External Auditing
Final Test Solutions
Course Introduction
External Auditing provides students with a comprehensive understanding of the principles, practices, and regulatory frameworks governing the independent examination of financial statements. The course covers the audit process from planning to completion, focusing on risk assessment, evidence gathering, internal controls evaluation, and audit reporting. Students will learn about professional standards, ethical considerations, and legal responsibilities auditors face, as well as recent developments affecting the auditing profession. Through case studies and practical exercises, the course equips learners with the analytical and technical skills necessary to perform external audits in a variety of organizational contexts.
Recommended Textbook
Auditing and Assurance Services 5th Edition by Timothy J. Louwers
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20 Chapters
2451 Verified Questions
2451 Flashcards
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Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) The definition of performance audits does not include
A) Economy audits.
B) Efficiency audits.
C) Financial audits.
D) Program audits.
Answer: C
Q2) A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of
A) Environmental auditing.
B) Financial auditing.
C) Compliance auditing.
D) Operational auditing.
Answer: D
Q3) The AICPA Statement on Auditing Standards defines auditing more broadly than the AAA definition of auditing.
A)True
B)False
Answer: False
Q4) What are the four basic requirements for becoming a CPA?
Answer: Education,the CPA Examination,experience,and a state certificate.
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Chapter 2: Professional Standards
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Sample Questions
Q1) Auditors' understanding of the internal control in an entity contributes information for
A) Determining whether members of the audit team have the required competence and capabilities to perform the audit.
B) Ascertaining the independence in mental attitude of members of the audit team.
C) Planning the professional development courses the audit staff needs to keep up to date with new auditing standards.
D) Planning the nature, timing, and extent of substantive procedures on an audit.
Answer: D
Q2) The evidence considered most appropriate by auditors is best described as
A) Internal documents such as sales invoice copies produced under conditions of strong internal control.
B) Written representations made by the president of the entity.
C) Documentary evidence obtained directly from independent external sources.
D) Direct personal knowledge obtained through physical observation and mathematical recalculation.
Answer: D
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4
Chapter 3: Engagement Planning
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Sample Questions
Q1) What are the characteristics that distinguish computer processing from manual processing?
Answer: Characteristics that distinguish computer processing from manual processing include:
a.Computer system transaction trails may exist for only a short time.
b.Computers process similar transactions uniformly.
c.Functions are more concentrated in a computer system.
d.Increased potential for errors and irregularities exist in computer systems.
e.Certain transactions can be initiated or executed automatically in a computer system.
Q2) Management is responsible for making the accounting ____________________________,and auditors are responsible for evaluating their ____________________________.
Answer: estimates; reasonableness
Q3) When auditing the existence assertion for an asset,auditors proceed from the A) Financial statement amounts back to the potentially unrecorded items.
B) Potentially unrecorded items forward to the financial statement amounts.
C) General ledger back to the supporting original transaction documents.
D) Supporting original transaction documents to the general ledger.
Answer: C
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Page 5
Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.
Q2) Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of:
A) The maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit.
B) A maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit.
C) A cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit.
D) Controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.
Q3) Why is it important for auditors to understand their clients' business risks?
Q4) What are the independent auditor's responsibilities to detect and report errors and frauds?
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) Significant deficiencies in internal control also include the more serious condition called a ___________________________________.
Q2) In gathering evidence about the client's internal control,auditors may use a(n)____________________________,which is a checklist of internal control-related questions.
Q3) According to the PCAOB,during the audit of internal controls for an issuer,the ultimate objective of testing the design effectiveness of internal controls is to
A) Determine whether the company's controls are processing company data effectively.
B) Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.
C) Determine that the company's employees are processing the controls according to the policy and procedure manuals at the company.
D) None of the above.
Q4) Identify and explain briefly the phases of an internal control evaluation.
Q5) Explain the difference between a significant deficiency and a material weakness.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) Which of the following combinations is a good means to conceal employee fraud but an ineffective means of perpetrating management (financial reporting)fraud?
A) Overstating sales revenue and overstating customer accounts receivable balances.
B) Overstating sales revenue and overstating bad debt expense.
C) Understating interest expense and understating accrued interest payable.
D) Omitting the disclosure information about related-party sales to the president's relatives at below-market prices.
Q2) Each morning the controller gets the prior day's listing of remittances,a copy of the payment report,and a copy of the deposit slip returned from the bank.When comparing these items,the controller would be able to determine that
A) No checks were returned for insufficient funds.
B) The cash received and remittance advice received were maintained in a single batch.
C) The accounts receivable system has controls over unauthorized access.
D) The assistant controller does not also reconcile the subsidiary accounts payable.
Q3) Describe how a lockbox works and indicate the advantages of such a system
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Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) Two widely used confirmation forms to test accounts receivable are
and
confirmations.
Q2) Which of the following statements is correct concerning the use of negative confirmation requests?
A) Unreturned negative confirmation requests rarely provide significant explicit evidence.
