation.
D) An investigation of material weaknesses in internal control previously communicated to the entity.
Q3) What information is typically requested in a legal letter to an entity's attorney?
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) An auditor may reasonably issue an "except for" qualified opinion for
A) a scope limitation or an unjustified accounting change.
B) a scope limitation, but not an unjustified accounting change.
C) an unjustified accounting change, but not a scope limitation.
D) neither an unjustified accounting change nor a scope limitation.
Q2) When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented,the successor auditor should make
A) no reference to the predecessor auditor.
B) reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion.
C) reference to the predecessor auditor only if the predecessor auditor expressed an unqualified opinion.
D) reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.
Q3) A basic assumption that underlies financial reporting is that an entity will continue as a going concern.
A)True
B)False
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Chapter 19: Professsional Conduct,Independence,and Quality Control
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Q1) According to the ethical standards of the profession,which of the following acts is generally prohibited?
A) Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.
B) Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society.
C) Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent.
D) Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.
Q2) PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.
A)True
B)False
Q3) When can a CPA disclose confidential information without the client's consent?
Q4) Why do professions establish codes of conduct that define ethical behaviors for members of the profession?
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Chapter 20: Legal Liability
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Sample Questions
Q1) A CPA's duty of due care to a client most likely will be breached when a CPA
A) gives a client an oral instead of a written report.
B) gives a client incorrect advice based on an honest error of judgment.
C) fails to give tax advice that saves the client money.
D) fails to follow generally accepted auditing standards.
Q2) Briefly describe the Sarbanes-Oxley Act of 2002.Be sure to mention (1)who passed the Act,(2)its primary objectives,(3)major aspects of the Act,(4)the parties that it affects,and (5)its relationship to the SEC rules.
Q3) Rule 10b-5 under Section 10(b)of the Securities Exchange Act of 1934 imposes liability on an accountant for violation of certain duties.Which of the following is an investor not required to prove to recover from a CPA?
A) A material, factual misrepresentation or omission.
B) Reliance by the plaintiff on the financial statements.
C) Damages suffered as a result of reliance on the financial statements.
D) The security price was artificially inflated as a result of the materially misstated financial statements.
Q4) Common law requires the auditor perform professional services with due care.
A)True
B)False
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Chapter 21: Assurance,Attestation,amd Internal Auditing
Services-professional Judgement Module
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Q1) Independence is required
A) under GAAS but not attestation standards.
B) under both GAAS and attestation standards.
C) under attestation standards but not GAAS.
D) is preferred but not required under both GAAS and attestation standards.
Q2) An entity's WebTrust seal is managed by
A) the CPA who performed the service.
B) the AICPA.
C) a third-party service organization.
D) the entity receiving the seal.
Q3) Limited assurance is provided in
A) an audit engagement.
B) a compilation engagement.
C) a review engagement.
D) none of the items listed.
Q4) The report in a review engagement provides
A) limited assurance.
B) positive assurance.
C) an opinion.
D) a summary of findings.
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