External Auditing
Midterm Exam
Course Introduction
External Auditing introduces students to the principles, practices, and regulatory framework of auditing from the viewpoint of an independent external auditor. The course covers the audit process from planning and risk assessment through evidence collection, evaluation, and reporting, with an emphasis on professional standards such as Generally Accepted Auditing Standards (GAAS) and International Standards on Auditing (ISA). Students will explore key topics including auditor independence, internal control evaluation, fraud detection, ethics, and the preparation of audit reports. Through case studies and practical exercises, the course develops analytical and critical thinking skills needed to assess the credibility of financial statements and communicate audit findings to stakeholders.
Recommended Textbook
Auditing and Assurance Services 15th Edition by Alvin A Arens
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26 Chapters
2759 Verified Questions
2759 Flashcards
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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46 Verified Questions
46 Flashcards
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Sample Questions
Q1) What are the five categories of attestation services?
Answer: The five categories of attestation services include:
Audit of historical financial statements
Audit of internal control over financial reporting
Review of historical financial statements
Attestation services on information technology
Other attestation services that may be applied to a broad range of subject matter
Q2) The most common way for users to obtain reliable information is to:
A)have an internal audit.
B)have an independent audit.
C)verify all information individually.
D)verify the information with management.
Answer: B
Q3) CPA firms are never allowed to provide bookkeeping services for clients.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Cpa Profession
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) Sets professional standards and rules for auditors.
A)AICPA
B)PCAOB
C)Securities Exchange Commission
D)Form 10-k
E)IAASB
F)Form S-1
G)Due professional care
H)Limited Liability Partnership
I)Professional Corporation
J)Limited Liability Company
K)Peer review
L)1933 Securities Act
M)1934 Securities Act
N) Form 8-k
O) State Regulation
P) Code of Professional Conduct
Q) Quality Control Standards
R) GAAS Standards
Answer: A
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Page 4
Chapter 3: Audit Reports
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) Whenever an auditor issues a qualified report, he or she must use the term "except for " in the opinion paragraph.
A)True
B)False
Answer: True
Q2) When a pervasive scope limitation exists:
A)a disclaimer of opinion rather than a qualified opinion is generally required.
B)the auditor's responsibility paragraph is modified to indicate that the auditor was not able to obtain sufficient appropriate evidence to express an audit opinion.
C)sections of the auditor's responsibility paragraph are eliminated to avoid stating anything that might lead readers to believe that other parts of the financial statements might be fairly stated.
D)all of the above.
Answer: D
Q3) Client imposed restrictions on the audit always require a disclaimer of opinion.
A)True
B)False
Answer: False
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5
Chapter 4: Professional Ethics
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Sample Questions
Q1) Which of the following is required for a firm to designate itself "Member of the American Institute of Certified Public Accountants" on its letterhead?
A)At least one of the partners must be a member of the AICPA.
B)All partners must be members of the AICPA.
C)The partners whose names appear in the firm name must be members of the AICPA.
D)A majority of the partners must be members of the AICPA.
Q2) Several months after an unqualified audit report was issued, the auditor discovers the financial statements were materially misstated.The client's CEO agrees that there are misstatements, but refuses to correct them.She claims that "confidentiality" prevents the CPA from informing anyone.Which of the following statements is correct?
A)The CEO is correct and the auditor must maintain confidentiality.
B)The CEO is incorrect, but since the audit report has been issued, it is too late to correct the report.
C)The CEO is correct, but to be ethically correct, the auditor should violate the confidentiality rule and disclose the error.
D)The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not correct the financial statements.
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Page 6
Chapter 5: Legal Liability
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113 Verified Questions
113 Flashcards
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Sample Questions
Q1) Which of the following is an illustration of liability under the federal securities acts?
A)A client sues the auditor for not discovering a theft of assets by an employee.
B)A bank sues the auditor for not discovering that the borrower's financial statements are misstated.
C)A combined group of stockholders sues the auditor for not discovering materially misstated financial statements.
D)The auditor sues a client for not cooperating during the engagement.
Q2) The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called:
A)separate and proportionate liability.
B)shared liability.
C)unitary liability.
D)joint and several liability.
Q3) Distinguish between what is meant by business failure and audit failure.
Q4) Distinguish between "joint and several liability" and "separate and proportionate liability."
Q5) Distinguish between constructive fraud and fraud.
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Page 7
Chapter 6: Audit Responsibilities and Objectives
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) The cycle approach to auditing:
A)ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.
B)cannot combine transactions recorded in different journals with the general ledger balances that result from those transactions.
