External Auditing Exam Bank
Course Introduction
External Auditing is a course designed to provide students with a comprehensive understanding of the principles, practices, and regulatory frameworks surrounding independent audits of financial statements. The course covers the roles and responsibilities of external auditors, audit planning and risk assessment, evidence gathering techniques, internal control evaluation, and the preparation of audit reports. Students will explore legal and ethical considerations, audit standards, and the professional judgments required to ensure the credibility and reliability of financial information. Emphasis is placed on real-world applications, case studies, and the use of auditing software tools to equip students with practical skills relevant to careers in public accounting and corporate governance.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 14th Canadian Edition by Alvin
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Page 2
A Arens
Chapter 1: The Demand for Audit and Other Assurance Services
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Q1) A major type of assurance service performed by large public accounting firms is
A)auditing.
B)reviewing.
C)compilation.
D)management consulting.
Answer: A
Q2) How does a financial statement audit affect a bank manager's decisions in providing loans to a corporate client?
A)Information risk is reduced and the bank manager can lower the interest rate charged.
B)The bank manager will lower the risk-free interest rate that applies to the corporation.
C)The business risk for the client will be reduced,so the borrowing costs will decline.
D)The business risk for the client will be increased,so the borrowing costs will be lowered.
Answer: A
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Chapter 2:The Public Accounting Profession and Audit Quality
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Q1) CAS 200 provides overall objectives of the independent auditor during the conduct of an audit in four categories.How do these standards provide guidance to auditors?
A)They detail what an auditor should do during each financial statement audit.
B)They represent a framework for further discussion of detailed standards.
C)They provide specific rules about how work should be done for evidence gathering.
D)They explain how the audit report should be developed and distributed.
Answer: B
Q2) What is one of the ways that the Canadian Auditing Standards (CASs)make management directly responsible for an organization's financial statements?
A)All listed company management must certify the accuracy of the evidence provided.
B)Management must implement and carry out development of high-quality internal controls.
C)Management must acknowledge and understand its responsibilities.
D)Companies must use internal auditors to assess the quality of the financial statements.
Answer: C
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Chapter 3: Professional Ethics and Legal Liability
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Sample Questions
Q1) A code of professional conduct typically includes principles,rules of conduct,and interpretations or examples.What is the purpose of the principles?
A)to state what a practitioner must do for each audit engagement conducted
B)to provide discussions of the rules of conduct and how they relate to practical situations
C)to provide minimum standards of ethical conduct stated specifically
D)to provide ideal standards of ethical conduct aimed to serve the public interest
Answer: D
Q2) Generally,all of the rules of professional conduct for CPAs apply to
A)students in public practice.
B)students and members in firms.
C)members in public practice.
D)all members and firms.
Answer: D
Q3) What is an ethical blind spot?
Answer: An ethical blind spot is an unconscious judgmental tendency that can hinder the ethical decision making process or cause the decision maker to fail to recognize the ethical dimension of a choice.
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Chapter 4: Audit Responsibilities and Objectives
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Q1) Georgina was working as the part-time accountant for three small businesses.Whenever she could,she pocketed cash and neglected to record the sale in the sales system.The general transaction-related audit objective affected by her actions is
A)occurrence.
B)completeness.
C)accuracy.
D)posting and summarization.
Q2) Heavy Manufacturing Company is in the business of making steel plates,forming heavy metal slabs,and drilling and scoring metals.The company recently upgraded many of its forming machines.Five machines were purchased on four different invoices.Unfortunately,one of the invoices was recorded twice,resulting in five invoices being recorded.The general balance-related audit objective affected by this activity is A)completeness.
B)accuracy.
C)classification.
D)existence.
Q3) List the components of the auditor's professional judgment framework.
Q4) Outline the specific areas that auditors responsibilities are focused upon.
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Chapter 5: Audit Evidence
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Questions
Q1) Mary is entering a fictitious transaction in the sales data entry system to see if the system will reject the order for a client that is already exceeding its credit limit.Mary is using A)observation.
B)analytical procedures.
C)test data.
D)generalized audit software.
Q2) The new Canadian Auditing Standards require the auditor to complete the audit working papers within how many days of the audit report date?
A)45
B)60
C)90
D)183
Q3) List and explain the three times during an audit engagement the auditor performs analytical procedures.
Q4) Identify the characteristics that working papers should have.For each characteristic,briefly explain why it is important.
