Contemporary Issues in Auditing Review Questions
Course Introduction
This course explores the evolving landscape of auditing by addressing current and emerging issues facing the profession. Students will examine topics such as auditing in a digital environment, the impact of regulatory changes, ethical challenges, the integration of artificial intelligence and big data in audit processes, and the increasing importance of sustainability and non-financial information in assurance services. Through case studies, guest speakers, and analysis of recent audit failures and successes, the course prepares students to critically assess and respond to the dynamic challenges confronting auditors in modern business settings.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 9th Edition by William F. Messier
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21 Chapters
1528 Verified Questions
1528 Flashcards
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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46 Verified Questions
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Sample Questions
Q1) Discuss an overview of the financial statement audit process using the terms "assertion," "evidence," and "report."
Answer: The auditor gathers evidence about the business transactions that have occurred (economic activity and events) and about management (the preparer of the statements). The auditor uses this evidence to compare the assertions contained in the financial statements to the criteria chosen by the user. The auditor's report communicates to the user the degree of correspondence between the assertions and the criteria.
Q2) Auditing is a type of attest service.
A)True
B)False
Answer: True
Q3) The basic purpose of a financial statement audit is to A) Detect fraud.
B) Examine individual transactions so that the auditor may certify as to their validity.
C) Provide assurance regarding whether the auditee's financial statements are fairly stated.
D) Assure the consistent application of correct accounting procedures.
Answer: C
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) Which of the following best describes the role of corporate governance?
A) Management decides which accounting principles are the most appropriate.
B) Shareholders vote to decide who should be members of the board of directors.
C) Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.
D) Management often is compensated based on the company's profitability.
Answer: C
Q2) Generally, the financial statements of U.S. companies must be prepared based on GAAP.
A)True
B)False
Answer: True
Q3) A financial statement audit is generally organized based on the five basic business processes or cycles.
A)True
B)False
Answer: True
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) 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
Q2) If the prospective client refuses to allow the predecessor auditor to communicate with the successor auditor, the successor auditor should have reservations about accepting the client.
A)True
B)False
Answer: True
Q3) There are five general types of audit tests.
A)True
B)False
Answer: False
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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) Which of the following is correct concerning required auditor communications about fraud?
A) Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C) Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.
D) The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
Q3) 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) Sarah is auditing the sales of a new client. In one procedure Sarah performs, she begins with the original sales documents and then searches the accounting records to find the corresponding entry. What test is Sarah performing and what management assertion is she testing?
Q2) Vouching is used primarily to test which of the following assertions about classes of transaction?
A) Occurrence.
B) Completeness.
C) Authorization.
D) Classification.
Q3) Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements?
A) Tests of controls.
B) Analytical procedures.
C) Computer controls.
D) Post-audit review of audit documents.
Q4) Audit procedures are designed to test management assertions.
A)True
B)False
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) Which of the following is not a characteristic of a batch processed computer system?
A) The collection of like transactions which are sorted and processed sequentially against a master file.
B) Keypunching of transactions, followed by machine processing.
C) The production of numerous printouts.
D) The posting of a transaction, as it occurs, to several files, without intermediate printouts.
Q2) Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether:
A) It is independent of management
B) It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations.
C) It asks management difficult questions.
D) It interacts regularly with internal audit personnel.
Q3) Once a level of control risk has been established, it cannot be changed.
A)True
B)False
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) 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.
Q2) Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control?
A) Multiple locations and business units.
B) Service organizations.
C) The role of the auditor in internal control.
D) Safeguarding assets.
Q3) Discuss the differences between a control deficiency, a significant deficiency, a material weakness, and the two dimensions of the control deficiency - likelihood and magnitude.
Q4) Discuss entity-level controls and provide examples of these types of controls.
Q5) All companies must follow the guidelines of AS5.
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) Which of the following risks is related to effectiveness of testing?
A) The risk of incorrect rejection.
B) Inherent risk.
C) The risk of incorrect acceptance.
D) None of these.
Q2) In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample?
A) Population size.
B) Tolerable deviation rate.
C) Expected population deviation rate.
D) Standard deviation.
Q3) The risk of incorrect acceptance relates to the
A) Effectiveness of the audit.
B) Efficiency of the audit.
C) Preliminary estimates of materiality levels.
D) Tolerable misstatement.
Q4) Define sampling risk and nonsampling risk.