C)is the only way of segmenting an audit.
D)assumes that each account has two or more cycles associated with it.
Q2) When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that:
A)the transactions are related to financing a company rather than to its operations.
B)most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively.
C)both A and B are correct.
D)neither A nor B is correct.
Q3) Discuss the differences between errors, frauds, and illegal acts.Give an example of each.
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8
Chapter 7: Audit Evidence
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Sample Questions
Q1) Distinguish between internal documentation and external documentation as types of audit evidence.Give two examples of each.Which type is considered more reliable?
Q2) "Physical examination" is the inspection or count by the auditor of items such as:
A)cash, inventory, and payroll timecards.
B)cash, inventory, canceled checks, and sales documents.
C)cash, inventory, canceled checks, and tangible fixed assets.
D)cash, inventory, securities, notes receivable, and tangible fixed assets.
Q3) The auditor must gather sufficient and appropriate evidence during the course of the audit.Sufficient evidence must:
A)be well documented and cross-referenced in the audit documents.
B)be based on sources that are external to company.
C)provide evidence that prove or disprove an audit objective/assertion.
D)be persuasive enough to enable the auditor to issue an audit report.
Q4) Audit documentation is the joint property of the auditor and the audit client.
A)True
B)False
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Page 9
Chapter 8: Audit Planning and Analytical Procedures
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) Define the term "related party" and discuss why an auditor should identify the client's related parties early in the audit.
Q2) An official record of meetings of the board of directors and stockholders is included in the corporate:
A)bylaws.
B)charter.
C)minutes.
D)license.
Q3) A major consideration in audit staffing is the need for continuity from year to year. A)True B)False
Q4) The major concern when using nonfinancial data in analytical procedures is the: A)accuracy of the nonfinancial data.
B)source of the nonfinancial data.
C)type of nonfinancial data.
D)presence of multiple sources of nonfinancial data.
Q5) Many inherent risks are common to all clients in certain industries. A)True B)False
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) Acceptable audit risk and the amount of substantive evidence required are inversely related.
A)True
B)False
Q2) If planned detection risk is reduced, the amount of evidence the auditor accumulates will:
A)increase.
B)decrease.
C)remain unchanged.
D)be indeterminate.
Q3) As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.
A)True
B)False
Q4) One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.
A)True
B)False
Q5) Why do auditors use the audit risk model when planning an audit?
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Chapter 10: Internal Control, Control Risk, and Section 404
Audits
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115 Verified Questions
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Sample Questions
Q1) Define the following terms: control deficiency, significant deficiency, and material weakness.
Q2) Describe the auditor's responsibilities related to required communications between the auditor and those charged with governance (remove auditor committee)regarding internal control.
Q3) When assessing whether the financial statements are auditable, the auditor must consider:
A)that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability.
B)that the integrity of management and the adequacy of risk management are the two primary factors determining auditability.
C)that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited.
D)the control risk before determining if the entity is auditable.
Q4) You are the audit manager for a new audit client.Your staff auditors are unsure of what constitutes a control deficiency.Discuss the terms control deficiency, design deficiency, and operating deficiency.
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Chapter 11: Fraud Auditing
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) Who is most likely to perpetrate fraudulent financial reporting?
A)Members of the board of directors
B)Production employees
C)Management of the company
D)The internal auditors
Q2) Financial statement manipulation risk is arguably present for all companies' financial statements.However, the risk is elevated for companies that:
A)are heavily regulated.
B)have low amounts of debt.
C)have to make significant judgments for accounting estimates.
D)operate in stable economic environments.
Q3) The two main categories of fraud are fraudulent financial reporting and misappropriation of assets.
A)True
B)False
Q4) Information and idea exchange sessions by the audit team are required by current auditing standards.
A)True
B)False
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Chapter 12: The Impact of Information Technology on the Audit Process
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Sample Questions
Q1) A service center:
A)must have an auditor hired by the PCAOB test the controls of the service center.
B)audit cannot be relied upon by those outside of the firm.
C)can engage a CPA firm to issue a report on their internal controls for use by all customers and their independent auditors.
D)must make all of their systems available to any external party.
Q2) Which of the following statements related to application controls is correct?
A)Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions.
B)Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles.
C)Application controls relate to all aspects of the IT function.
D)Application controls relate to the processing of individual transactions.
Q3) Output controls focus on preventing errors during processing.
A)True
B)False
Q4) Discuss the advantages and benefits of using generalized audit software.
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) When controls are deemed ineffective and assessed control risk is at the maximum for a private company, which of the following would normally be true?
