External Auditing
Final Exam Questions
Course Introduction
External Auditing is a comprehensive course that introduces students to the principles, standards, and procedures of external audit engagements. It covers the objectives and responsibilities of external auditors, the legal and ethical framework governing their work, and the process of planning, conducting, and reporting on an audit of financial statements. The course emphasizes risk assessment, internal control evaluation, audit evidence gathering, and documentation, as well as the application of relevant auditing standards and codes of professional conduct. By the end of the course, students will have a strong understanding of the external auditor's role in enhancing the credibility and reliability of financial information for stakeholders.
Recommended Textbook
Principles of Auditing Other Assurance Services 21st Edition by Ray Whittington
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Chapter 1: The Role of the Public Accountant in the American Economy
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Q1) The attest function:
A)Is an essential part of every engagement by the CPA,whether performing auditing,tax work,or other services.
B)Includes the preparation of a report of the CPA's findings.
C)Requires a consideration of internal control.
D)Requires a complete review of all transactions during the period under examination.
Answer: B
Q2) The Statements on Auditing Standards have been issued by the:
A)Auditing Standards Board.
B)Financial Accounting Standards Board.
C)Securities and Exchange Commission.
D)Federal Bureau of Investigation.
Answer: A
Q3) The American Institute of Certified Public Accountants creates the CPA Exam,while individual states issue CPA certificates and permits CPAs to practice.
A)True
B)False
Answer: True
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Chapter 2: Professional Standards
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Q1) A public company's audit report must be addressed to the board of directors and the A)Audit committee.
B)Company itself.
C)President.
D)Shareholders.
Answer: D
Q2) If the auditors discover illegal acts by a client,they must immediately report the act to law enforcement.
A)True
B)False
Answer: False
Q3) Generally accepted auditing standards established by the AICPA through April of 2003:
A)Were accepted as interim standards by the Public Company Accounting Oversight Board.
B)Provide accounting guidance for nonpublic companies.
C)Were also adopted as international auditing standards at that date.
D)Are now developed by the Securities and Exchange Commission.
Answer: A
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Page 4
Chapter 3: Professional Ethics
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Q1) The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors.
A)True
B)False
Answer: False
Q2) A CPA should maintain objectivity and be free of conflicts of interest when performing:
A)Audits,but not any other professional services.
B)All attestation services,but not other professional services.
C)All attestation and tax services,but not other professional services.
D)All professional services.
Answer: D
Q3) Contingency fee based pricing of accounting services is:
A)Always strictly prohibited in public accounting practice.
B)Never restricted in public accounting practice.
C)Prohibited for clients for whom attestation services are provided.
D)Considered an act discreditable to the profession.
Answer: C
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Chapter 4: Legal Liability of Cpas
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Q1) The Ultramares v.Touche case established that auditors could be held liable to a known third party for ordinary negligence.
A)True
B)False
Q2) Under which act (or acts)may criminal charges against a CPA be filed? \(\begin{array}{lll}&\text { Securities Act of } 1933&\text { Securities Exchange Act of } 1934\\
\text { A } & \text { Yes } & \text { Yes } \\
\text { B. } & \text { Yes } & \text { No } \\
\text { C. } & \text { No } & \text { Yes } \\
\text { D. } & \text { No } & \text { No } \end{array}\)
A)Option A
B)Option B
C)Option C
D)Option D
Q3) Most of the burden of affirmative proof is on the defendant under common law. A)True
B)False
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Page 6
Chapter 5: Audit Evidence and Documentation
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Q1) Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?
A)The financial statements must often be adjusted for the effects of material related party transactions.
B)Material related party transactions must be disclosed in the notes to the financial statements.
C)The substance of related party transactions will differ from their form.
D)In a related party transaction one party has the ability to exercise significant influence over the other party.
Q2) Which of the following is the most accurate statement regarding audit evidence?
A)Audit evidence gathered by an auditor from outside an enterprise is reliable.