Q5) Identify and explain the three determinants of the persuasiveness of evidence.
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Chapter 6: Client Acceptance,Planning,and Materiality
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Q1) Organizations with a good control environment are able to document their positive "tone at the top" with a clear code of ethics.How would the auditor include the presence of such a code of ethics in the risk assessment process?
A)increase inherent risks associated with violations of laws and regulations
B)lower inherent risks associated with violations of laws and regulations
C)increase control risks associated with violations of laws and regulations
D)lower control risks associated with violations of laws and regulations
Q2) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
Q3) Jibbery Company has numerous transactions with related parties.For example,it has borrowed money from shareholders,purchases raw materials from a subsidiary company,and sells finished goods to its parent company.Which of the following describes one of the impacts of these transactions on risk assessment ?
A)inherent risk would be set as low
B)inherent risk would be set as high
C)control risk would be set as low
D)audit risk would be decreased
Q4) What is performance materiality?
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Chapter 7: Assessing the Risk of Material Misstatement
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Q1) Your firm has been appointed as the auditor of Bush Mining Inc.(BMI),a company that runs small mining operations in remote areas of northern Canada,primarily in surface mines.You have been assigned the job of senior auditor for BMI. BMI's operations are subject to provincial and federal laws and regulations.These laws and regulations have become stricter in recent years and some of BMI's older mines may be in violation of environmental laws.Surface mining produces tailings (toxic wastes that are dangerous to animal and plant life).These tailings are either further processed and buried or retained in tailings ponds.BMI is required to restore the mining property to a safe condition after a mine is exhausted.BMI has programs in place to monitor and control pollutants that are released to the air and to local waterways.
Required:A)What factors would affect the client business risk of BMI? Based upon your assessment of BMI's client business risk,would you adjust acceptable audit risk? Why or why not? B)What is your preliminary assessment of acceptable audit risk? Justify your answer.
Q2) What is a nonroutine transaction,and give two examples of a nonroutine transaction.
Q3) List the audit procedures outlined in CAS 240 that the auditor should perform to assess fraud risk.
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Chapter 8: Internal Control and COSO Framework
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Q1) The control environment consists of actions,policies,and procedures that
A)reflect the overall attitudes of top management,the directors,and the owners of an entity about control and its importance.
B)govern access to particular applications,such as how employees use passwords to change master file payroll rates.
C)are recorded on the web site (for example,access policies to data).
D)help implement the ethical attitudes at the organization,such as a computer usage policy.
Q2) Which of the following duties would indicate a weakness in internal controls?
A)The accounting function is under the controller.
B)The custodianship of cash is the responsibility of the treasurer's function.
C)The internal auditor reports to the board of directors.
D)The custodianship of buildings and equipment is the responsibility of the controller's function.
Q3) A)Describe the four broad objectives of management when designing an effective system of internal control.B)Describe the aspect of internal control that auditors are primarily concerned with for a financial statement audit.
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Chapter 9: Assessing Control Risk and Designing Test of Controls
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Q1) A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is
A)inspection.
B)observation.
C)reperformance.
D)reconciliation.
Q2) The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk are called
A)tests of details of balances.
B)tests of controls.
C)analytical procedures.
D)a walk-through.
Q3) Control risk is a measure of the auditor's expectation that internal controls will
A)prevent material misstatements from occurring.
B)detect and correct material misstatements.
C)either prevent material misstatements or detect and correct them.
D)neither prevent material misstatements nor detect and correct them.
Q4) What are the two types of reports service auditors issue?
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Chapter 10: Develop Risk Response: Audit Strategy and Audit Program
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Q1) When auditors perform audit procedures relating to contingent liabilities and subsequent events,what evidence do the auditors gather for the financial statements as a whole?
A)perform preliminary analytical procedures
B)evidence from test of controls
C)evidence from substantive testing
D)obtain client representation letter
Q2) After finishing the procedures to obtain an understanding of internal control in an audit engagement,the auditor should perform substantive test of transactions on
A)those controls that the auditor does not plan to rely upon.
B)those controls in which material weaknesses were identified.
C)those controls that have a material effect upon the financial statement balances.
D)a random sample of the controls that were reviewed.
Q3) Risks of fraud are assessed at which level(s)of the audit?