A)No emphasis is placed on the controls.
B)Relatively little emphasis is placed on the controls.
C)Moderate emphasis is placed on the controls.
D)Heavy emphasis is placed on the controls.
Q2) Auditors must perform tests of controls separately from substantive tests of transactions.
A)True
B)False
Q3) The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency.
A)True
B)False
Q4) Discuss the major activities and procedures performed by the auditor in the plan and design of the audit approach.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of
Controls and Substantive Tests of Transactions
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:
A)existence objective.
B)completeness objective.
C)ownership objective.
D)valuation objective.
Q2) When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
A)Valuation
B)Cutoff
C)Completeness
D)Classification
Q3) The total of the individual account balances in the accounts receivable subsidiary ledger should equal the:
A)total sales for the period.
B)balance of the sales account in the general ledger.
C)total sales less the total cash received for the period.
D)balance of the accounts receivable account in the general ledger.
Page 16
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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118 Verified Questions
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Sample Questions
Q1) An advantage of using statistical sampling techniques is that such techniques:
A)mathematically measure risk.
B)eliminate the need for judgmental decisions.
C)define the values of precision and reliability required to provide audit satisfaction.
D)have been established in the courts to be superior to judgmental sampling.
Q2) What is the key advantage and disadvantage associated with systematic sample selection?
How must auditors address this disadvantage?
Q3) In using sampling distribution for attributes, which one of the following must be known to evaluate the sample results?
A)Estimated dollar value of the population
B)Standard exception of the values in the population
C)Actual exception rate of the attribute in the population
D)Sample size
Q4) The advantage of systematic sample selection is that:
A)it is easy to use.
B)there is limited possibility of it being biased.
C)it is unnecessary to determine if the population is arranged randomly.
D)it automatically selects items material to the financial statements.
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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Sample Questions
Q1) Each client misstatement in accounts receivable must be analyzed to determine whether it was consistent with the original assessed level of control risk.
A)True
B)False
Q2) The balance-related audit objectives of realizable value and rights are not affected by assessed control risk.
A)True
B)False
Q3) If material, all of the following are required to be separately disclosed in the financial statements except for:
A)accounts receivable from officers.
B)accounts receivable from affiliates.
C)sales and assets for different business segments.
D)sales for the last ten days of the fiscal year.
Q4) Cutoff misstatements occur:
A)either by error or fraud.
B)by error only.
C)by fraud only.
D)randomly without causes related to errors or fraud.
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) When errors are found in a sample, auditors in practice generally make the assumption:
A)of a 100% assumption for all errors.
B)that the population errors are larger than the sample errors.
C)that the population errors are smaller than the sample errors.
D)that the actual sample errors are representative of the population errors.
Q2) If no exceptions were found in the substantive tests of transactions:
A)ARIA would stay the same.
B)the sample size would stay the same.
C)ARIA would increase.
D)the sample size would increase.
Q3) The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is: A)the upper bound.
B)the tolerable risk.
C)the acceptable risk of incorrect acceptance.
D)the lower bound.
Q4) Explain the decision rule used in monetary unit sampling to determine whether the population is acceptable.
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Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
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Sample Questions
Q1) When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated.Alternatively, auditors focus their efforts on understatement when auditing liabilities.What is the primary reason for this difference in focus?
A)Auditors' legal liability
B)GAAP
C)GAAS requirements
D)All of the above
Q2) The acquisition and payment cycle consists of one class of transactions. A)True
B)False
Q3) A vendor's statement is unreliable and auditors rarely use it. A)True
B)False
Q4) To test for overstatement cutoff amounts when auditing accounts payable, the auditor should trace receiving reports issued before year-end to related vendors' invoices to make sure they are not recorded as accounts payable. A)True
20
B)False
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Chapter 19: Completing the Tests in the Acquisition and Payment Cycle:
Verification of Selected Accounts
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Sample Questions
Q1) When the auditor is determining whether the client followed a consistent depreciation policy from period to period, and the client's depreciation calculations are correct, the balance-related audit objective of ________ is being determined for depreciation expense.
A)completeness
B)existence
C)classification
D)accuracy
Q2) Changing circumstances may require a change in the useful life of an asset.When this occurs, it involves a change in:
A)accounting estimate rather than a change in accounting principle.
B)accounting principle rather than a change in accounting estimate.
C)both accounting principle and accounting estimate.
D)neither accounting principle nor accounting estimate.
Q3) Describe the two tests auditors can perform to test for the existence and omissions of insurance policies in force.