B) Negative confirmation requests are effective when detection risk is low.
C) Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D) Negative confirmation requests are effective when understatements of account balances are suspected.
Q3) An internal control questionnaire for evaluating the occurrence objective of revenues would not include which of the following questions?
A) Is customer credit approved before orders are shipped?
B) Are customer statements mailed monthly by the accounts receivable department?
C) Are direct confirmations of receivables obtained periodically by the internal auditor?
D) Are returned goods checked against necessary reports?
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Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) Which of the following functional responsibilities would not typically relate to salaried employees?
A) Collecting timekeeping data.
B) Supervision.
C) Personnel or labor relations.
D) Payroll distribution.
Q2) Auditors' "search for unrecorded liabilities" should emphasize the large balances,especially for regular vendors.
A)True
B)False
Q3) A voucher typically does not have attached to it a copy of which of the following documents?
A) Requisition.
B) Purchase order.
C) Vendor's invoice.
D) Check register.
Q4) The main feature of custody in the payroll cycle is the possession of the payroll checks.
A)True
B)False
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Chapter 9: Production Cycle
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Sample Questions
Q1) If an auditor was not present at a new client's inventory count,the auditor has no obligation to test the inventory.
A)True
B)False
Q2) An auditor's tests of controls over the issuance of raw materials to production would most likely include
A) Reconciling raw materials and work-in-process perpetual inventory records to general ledger balances.
B) Inquiring of the custodian about the procedures followed when defective materials are received from vendors.
C) Observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.
D) Examining material requisitions and reperforming client controls designed to process and record issuances.
Q3) With a sample of open and closed production cost reports,vouching labor cost to ________________________________ is a test for
Q4) Prepare an audit plan for the observation of an inventory count.
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11
Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) Taking a "big bath" in the financial statements refers to A) Overstating income.
B) Overstating revenues.
C) Understating income.
D) An economic downturn.
Q2) Capital stock may be subject to _____________________________ when independent registrars and transfer agents are employed.
Q3) The primary audit concern with the verification of long-term liabilities is that all _________________ are recorded and that the ___________________ is properly paid or ____________.
Q4) During an audit of an entity's stockholders' equity accounts,the auditor determines whether there are restrictions on retained earnings resulting from loans,agreements,or state law.This audit procedure most likely is intended to verify the ASB presentation and disclosure assertion of A) Occurrence.
B) Completeness.
C) Rights and Obligations.
D) Understandability.
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Chapter 11: Completing the Audit
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Sample Questions
Q1) Attorneys should always provide a dollar estimate of the amount of potential loss for items included in the attorney letter.
A)True
B)False
Q2) Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously issued financial statements?
A) An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.
B) A contingency that had been disclosed in the audited financial statements is resolved.
C) New information concerning undisclosed lease transactions during the period under audit is discovered.
D) A subsidiary that accounts for 25% of the entity's consolidated net income is sold.
Q3) Subsequently discovered facts may be identified either following the date of the auditors' report or the ________________________________.
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Chapter 12: Reports on Audited Financial Statements
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Sample Questions
Q1) If the auditors encounter a material scope limitation in the examination of an entity's financial statements,which of the following types of opinions could be issued?
A) Adverse opinion or disclaimer of opinion.
B) Adverse opinion or qualified opinion.
C) Unqualified opinion with explanatory language or qualified opinion.
D) Disclaimer of opinion or qualified opinion.
Q2) The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made.The opinion paragraph of the auditors' report should express a(n)
A) Unqualified opinion.
B) Qualified opinion citing a departure from generally accepted accounting principles.
C) Qualified opinion citing a scope limitation and lack of specific evidence.
D) Disclaimer of opinion.
Q3) If a departure from GAAP is material (but not pervasive),a(n)_____________________________ opinion on the entity's financial statements should be issued.
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Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) Each page of the financial statements of a review service should be marked " __________________________________."
Q2) What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy,security,processing integrity,availability,and confidentiality?
A) WebTrust.
B) SysTrust.
C) XBRL.
D) WebSecure.
Q3) When accountants are not independent,which of the following reports can nevertheless be issued?
A) Compilation report.
B) Standard unqualified audit report.
C) Examination report on a forecast.
D) Examination of internal control over financial reporting.
Q4) Engagements to perform ______________ - ______________ procedures are not considered audits because they have a
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Chapter 14: Professional Ethics
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Sample Questions
Q1) Which of the following philosophical principles in ethics emphasizes the consequences of action rather than on following the rules?
A) Imperative principle.
B) Utilitarianism principle.
C) Generalization principle.
D) Moral principle.
Q2) An auditor recommends a local computer company to a client that is trying to upgrade its computerized sales records.The client purchases $25,000 worth of equipment and sends a check to the auditor for 5 percent of the total sales.This is an example of a
A) Commission.
B) Contingent fee.
C) Referral fee.
D) Nonaudit fee.
Q3) Ethics in the imperative sense is a function of moral rules and principles,not a situation specific calculation of the consequences.