Q5) Confidence level and sampling risk are related to sample size. A)True B)False
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) In a monetary-unit sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected misstatement of this sample was
A) $3,000.
B) $4,000.
C) $6,000.
D) $8,000.
The misstatement amount is 60% with a taint of .60 of the book value of the selected item. The taint is applied to the sampling interval to determine the projected misstatement for the account. The projected misstatement would be $6,000 ($10,000 x .60).
Q2) The objective of monetary-unit sampling is to test the assertion that no material misstatements exist in an account balance or class of transactions.
A)True
B)False
Q3) You are auditing accounts receivable for a small company and have found the following results:
Q4) What is one advantage and one disadvantage of classical variables sampling?
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?
A) The credit manager's opinion.
B) An aging schedule of past due accounts.
C) Subsequent year collections of amounts in accounts receivable at the balance sheet date.
D) Ratios calculated showing the past relationship of the valuation allowance to net credit sales.
Q2) A remittance advice is used to track purchases.
A)True
B)False
Q3) Tracing bills of lading to sales invoices provides evidence that
A) Shipments to customers were properly authorized.
B) Recorded sales were shipped.
C) Billed sales were shipped.
D) Shipments to customers were billed.
Q4) According to the Association of Certified Fraud Examiners, there are eight common methods for committing financial statement fraud. List 4 of the 8 methods.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) The principal business objectives of the purchasing process are acquiring goods and services and paying for those goods and services.
A)True
B)False
Q2) Purchase cutoff procedures should be designed to test whether or not all inventory
A) Purchased and received before the year-end was recorded before year-end.
B) On the year-end balance sheet was carried at lower of cost or market.
C) On the year-end balance sheet was paid for by the company.
D) Owned by the company is in the possession of the company.
Q3) An auditor performs a test to determine whether all merchandise was received for which the entity was billed. The population for this test consists of all
A) Merchandise received.
B) Vendors' invoices.
C) Canceled checks.
D) Receiving reports.
Q4) A purchase transaction usually begins with the preparation of a purchase order.
A)True
B)False
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Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) 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.
Q2) In the substantive audit procedures for payroll where the control risk is set at low, an auditor most likely would
A) Verify that checks representing unclaimed wages are mailed.
B) Trace individual employee deductions to entity journal entries.
C) Observe entity employees during a payroll distribution.
D) Compare payroll costs with entity standards or budgets.
Q3) Which of the following internal control objectives is likely to be a larger concern in the audit of the payroll cycle?
A) Payroll transactions are properly disclosed.
B) Recorded payroll transactions are valid.
C) Payroll transactions are recorded in the appropriate time period.
D) All payroll transactions have been recorded.
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Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?
A) Verifying that inventory counted is owned by the entity.
B) Verifying that the entity has used proper inventory pricing.
C) Ascertaining the physical quantities of inventory on hand.
D) Verifying that all inventory owned by the entity is on hand at the time of the count.
Q2) The auditor tests the quantity of materials charged to work in process by tracing these quantities to
A) Cost ledgers.
B) Perpetual inventory records.
C) Receiving reports.
D) Material requisitions.
Q3) List five things an auditor should do during the observation of the physical count of inventory.
Q4) Sale of finished goods is a part of the inventory management process.
A)True
B)False
Q5) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financing Investing Process:
Prepaid Expenses Intangible Assets and Property Plant and Equipment
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Sample Questions
Q1) Identify the types of transactions that occur in the property management process.
Q2) When there are numerous property and equipment transactions during the year, an auditor planning to set control risk at low usually plans to obtain an understanding of internal control and to perform
A) Tests of controls and extensive tests of property and equipment balances at the end of the year.
B) Extensive tests of current year property and equipment transactions.
C) Tests of controls and limited tests of current year property and equipment transactions.
D) Analytical procedures for property and equipment balances at the end of the year.
Q3) Which of the following is the best evidence of real estate ownership at the balance sheet date?
A) Title insurance policy.
B) A duplicate of the original deed held in the entity's safe.
C) Paid real estate tax bills.
D) Closing statements.
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Chapter 15: Auditing the Financing Investing Process:
Long-Term Liabilities Stockholders Equity and Income
Statement Accounts
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Sample Questions
Q1) What kind of information would typically be found on an income statement account analysis working paper? What kind of tests can an auditor perform using this information? Why would an auditor conduct additional analysis on an income statement account?