A)overall audit,transaction-related audit objectives
B)balance-related audit objectives only
C)overall audit,cycle,and account
D)cycle,account,and transaction-related audit objectives
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Chapter 11: Audit Sampling Concepts
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Q1) What is the difference between probabilistic and nonprobabilistic sample selection?
Q2) An auditor used sampling that has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars.The auditor is using what type of sampling?
A)attribute sampling
B)discovery sampling
C)monetary unit sampling
D)variable estimation sampling
Q3) The auditor is going to select a sample that is a statistical probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest.The auditor is using what type of sampling?
A)attribute sampling
B)discovery sampling
C)monetary unit sampling
D)variable estimation sampling
Q4) Kyle is performing a test of detail using a nonstatistical sample.A)Can Kyle formally measure sampling error? B)What should Kyle consider in determining the sampling error?
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Chapter 12: Audit of the Revenue Cycle
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Q1) Proper accounting requires that an account receivable must be written off by the client when
A)the client company concludes that an amount is no longer collectible.
B)the customer files for bankruptcy.
C)a collection agency cannot inspire the customer to pay the debt.
D)the account is at least six months old.
Q2) You are the audit senior responsible for a large photofinishing centre and camera store.The store uses automated cash registers tied to inventory (also known as point-of-sale devices).The point-of-sale devices take advantage of automated procedures and controls that can be programmed to reduce errors and improve controls over completeness of transactions.
Required:
Provide examples of interdependent controls that should be used to complement the programmed controls.
Q3) What are the six classes of transactions in the revenue cycle and what entries relate to each class of transactions?
Q4) State the five specific balance-related audit objectives as applied to accounts receivable.
Q5) Describe skimming.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) Discuss the key internal controls related to the disposal of manufacturing equipment.
Q2) Describe the two objectives that are most important in auditing accumulated amortization.Explain why these objectives are important.
Q3) The main focus taken by the auditor in verifying liability balances is on the discovery of
A)liabilities posted to the wrong account.
B)overstated liabilities.
C)understated or omitted liabilities.
D)overstated or extraneous liabilities.
Q4) The statement that all purchase orders must be supported by properly approved purchase requisitions is a specific example of which general objective?
A)completeness
B)valuation
C)authorization
D)classification
Q5) State each of the six specific balance-related audit objectives for manufacturing equipment additions and describe one common test of details of balances for each objective.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) The auditor has evaluated the effectiveness of the client's procedures to count inventory,and has provided constructive suggestions for improvement.However,the client has not implemented the suggestions,so the auditor has concluded that the inventory instructions do not provide adequate controls.This means that the auditor
A)must send a management letter informing management of the impact of these weaknesses.
B)must spend more time ensuring that the physical count is accurate.
C)should use attribute sampling to select a smaller sample for testing the physical inventory.
D)should increase the level of price and compilation tests to ensure better quality inventory pricing data.
Q2) Outline some examples of fraud-related procedures that could be performed for the inventory and distribution cycle.
Q3) Identify three analytical procedures commonly used when auditing accounts in the inventory and distribution cycle.
Q4) The audit of the inventory and distribution cycle consists of five parts.State the five parts and,for each part,identify the cycle in which that part is tested by the auditor.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) List the common key controls for the human resources and payroll cycle.
Q2) Which of the following procedures carried out by the personnel department best reduces the risk of payroll fraud and represents an appropriate responsibility for the department?
A)authorizing overtime hours
B)authorizing the addition or removal of employees from the payroll
C)distributing paycheques
D)collecting and retaining unpaid paycheques
Q3) A wage rate form that also documents a change in job responsibility for one of the warehouse employees should be approved by
A)human resources and the corporate controller.
B)the warehouse supervisor and human resources.
C)the warehouse supervisor.
D)human resources.
Q4) Which is the only one class of transaction relating to the payroll cycle?
A)receiving of goods
B)obtaining of service
C)receipt of cash
D)sales
Q5) What are the risks of error or fraud in the human resources and payroll cycle?
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) The amount of time spent verifying owners' equity is frequently minimal for closely-held corporations because
A)these companies are so small that it is not necessary to audit the capital section.
B)the few owners all have access to the books,so the auditor spends more time on accounts like liabilities,which affect outsiders.
C)there are few,if any,transactions during the year for the capital stock accounts,except for earnings and dividends.
D)there is no public interest in these companies.
Q2) State the audit objectives while testing dividends-related transactions.
Q3) State the risks of fraud and errors relating to owners' equity and related accounts.