B)Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.
C)Oral representations made by management are not valid evidence.
D)The auditor must obtain sufficient appropriate audit evidence.
Q3) The use of data analytics in auditing requires large,error-free populations.
A)True
B)False
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Chapter 6: Audit Planning, understanding the Client, assessing
Risks, and Responding
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Q1) A successor auditor should always make inquiries of the predecessor auditor before accepting an audit engagement.The successor should specifically inquire about the predecessor's:
A)Awareness of the consistency in the application of generally accepted accounting principles between accounting periods.
B)Evaluation of all matters of continuing accounting significance.
C)Opinion of any subsequent events occurring since the predecessor's audit report was issued.
D)Understanding as to the reasons for the change of auditors.
Q2) Which of the following is <b>not</b> an assertion that is made in the financial statements by management concerning each major account balance?
A)Completeness.
B)Rights and obligations.
C)Legality.
D)Valuation.
Q3) The auditors' consideration of internal control is required to be performed at the balance sheet date.
A)True
B)False
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Chapter 7: Internal Control
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Q1) After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk,an auditor decided to perform tests of controls.The auditor most likely decided that:
A)Additional evidence to support a reduction in the assessed level of control risk is not available.
B)An increase in the assessed level of control risk is justified for certain financial statement assertions.
C)It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.
D)There were many internal control deficiencies that would allow misstatements to enter the accounting system.
Q2) During financial statement audits,the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:
A)Assess inherent risk.
B)Design further audit procedures.
C)Assess compliance with the Foreign Corrupt Practices Act.
D)Provide a reasonable basis for an opinion on compliance with applicable laws.
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Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Q1) For good internal control,programmers should not be given access to program documentation for the programs they work on.
A)True
B)False
Q2) Which of the following employees normally would be assigned the operating responsibility for designing the information system?
A)Computer programmer.
B)Data processing manager.
C)Systems analyst.
D)Internal auditor.
Q3) Which of the following would <b>not </b>generally be considered a program control?
A)Limit tests.
B)Segregation of duties controls.
C)Allowed character tests.
D)Missing data tests.
Q4) Data encryption is an example of data communication control.
A)True
B)False
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Chapter 9: Audit Sampling
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Sample Questions
Q1) Using ratio estimation,an auditor has taken a sample of 150 from a population's 50,000 items;that population has a book value of $250,000.She found that in her sample the average audited value was $4.50,while the average book value was $5.20.What is the estimated total audited value of the population?
A)$215,000.
B)$216,346.
C)$225,000.
D)$250,000.
Q2) What effect does increasing the risk of incorrect acceptance have on sample size?
A)Increases.
B)Decreases.
C)No effect.
D)Indeterminate.
Q3) Which of the following is <b>not</b> generally used for selecting samples?
A)Random number tables.
B)Random number generators.
C)Physical representation numbers.
D)Systematic selection.
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Chapter 10: Cash and Financial Investments
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Q1) In many financial statements audits,auditing financial investments involves complex tasks requiring specialized skill and knowledge.
a.List three audit tasks related to the audit of financial investments that may require specialized skill or knowledge.
b.Define the term "financial derivative."
c.List the two general purposes why a client might acquire a financial derivative.
Q2) Which of the following could <b>not</b> be more efficiently performed with data analytics?
A)Identification of possible duplicate payments.
B)Identification of unusual expense reimbursements.
C)Identification of cash recorded from an unusual accounting source.
D)Identification of an unrecorded cash deposit.
Q3) Which of the following is the best audit procedure for the detection of lapping?
A)Comparison of postings of cash receipts to accounts with the details of cash deposits.
B)Confirmation of the cash balance.
C)Reconciliation of the cash account balances.
D)Preparing a proof of cash.
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Chapter 11: Accounts Receivable, notes Receivable, and Revenue
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Q1) A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December.Such entries recorded in which journal are most likely to achieve this end?