Q4) The most important audit objective for depreciation expense is detail tie-in.
A)True
B)False
21
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) An auditor is vouching a sample of hourly employees from the payroll master file to approved time clock or time sheet data in order to provide evidence that:
A)employees work the number of hours for which they are paid.
B)payments are made at the contractual rate.
C)product cost information is accurate.
D)segregation of duties is present between the payroll function and the payment function for cash disbursements.
Q2) Which of the following best describes inherent risk for balance-related audit objectives as they relate to payroll?
A)Not considered
B)Low
C)Moderate
D)High
Q3) "Physical control over assets" is not a type of control that is applicable to the payroll cycle.
A)True
B)False
Q4) How do auditors commonly verify sales commission expense?
Q5) What events initiate and terminate the payroll and personnel cycle?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) Inventory compilation tests are used to verify that the inventory is recorded at the lower of cost or market.
A)True
B)False
Q2) When there are no perpetual inventory files and inventory is material:
A)an audit cannot be performed, so the auditor must issue a disclaimer.
B)a physical inventory should be taken by the client near year-end.
C)the auditor will have to perform the inventory count and determine valuation.
D)the auditor need not observe inventory counts but must do test counts.
Q3) The receipt of raw materials is a part of the acquisition and payment cycle.
A)True
B)False
Q4) In the audit of inventory, the auditor and client are jointly responsible for making and recording the count of physical inventory; while the auditor is responsible for drawing conclusions about the adequacy of the physical inventory.
A)True
B)False
Q5) Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned.
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Auditing capital stock transactions as part of a merger is challenging because judgment is often involved.
A)True
B)False
Q2) State the four most important audit objectives for capital stock and describe how the auditor typically verifies each of the four objectives.
Q3) The audit of owners' equity of public and private companies is very different.Which of the following is not one of these differences?
A)The number of transactions (private companies have fewer transactions)
B)Payment of dividends (public companies rarely pay dividends)
C)Complexity of transactions (public companies generally have more complex transactions)
D)Type of noncurrent debt (public companies issue more bonds)
Q4) When auditing the capital acquisition and repayment cycle, it is common to verify each transaction taking place in the cycle for the entire year as a part of verifying the balance sheet accounts.
A)True
B)False
24
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) The auditor is generally concerned about the realizable value and the rights to cash.
A)True
B)False
Q2) The process of transferring money from one bank account to another and improperly recording the transaction is referred to as:
A)kiting.
B)lapping.
C)scamming.
D)embezzling.
Q3) Analytical procedures may be used to assess the year-end balances for financial instruments.
A)True
B)False
Q4) A proof of cash includes a reconciliation of cash receipts deposited in the bank with the cash disbursements records for a given period.
A)True
B)False
Q5) Explain kiting, and discuss how it is performed.
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Chapter 24: Completing the Audit
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Q1) Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent:
A)the culmination of conditions that existed at the balance sheet date.
B)additional new information related to events that were in existence on the balance sheet date.
C)final estimates of losses relating to casualties occurring in the subsequent events period.
D)preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.
Q2) Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit.
A)True
B)False
Q3) When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's officials.
A)True
B)False
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) The accountant's report on the examination of prospective financial statements should include a caveat that the prospective results may not be achieved.
A)True
B)False
Q2) Which of the following is not an accurate statement regarding agreed-upon procedures engagements?
A)These engagements are also known as procedures and findings engagements. B)A report for such an engagement describes the findings resulting from the procedures, but cannot describe the procedures agreed upon.
C)All agreed-upon procedure engagements are now under the scope of attestation standards.
D)Agreed-upon procedures engagements appeal to CPAs because management, or a third-party user, specifies the procedures they want done.
Q3) There are five Trust Service principles, including security and integrity.
A)True
B)False
Q4) Briefly describe each of the five Trust Services principles.
Q5) Briefly describe a SysTrust engagement.
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Sample Questions
Q1) Which of the following is not a difference between operational auditing and financial auditing?
A)Both must be performed by a CPA.
B)Operational audit reports are usually of a restricted distribution while financial audit reports are widely distributed.
C)Operational audits often cover non-financial issues while financial audits do not.
D)None of the above is a difference.
Q2) Effectiveness refers to the degree to which costs are reduced without reducing efficiency.
A)True
B)False
Q3) Operational auditing is the review of an organization for efficiency and effectiveness.Discuss what is meant by the terms "effectiveness" and "efficiency."
Q4) Professional guidelines for performing internal audits for companies are not as well-defined as for external audits.
A)True
B)False
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