Q2) The auditor can best verify an entity's bond sinking fund transactions and year-end balance by
A) Recomputation of interest expense, interest payable, and amortization of bond discount or premium.
B) Confirmation with individual holders of retired bonds.
C) Confirmation with the bond trustee.
D) Examination and count of the bonds retired during the year.
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.
D) Determining that dividend declarations comply with debt agreements.
Q4) Income statement accounts must be accounted for in accordance with GAAP. A)True B)False Page 17
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) The least crucial element of internal control over cash is
A) Separation of cash record-keeping from custody of cash.
B) Preparation of the monthly bank reconciliation.
C) Batch processing of checks.
D) Separation of cash receipts from cash disbursements.
Q2) The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?
A) Confirming all December 31 bank balances.
B) Counting the cash working fund at the close of business on December 31.
C) Preparing independent bank reconciliations as of December 31.
D) Preparing and detail testing a bank transfer schedule.
Q3) Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.
A)True
B)False
Q4) What should an auditor look for when testing for proper classification of securities?
Q5) Explain how cash plays a role in all business processes.
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) The auditor's primary means of obtaining corroboration of management's information concerning litigation is a
A) Letter of audit inquiry to the entity's lawyer.
B) Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C) Confirmation of claims and assessments from the other parties to the litigation.
D) Confirmation of claims and assessments from an officer of the court presiding over the litigation.
Q2) A major customer of an entity suffers a fire after year-end, but just prior to completion of audit fieldwork. The entity believes that this event could have a significant direct effect on the financial statements. The auditor should
A) Advise management to disclose the event in the notes to the financial statements.
B) Disclose the event in the auditor's report.
C) Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known.
D) Advise management to adjust the financial statements.
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should
A) Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles.
B) Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.
C) Not express an opinion on whether the statements are presented in conformity with the basis of accounting used.
D) Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.
Q2) If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an)
A) Disclaimer of opinion.
B) Qualified opinion.
C) Review report.
D) Unqualified opinion with a separate explanatory paragraph.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Sample Questions
Q1) When can a CPA disclose confidential information without the client's consent?
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) An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee
A) Was unusually large.
B) Has not been paid and will not be paid for at least twelve months.
C) Has not been paid and the client has filed a voluntary petition for bankruptcy.
D) Was renegotiated during the prior year audit based on the need for expanded testing.
Q4) If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work.
A)True
B)False
Q5) Identify the primary purposes of Rules 201-203 of the Rules of Conduct.
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Chapter 20: Legal Liability
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Sample Questions
Q1) Which of the following is not one of the four general stages in the initiation and disposition of audit-related disputes?
A) Discovery of fraud subsequent to issuance of the audit report.
B) Users of financial statements incur losses.
C) The legal process commencing with the filing of a lawsuit.
D) Final resolution of the dispute.
Q2) An auditor can be held criminally liable for
A) Illegal acts under common law.
B) Illegal acts under statutory law.
C) Negligent acts when the third party has privity status.
D) Tort of contract for failing to follow due professional care.
Q3) The Sarbanes-Oxley Act of 2002 is considered the most sweeping securities law since the 1933 and 1934 Acts. Which item in the list below was not part of the Sarbanes-Oxley Act of 2002?
A) Enhances prosecutorial tool available in fraud cases.
B) Legislates new guidelines for ethics and integrity for public accounting firms.
C) Expands statutory prohibitions against fraud and obstruction of justice.
D) Increases authorized penalties for securities and financial fraud.
E) Strengthens the legal protections accorded whistleblowers.
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Sample Questions
Q1) An attestation report should state that the use of the report is restricted to specified parties under all of the following circumstances except when:
A) The criteria used to evaluate the subject matter are available only to specified parties.
B) The report is an attest engagement to apply agreed-upon procedures.
C) A written assertion on the subject matter of the report has not been provided by the responsible party.
D) All of the listed scenarios are circumstances that would dictate that the use of the report is restricted to specific parties.
Q2) The type of report issued under a PrimePlus assurance engagement is likely which of the following?
A) Unqualified.
B) Assurance.
C) Audit.
D) Agreed-upon procedures.
Q3) Explain each of the three PrimePlus Services typically offered by practitioners.
Q4) How has the advancement in technology led to the creation of the Trust Services?
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