A)Cash receipts.
B)Payroll.
C)Purchases.
D)Sales.
Q2) Which of the following is <b>least</b> likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?
A)Examine bills of lading.
B)Physically examine items sold.
C)Examine correspondence.
D)Examine subsequent cash receipts.
Q3) Which of the following is<b> not</b> a primary objective of the auditors in the examination of accounts receivable?
A)Determine the approximate realizable value.
B)Consider the adequacy of internal control.
C)Establish the existence of receivables.
D)Determine the expected day of collection of each of the receivables.
Page 13
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Chapter 12: Inventories and Cost of Goods Sold
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Q1) The receiving department should accept only goods for which there is an approved purchase order on hand.
A)True
B)False
Q2) An inventory turnover analysis is useful to the auditor because it may detect:
A)Inadequacies in inventory pricing.
B)Methods of avoiding cyclical holding cost.
C)The optimum automatic reorder points.
D)The existence of obsolete merchandise.
Q3) Purchase cutoff procedures should be designed to test whether all inventory:
A)Owned by the company was recorded.
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.
Q4) A "bill and hold" scheme is most likely to include:
A)Shipment of items to a customer beyond what the customer has ordered.
B)Recording as sales items that the company retains as of year-end.
C)Billing of items that are held by customers for future revenue production purposes.
D)Selling items at substantial discounts near year-end.
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Chapter 13: Property,plant,and Equipment: Depreciation and Depletion
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Q1) Which of the following is the best evidence of continuous ownership of property?
A)Examination of the deed.
B)Examination of the client's property tax bills.
C)Examination of the title policy.
D)Examination of canceled check in payment for the property.
Q2) Material purchases of assets from an affiliated company should be disclosed in the financial statements.
A)True
B)False
Q3) Even when internal control is weak,a significant portion of the audit work on property,plant,and equipment may be performed at an interim date.
A)True
B)False
Q4) In the examination of property,plant,and equipment,the auditor tries to determine all of the following except the:
A)Extent of the control risk.
B)Extent of property abandoned during the year.
C)Adequacy of replacement funds.
D)Reasonableness of the depreciation.
Page 15
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Chapter 14: Accounts Payable and Other Liabilities
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Q1) Which of the following manipulations would understate accounts payable on the financial statements?
A)Overstatement of purchases.
B)Closing the cash disbursements journal prior to year-end.
C)Leaving the cash receipts journal open after year-end.
D)Omission of expenses.
Q2) Most of the audit work on accounts payable is typically performed:
A)Before the balance sheet date.
B)At the balance sheet date in conjunction with inventory cutoff tests.
C)After the balance sheet date.
D)Simultaneously with the audit of accrued liabilities.
Q3) Overstatement of financial results can involve failure to record a transaction.
A)True B)False
Q4) It is less important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable.
A)True
B)False
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Chapter 15: Debt and Equity Capital
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Q1) An audit plan for the examination of the retained earnings account should include a step that requires verification of the:
A)Market value used to charge retained earnings to account for a two-for-one stock split.
B)Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
C)Authorization for both cash and stock dividends.
D)Gain or loss resulting from disposition of treasury shares.
Q2) The auditor can best verify a client's bond sinking fund transactions and year-end balance by:
A)Confirmation with individual holders of retired bonds.
B)Confirmation with the bond trustee.
C)Recomputation of interest expense,interest payable,and amortization of bond discount or premium.
D)Examination and count of the bonds retired during the year.
Q3) Registered bondholders receive periodic interest payments without any action on their part.
A)True B)False
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Page 17
Chapter 16: Auditing Operations and Completing the Audit
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Q1) Hall accepted an engagement to audit the year 1 financial statements of XYZ Company.XYZ completed the preparation of the year 1 financial statements on February 13,year 2,and Hall began the audit work on February 17,year 2.Hall completed the audit work on March 24,year 2,and completed the report on March 28,year 2.The client's representation letter normally would be dated:
A)February 13,year 2.