A)True
B)False
Q4) What are the powers of the AICPA trial board in ethics violations?
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Chapter 15: Legal Liability
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Sample Questions
Q1) Auditors have high exposure to liability under the Securities Act of 1933,section 11,primarily because the
has been placed on auditors.
Q2) N.Lauren hires D. Humphrey, CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming
A) Breach of contract.
B) Ordinary negligence.
C) Gross negligence.
D) Constructive fraud.
Q3) In general,which of the following parties would have the lowest burden of proof in bringing suit against an auditor?
A) Clients.
B) A lender who meets the definition of a primary beneficiary.
C) A third-party investor under the Securities Act.
D) A lender who meets the definition of a foreseen third party.
Q4) What are the legal liabilities of auditors under common law?
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Chapter 16: Internal Governmental and Fraud Audits
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Sample Questions
Q1) Explain briefly the purpose and requirements under the Single Audit Act.
Q2) Which of the following would be considered in determining whether an internal audit department is independent?
A) The organizational level of the chief audit officer and the objectivity of the audit staff.
B) A requirement for the auditors to report to the audit committee and the composition of the audit committee.
C) The organizational status of the audit committee and the individual independence of internal auditors in the department.
D) The nature of the audit charter and the objectivity of the audit staff.
Q3) The IIA Performance Standards do not include the standard for A) Managing the internal audit activity.
B) Nature of work.
C) Compliance with policies, plans, procedures, laws and regulations.
D) Engagement planning.
Q4) What are the different types of internal audits?
Q5) A person testifying about findings during litigation support,application of accounting principles,or application of auditing standards is called a(n)_________________________________.
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) If a golf professional is interested in determining whether a golf ball can be hit over 300 yards,which of the following relationships between the adjusted sample estimate of distance and the actual distance would represent sampling risk?
A) Adjusted estimate = 295 yards; actual = 298 yards.
B) Adjusted estimate = 305 yards; actual = 301 yards.
C) Adjusted estimate = 310 yards; actual = 295 yards.
D) All of the above are examples of sampling risk.
Q2) The auditor typically cannot control nonsampling risk during an examination by selecting a larger number of items.
A)True
B)False
Q3) An auditor is most likely to use statistical sampling under which of the following situations?
A) Random numbers can be associated with population items.
B) Strictly defensible results based on mathematics are not necessary.
C) The auditor has a very good knowledge of the population.
D) The population is very diverse with some segments especially prone to misstatement.
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Chapter 18: Attributes Sampling
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Sample
Questions
Q1) The sample rate of deviation is determined by dividing the number of deviations noted by the auditor by the ________________________.
Q2) J.Pitino is auditing the revenue cycle of Texas Boots and has elected to perform a nonstatistical test of controls.Texas Boots sells Snakeskin Boots to wholesale distributors around the country.Pitino does not expect more than 1% deviations to be present in the system.A tolerable rate of deviation would be 5%.Pitino has assessed control risk as medium low and selected a sample size of 40 sales and has defined a deviation as a recorded sale not being supported by a shipping document.
Required:
A.How does nonstatistical sampling differ from statistical sampling?
B.Why would Pitino choose to perform nonstatistical sampling instead of statistical sampling?
C.How should Pitino select the sample?
D.What conclusion should Pitino draw if one deviation is found?
Q3) A(n)_____________________ is an instance in which controls are not functioning as intended.
Q4) The expected population deviation rate has a(n)___________________ relationship with the necessary sample size.
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Chapter 19: Variables Sampling
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Sample Questions
Q1) A method of variables sampling that defines the population as the number of dollars in an account balance or class of transactions is referred to as
A) Attributes sampling.
B) Classical variables sampling.
C) Mean-per-unit sampling.
D) Monetary unit sampling.
Q2) Which of the following courses of action would an audit team most likely follow in planning a sample of cash disbursements if the audit team is aware of several unusually large cash disbursements?
A) Increase the sample size to reduce the effect of the unusually large disbursements.
B) Continue to draw new samples until all unusually large disbursements appear in the sample.
C) Set the tolerable rate of deviation at a lower level than originally planned.
D) Stratify the cash disbursements population so that the unusually large disbursements are selected.
Q3) __________________________ sampling methods do not allow the auditor to control the exposure to sampling risk.
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Chapter 20: Auditing in a Computerized Environment
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Sample Questions
Q1) The use of the systems development life cycle is an example of an access to programs and data control.
A)True
B)False
Q2) Input controls are one of the major categories of general controls.
A)True
B)False
Q3) Why is it important that the organization establish systems development and documentation standards?
A) These standards enable the organization to understand the programming logic underlying recently developed programs.
B) These standards ensure that the program controls and documentation included in recently developed programs is adequate.
C) The absence of these standards would constitute a material weakness in internal control.
D) These standards ensure the appropriate separation of duties of computer personnel.
Q4) Separation of incompatible functions is an example of a ___________________________________ control.
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