Auditing Theory and Practice
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Course Introduction
Auditing Theory and Practice provides students with a comprehensive understanding of the principles, standards, and procedures involved in the auditing process. The course explores the conceptual foundations of auditing, the regulatory and ethical environment, and the roles and responsibilities of auditors. Key topics include risk assessment, internal control evaluation, evidence gathering, audit planning, and reporting. Emphasis is placed on both external and internal auditing practices, professional skepticism, and real-world application through case studies and practical exercises. By the end of the course, students are equipped to critically evaluate audit processes and apply their knowledge to ensure accuracy, transparency, and integrity in financial reporting.
Recommended Textbook
Auditing Assurance Services A Systematic Approach 11th Edition by William F Messier Jr
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Sample Questions
Q1) Before accepting an engagement to audit a new entity, an auditor is required to:
A)make inquiries of the predecessor auditor.
B)tell the company whether or not the auditor is willing to issue a "clean" opinion.
C)prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D)become a member of the entity's board of directors.
Answer: A
Q2) When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:
A)identify areas of relatively high risk of misstatement and plan the audit accordingly.
B)provide suggestions for improvement to the company.
C)serve as a basis for setting audit risk and materiality.
D)decide whether to perform an audit for the company.
Answer: A
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3
Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) Due professional care requires:
A)auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence.
B)the examination of all available corroborating evidence.
C)the exercise of error-free judgment.
D)a study and review of internal controls that includes tests of controls.
Answer: A
Q2) The main difference between SAS and AU is:
A)they are the same except that SAS are organized chronologically and the AU are organized by topical area.
B)SAS are issued by the ASB and AU are issued by the PCAOB.
C)SAS are issued by the PCAOB and AU are issued by the ASB.
D)SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP.
Answer: A
Q3) The audit committee generally includes senior executives of the organization.
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) In the context of an audit of financial statements, substantive procedures are audit procedures that:
A)may be eliminated under certain conditions.
B)are primarily designed to discover significant subsequent events.
C)may be either tests of details of transactions, tests of details of account balances, or analytical procedures.
D)will increase proportionately with an increase in the auditor's reliance on internal control.
Answer: C
Q2) A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:
A)engagement letter.
B)audit working papers.
C)engagement letter and audit working papers.
D)It would not be typical to allow a review of either the engagement letter or the audit working papers.
Answer: B
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Chapter 4: Risk Assessment
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Sample Questions
Q1) On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:
A)decrease amount of substantive testing.
B)decrease detection risk.
C)increase detection risk.
D)increase materiality levels.
Q2) When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are:
A)susceptible to bias.
B)consistent with prior periods.
C)insensitive to variations.
D)similar to industry guidelines.
Q3) The acceptable level of detection risk is inversely related to the:
A)extent of the substantive procedures.
B)risk of misapplying auditing procedures.
C)overall materiality.
D)risk of failing to discover material misstatements.
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
A)difficulty and expense involved in testing a particular item.
B)assessment of control risk at a low level.
C)low inherent risk involved.
D)high quality of the evidence gathered.
Q2) Several factors may influence the reliability of evidence. Identify and describe two of these factors.
Q3) Which of the following is not a typical analytical procedure?
A)Study of relationships of the financial information with relevant nonfinancial information.
B)Comparison of the financial information with similar information regarding the industry in which the entity operates.
C)Comparison of recorded amounts of major disbursements with appropriate invoices.
D)Comparison of the financial information with budgeted amounts.
Q4) According to the text, what are the three functions of working papers?
Q5) The audit testing hierarchy is considered to be more effective and more efficient. Why?
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) Information and communication includes all of the following except:
A)identifying and recording all valid transactions.
B)determining the time period in which transactions occurred.
C)communicating price changes to customers.
D)properly presenting transactions and related disclosures in the financial statements.
Q2) Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements?
A)Scanning the journals produced by the internal control system.
B)Performing analytical procedures using data aggregated at a high level.
C)Vouching a sample of transactions directly related to the controls.
D)Observing the entity's personnel applying the controls.
Q3) Which of the following procedures most likely would be included as part of an auditor's tests of controls?
A)Inspection.
B)Reconciliation.
C)Confirmation.
D)Analytical procedures.
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 determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except:
A)be ready to document the extent to which he or she relied on the work.
B)evaluate the risks associated with the controls subjected to the work of others.