B)February 17,year 2.
C)March 24,year 2.
D)March 28,year 2.
Q2) For clients that distribute checks or cash payments and have significant payroll control weakness,which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job?
A)A surprised observation of a paycheck distribution,while establishing the identity of each employee receiving payment.
B)A test of payroll extensions.
C)Analytical comparisons of budgeted to actual payroll expense.
D)Comparison of payee names on canceled payroll checks with the payroll register.
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Chapter 17: Auditors Reports
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Q1) Which of the following is<b> least</b> likely to result in a qualification of the auditors' opinion due to a scope limitation?
A)Scope limitations imposed by the client.
B)Reliance placed upon the report of component auditors.
C)Inability to obtain sufficient appropriate audit evidence.
D)Inadequate accounting records.
Q2) Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected.
A)True
B)False
Q3) An auditor's report on comparative financial statements should be dated as of the date of the:
A)Issuance of the report.
B)Accumulation of sufficient appropriate audit evidence.
C)Latest financial statements being reported on.
D)Last related-party transaction disclosed in the statements.
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Chapter 18: Integrated Audits of Public Companies
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Q1) Tests of operating effectiveness ordinarily include reperformance of the application of controls.
A)True
B)False
Q2) The minimum likelihood of loss involved in the consideration of a possible significant deficiency is:
A)Remote.
B)Reasonably possible.
C)Probable.
D)Not considered.
Q3) Which of the following best describes a CPA's engagement to report on a public entity's internal control over financial reporting?
A)An engagement to form an opinion on the effectiveness of internal control.
B)An audit engagement to provide negative assurance on the entity's internal control.
C)A consulting engagement to provide constructive advice.
D)A prospective engagement to project internal control for the next year.
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Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) Which of the following types of association with financial statements is <b>least</b> likely to result in a report by the CPAs?
A)Compilation.
B)Review.
C)Preparation.
D)Audit.
Q2) Which of the following types of services is most likely to result in a report that is restricted to specified parties?
A)Compilations.
B)Reviews.
C)Agreed-upon procedures.
D)Audits.
Q3) A comfort letter will ordinarily include:
A)Negative assurance on whether internal control operated as designed.
B)An opinion on compliance with Single Audit Act of 1984 requirements.
C)An opinion on whether the audited financial statements comply in form with SEC accounting requirements.
D)Positive assurance on whether unaudited condensed financial information complied with GAAP.
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Chapter 20: Additional Assurance Services: Other Information
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Q1) When a practitioner examines projected financial statements,the practitioner's report should include a separate paragraph that:
A)Describes the limitations on the usefulness of the presentation.
B)Provides an explanation of the differences between an examination and a review.
C)States that the accountant is responsible for events and circumstances for a period not exceeding one year after the report's date.
D)Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.
Q2) Under which principles is a cybersecurity engagement is currently being developed by the AICPA?
A)Generally Accepted Auditing Standards.
B)Government Cybersecurity Principles.
C)Assurance Procedures Standards.
D)Trust Services Principles and Criteria
Q3) SysTrust engagements relate only to database systems.
A)True
B)False
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Page 22
Chapter 21: Internal, operational, and Compliance Auditing
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Q1) The operational auditors' initial conclusions about potential problem areas are summarized as:
A)The definition of purpose.
B)The audit program.
C)The preliminary survey.
D)The audit report.
Q2) An operational audit report which deals with the accounts receivable department of a wholesaler is most likely to address:
A)The efficiency and effectiveness of the customer collections and include any findings requiring corrective action.
B)Whether accounts receivable is reported net of an allowance for uncollectible accounts.
C)Whether the major customer accounts receivable have been confirmed.
D)Whether the accounts receivable account includes any related party transactions.
Q3) In operational auditing,the preliminary survey serves as a guide for the development of the audit program.
A)True
B)False
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