Q4) Tests of details for notes payable interest expense and accrued interest can frequently be eliminated when A)tests of controls are conducted over authorization and recording procedures.
B)notes are issued by a person independent of the accounting department.
C)the notes payable schedule indicates that all notes have been repaid.
D)results of analytical review are favourable.
Q5) Discuss the four key controls over notes payable.
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Chapter 17: Audit of Cash Balances
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Q1) During his examination of a January 19,2019 cutoff bank statement,an auditor noticed that the majority of cheques listed as outstanding at December 31,2018 had not cleared the bank.This would indicate
A)a high probability of lapping.
B)a high probability of kiting.
C)that the cash disbursements journal had been held open past December 31,2018.
D)that the cash disbursements journal had been closed prior to December 31,2018.
Q2) What is an important benefit of independent preparation of bank reconciliations?
A)an opportunity to independently check that cheques have two signatures
B)the client being able to check that the bank is processing transactions correctly
C)the ability to internally verify cash receipt and disbursement transactions
D)the best time to carefully account for cheques issued
Q3) The most important internal control for petty cash is
A)the use of an imprest fund that is the responsibility of one individual.
B)keeping it in a safe or locked drawer.
C)keeping the amount of cash to a minimum.
D)accessibility so that cheques won't have to be written for small amounts.
Q4) What audit procedures are used to uncover a fraud in the cash receipts area?
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Chapter 18: Completing the Audit
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Q1) The following events all occurred after the balance sheet date (6/30/17)but prior to the auditor's report (9/10/17).Which one would require an adjustment to the account balances as of 6/30/17?
A)client will market a new series of equity securities ($2 million of preferred shares)on 8/1/17
B)unused equipment on the books at 6/30/17 for $100 000 was disposed of 7/31/17 for $60 000
C)securities costing $30 000 held for temporary investment on 6/30/17 declined in value by one-third when the market took a plunge on 8/15/17
D)inventory valued at $100 000 on 6/30/17 was destroyed in a fire on 8/1/17
Q2) Which level of risk does the auditor normally assign to the presentation and disclosure-related assertion of completeness for contingent liabilities and subsequent events?
A)low risk for inherent risks that required information may not be disclosed in the notes
B)medium for control risk with respect to identifying relevant events
C)medium with respect to providing adequate detail for the notes
D)high risk that all required information may not be disclosed in the notes
Q3) State the auditors' objectives for verifying contingent liabilities.
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Chapter 19: Audit Reports on Financial Statements
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Q1) Dussault & Montgomery,the auditors of Greenwich Corp. ,relied on Groves & Padden,another PA firm,to audit the Quebec subsidiaries of Greenwich.The responsibility for the opinion to issue on the financial statements is the responsibility of
A)Greenwich Corp.
B)Dussault & Montgomery.
C)Groves & Padden.
D)Dussault & Montgomery and Groves & Padden.
Q2) What does the key audit matters section in an auditor's report typically include?
Q3) The appropriate date for the audit report for a public company is the date on which the
A)client's fiscal year ended.
B)auditor and client entered into a contract.
C)board of directors approved the financial statements.
D)auditor prepares and delivers the report to the client.
Q4) Give an example of the key audit matters paragraph for a first year audit.
Q5) CAS 700 is the overarching standard for auditing reporting.Outline the relevant standards that come under it.
Q6) As per CAS 705,what are the causes of financial misstatements?
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Chapter 20: Other Assurance and Nonassurance Services
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Q1) As part of the review engagement for a small manufacturing company,which of the following would be a typical review procedure for the sales cycle?
A)review of internal controls over the granting of credit
B)examination of sales documents to ensure credit approval is documented
C)recalculation of the taxes and extensions on a sample of invoices
D)comparison of sales and gross profit to the prior year
Q2) Criteria are the benchmarks against which nonfinancial information will be evaluated while applying professional judgment during assurance engagements.According to the umbrella standards,suitable criteria should have which features?
Q3) An engagement for applying specified auditing procedures to financial information other than financial statements provides no assurance.This results in
A)a report that can be readily tailored to any type of engagement.
B)a broad set of audit procedures being conducted for specific information.
C)frequent disagreement between auditor and client with respect to results.
D)distribution of the report normally being restricted.
Q4) Outline the three performance standards of "Standards for Assurance Engagements."
Q5) Define "attestation engagements."
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