C)evaluate the competence and objectivity of the individuals who performed the work.
D)All of these are required.
Q2) The PCAOB makes it clear that the CEO and CFO are responsible for the internal control over financial reporting and the preparation of the statements.
A)True
B)False
Q3) 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
Q4) Discuss entity-level controls and provide examples of these types of controls.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) Audit sampling is commonly used to gather confirmation audit evidence. A)True
B)False
Q2) With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test.
A)True
B)False
Q3) Indicate which of the following audit procedures, used as tests of controls, do not involve audit sampling.
1. Observing and evaluating segregation of duties.
2. Testing of whether sales invoices are supported by authorized customer orders and shipping documents.
3. Reviewing entity's procedures for accounting for the numerical sequence of shipping documents.
4. Examining sales orders for proper credit approval.
5. Recomputing the information on copies of sales invoices.
6. Comparing the average days outstanding in accounts receivable with industry averages.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) After a sample is drawn randomly, the allowance for sampling risk must be statistically quantified within a specified level of confidence when using nonstatistical sampling techniques.
A)True
B)False
Q2) MUS logical unit
A)an individual dollar
B)the total of the projected misstatement plus the allowance for sampling risk
C)the difference between monetary amounts in the entity's records and amounts supported by audit evidence
D)the account or transaction that contains the selected dollar
Q3) Haphazard selection allows the auditor to select items with bias.
A)True
B)False
Q4) The purpose of audit sampling is to draw inferences about the entire population from the results of a sample.
A)True
B)False
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Q5) What is one advantage and one disadvantage of classical variables sampling?
Q6) 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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Sample Questions
Q1) To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would:
A)validate the sender of electronic information.
B)examine subsequent cash receipts for the accounts in question.
C)consider the electronic responses to the confirmations to be exceptions.
D)mail second requests to the electronic respondents.
Q2) All of the following are important controls over credit memos except:
A)proper segregation of duties to ensure that sales discounts taken were earned.
B)credit memos should be approved by someone other than whoever initiated it.
C)credit memos should be supported by a receiving document for returned goods. D)proper segregation of duties between access to customer records and authorizing credit memos.
Q3) The XYZ Company billing department has decided to assign one employee to each of its customers. This employee will be responsible for granting credit to the entity and then handling the billing. XYZ believes this will result in better customer service, because the entity will only have to deal with one person and that one person will be very familiar with the credit terms. As an auditor, would you agree with XYZ's decision?
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) Trace a sample of receiving reports to their respective vendor invoices and vouchers
A)Completeness
B)Occurrence
C)Accuracy
D)Cutoff
E)Authorization
F)Classification
Q2) Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable?
A)Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
B)Receiving the entity's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices.
C)Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
D)Confirming accounts payable balances with known suppliers who have zero balances.
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14
Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) All of the following are incorporated into valuation models for share-based compensation except:
A)the exercise price of the option.
B)the term of the option.
C)expected dividends.
D)current tax rates.
Q2) Key segregations of duties in the human resource management process include all of the following except:
A)the supervision function should be separate from the payroll-processing function.
B)the disbursement function should be separate from the supervision function.
C)the human resource function should be separate from setting salaries.
D)the payroll-processing function should be separate from the general ledger function.
Q3) Payroll-related expenses normally are not a material cost to the organization.
A)True
B)False
Q4) Give an example of a test of controls that could be used by an auditor to test for the following assertions: Occurrence, Accuracy, and Cutoff.
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Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) Tracing costs used to price inventory to vendors' invoices test which of the following assertions?
A)Occurrence.
B)Cutoff.
C)Accuracy.
D)Classification.
Q2) The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference?
A)Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
B)Credit memos for several items returned by customers had not been prepared.
C)No journal entry had been made on the retailer's books for several items returned to its suppliers.
D)An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
Q3) 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) To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes:
A)continuous analysis of the repairs and maintenance account.
B)periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
C)a level of authorization above the department initiating the retirement.
D)periodic inspection of insurance policies by the internal auditors.
Q3) To achieve effective control over fixed-asset additions, a company should establish activities that require:
A)capitalization of the cost of fixed asset additions in excess of a specific dollar amount.
B)performance of recurring fixed asset maintenance work solely by maintenance department employees.
C)any fixed asset additions that are not used in the business to be classified as investments.
D)authorization and approval of major fixed asset additions.
Page 17
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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) Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account?
A)Changing from one method of depreciation to another.
B)Adjusting the percentage used to estimate the allowance for doubtful accounts.
C)Changing from the FIFO to LIFO method of inventory valuation.
D)Correcting an error in depreciation in a prior year.
Q2) Which audit procedure is most closely related to management's assertions about the presentation of stockholders' equity?
A)Determining whether restrictions have been imposed on retained earnings.
B)Counting treasury stock certificates.
C)Inspecting minutes of the board of directors to verify that cash dividends were declared.
D)Establishing that treasury stock is valued at cost.
Q3) An audit of stockholders' equity ordinarily should include:
A)tracing individual dividend payments to the capital stock records.
B)reviewing minutes of board meetings to determine the number of shares outstanding.
C)confirming shares outstanding with state officials.
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D)determining that dividend declarations comply with debt agreements.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) Explain how cash plays a role in all business processes.
Q2) An interbank transfer schedule:
A)is another name for the proof of cash.
B)helps the auditor test for kiting.
C)is on a standard bank confirmation.
D)is used to examine entity bank reconciliations.
Q3) The auditor's use of analytical procedures for auditing cash is limited.
A)True
B)False
Q4) Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
A)Tracing recorded dividend income to cash receipts records and validated deposit slips.
B)Utilizing analytical procedures and statistical sampling.
C)Comparing recorded dividends with amounts appearing on federal information forms 1099.
D)Comparing recorded dividends with a standard financial reporting service's record of dividends.
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) Which of the following auditing procedures is ordinarily performed last?
A)Confirming accounts payable.
B)Testing the purchasing function.
C)Reading the minutes of directors' meetings for evidence of authorization of acquisition of fixed assets.
D)Obtaining a management representation letter.
Q2) Discuss the internal control communication requirements of the PCAOB. What must auditors of public companies report to those charged with governance?
Q3) 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.
Q4) What is the difference between a contingent liability and a commitment?
Q5) State the two primary purposes of the management representation letter.
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the nature and impact of the faulty accounting or misstatement in the auditor's report and express a(n):
A)qualified opinion or a disclaimer of opinion.
B)qualified opinion or an adverse opinion.
C)adverse opinion or a disclaimer of opinion.
D)qualified opinion or an unqualified opinion.
Q2) All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except:
A)the auditor is under no obligation to perform audit procedures on this other information.
B)the auditor must consider whether the other information is consistent with the information contained in the audited financial statements.
C)the auditor must request that material inconsistencies be corrected.
D)the auditor must perform audit procedures on this other information.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Sample Questions
Q1) A major purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:
A)enable the CPA firm to attest to the reliability of the client.
B)satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
C)minimize the likelihood of association with clients whose management lacks integrity.
D)anticipate before performing any fieldwork whether an unqualified opinion can be expressed.
Q2) Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same private client?
A)When the CPA, as legal agent, consummates a business acquisition for the client.
B)When the CPA's audit fees and legal fees are not billed separately.
C)When the CPA uses legal expertise to research a question of income tax law.
D)When the legal services consist of an analysis of the terms of an existing lease agreement.
Q3) When can a CPA disclose confidential information without the client's consent?
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Chapter 20: Legal Liability
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Sample Questions
Q1) An auditor, using the same degree of due care as other members of the profession, fails to identify an inadequate allowance for bad debts. This occurrence is an example of:
A)negligence.
B)fraud.
C)an error in judgment.
D)constructive negligence.
Q2) In general, the third-party (primary)beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA?
A)Fraud and constructive fraud, but not negligence.
B)Fraud, but not constructive fraud or negligence.
C)Constructive fraud and negligence, but not fraud.
D)Negligence, but not fraud or constructive fraud.
Q3) An auditor can be guilty under federal statutory law if s/he was reckless in performance of her/his professional duties.
A)True
B)False
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Sample Questions
Q1) May an accountant plan and perform an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles?
A)Only a compilation could be performed without the specialized knowledge.
B)Only a review could be performed without the specialized knowledge.
C)Both a compilation and a review could be performed without the specialized knowledge.
D)Neither a compilation nor a review could be performed without the specialized knowledge.
Q2) Examples of attest engagements include examination, review, and agreed-upon procedures engagements.
A)True
B)False
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) How has the advancement in technology led to the creation of the Trust Services?
Page 24
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