External Auditing Practice Questions
Course Introduction
This course provides an in-depth understanding of the principles, procedures, and standards of external auditing, focusing on the role of the independent auditor in evaluating an organizations financial statements. Students will learn about the audit process, including planning, evidence gathering, internal control evaluation, risk assessment, and reporting. Emphasis is placed on ethical considerations, professional standards, legal responsibilities, and the regulatory environment that auditors operate within. The course also covers contemporary issues in auditing, such as fraud detection and the impact of emerging technologies on audit practices. Through case studies and real-world scenarios, students gain practical insights into the challenges and best practices of external auditing.
Recommended Textbook
Auditing and Assurance Services 5th edtion by Grant Gay
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16 Chapters
732 Verified Questions
732 Flashcards
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Page 2
Chapter 1: Assurance and Auditing: An Overview
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47 Verified Questions
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Sample Questions
Q1) An auditor of a company finds that there are rare and exceptional circumstances where they are unable to comply with a relevant requirement in an auditing standard. They are however able to perform appropriate alternative audit Procedures. To whom do they have to report or document these circumstances?
A) The auditor must report these circumstances to either management or the audit committee and obtain their agreement that the alternative procedures are appropriate.
B) If the auditor can use appropriate alternative audit procedures, no reporting or documentation required.
C) The auditor is required to document the circumstances in the auditor's report.
D) The auditor is required to document the circumstances in the audit working papers.
Answer: D
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3
Chapter 2: The Structure of the Profession
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Sample Questions
Q1) Which of the following bodies monitors the operation of the Australian Accounting Standards Board?
A) Australian Securities Exchange.
B) Financial Reporting Council.
C) Australian Securities and Investments Commission.
D) Auditing and Assurance Standards Board.
Answer: B
Q2) Which of the following bodies is able to impose penalties on auditors who have failed to carry out their duties properly?
A) Financial Reporting Council.
B) Companies Auditors and Liquidators Disciplinary Board.
C) Auditing and Assurance Standards Board.
D) All of the options listed here are correct.
Answer: B
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4
Chapter 3: Ethics, Independence and Corporate Governance
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Sample Questions
Q1) Which of the following circumstances would not be considered by ASIC to be 'exceptional' for them to allow the auditor of a public company to resign outside of the company's annual general meeting?
A) The company is not audited by the auditor of the parent company.
B) A negligence claim has been filed against the auditor by the company.
C) The auditor loses his/her independence.
D) The auditor's health is failing.
Answer: B
Q2) Which of the following is not one of the key areas covered by the OECD Principles of Corporate Governance?
A) Protection of shareholder's rights.
B) Responsibilities of the board.
C) Disclosure and transparency.
D) Responsibilities of the auditor.
Answer: D
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Chapter 4: The Legal Liability of Auditors Part Two: Planning
and Risk
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Sample Questions
Q1) Common law requires that the auditor:
A) guarantee their work.
B) perform their work with due care.
C) discover all fraud.
D) check all transactions.
Q2) The CLERP 9 reforms now provide for limitation of auditor's liability through:
A) a statutory cap.
B) proportionate liability.
C) incorporation.
D) All of the given answers are correct.
Q3) The 'Second Report of the Inquiry into the Law of Joint and Several Liability' in January 1995 recommended:
A) proportionate liability in all circumstances.
B) proportionate liability when the plaintiff is partly at fault.
C) proportionate division of insolvent defendant's share.
D) proportionate liability and defendant's degree of fault.
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6
Chapter 5: Overview of Elements of the Financial Report
Audit Process
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Sample Questions
Q1) Tracing is used primarily to test which of the following assertions about classes of transactions?
A) Occurrence.
B) Completeness.
C) Cut-off.
D) Classification.
Q2) An auditor's working papers will generally be least likely to include documentation showing how the:
A) client's schedules were prepared.
B) engagement had been planned.
C) client's internal control had been understood and the level of control risk assessed.
D) unusual matters were resolved.
Q3) Most of the independent auditor's work in formulating an opinion on a financial report consists of:
A) obtaining an understanding of the internal control.
B) obtaining and examining audit evidence.
C) examining cash transactions.
D) comparing recorded accountability with assets.
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Chapter 6: Planning, Understanding the Entity and Evaluating Business Risk
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Sample Questions
Q1) Which of the following procedures would not be used to obtain an understanding of the entity and its environment?
A) Observe entity operations.
B) Re-perform entity processes.
C) Verify proper evaluation of inventory subject to technological obsolescence.
D) Review prior year's audit documentation.
Q2) Which of the following is a nonfinancial performance measure?
A) Warranty rates.
B) Return on investment.
C) Net profit.
D) Sales.
Q3) Which of the following should an auditor obtain from the previous auditor prior to accepting an audit engagement?
A) Analysis of statement of financial position accounts.
B) Analysis of income statement accounts.
C) All matters of continuing accounting significance.
D) Facts that might bear on the integrity of management.
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Page 8
Chapter 7: Assessing Specific Business Risk
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Sample Questions
Q1) An auditor discovers a likely fraud during an audit, but concludes that the effect of the fraud is not sufficiently material to affect the auditor's opinion. The auditor should:
A) disclose the fraud to the appropriate level of the client's management.
B) disclose the fraud to appropriate authorities external to the client.
C) discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud.
D) modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial report.
Q2) Which of the following situations would be defined as fraud under the auditing standards?
A) Errors in the application of accounting principles.
B) Errors in the accounting data underlying the financial report.
C) Misinterpretation of facts that existed when the financial report was prepared.
D) Misappropriation of assets.
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9
Chapter 8: Understanding and Assessing Internal Control
Part Three: Tests of Control and Tests of Details
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Sample Questions
Q1) After obtaining an understanding of internal control in an audit engagement, the auditor should perform tests of controls on:
A) those control activities for which reportable conditions were identified.
B) a random sample of the control activities that were identified.
C) those control activities that have a material effect upon the financial report balances.
D) those control activities that the auditor identified to reduce the assessed level of control risk.
Q2) The auditor's understanding of the client's internal control is documented to substantiate:
A) conformity of the accounting records with the accounting standards.
B) representation as to adherence to requirements of management.
C) compliance with the auditing standards.
D) the fairness of the financial report presentation.
Q3) The internal control environment includes all of the following except:
A) organisational structure.
B) management philosophy and operating style.
C) human resource policies and procedures.
D) tests of control.
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Chapter 9: Tests of Controls
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Sample Questions
Q1) Selected items from the payroll register are compared to employee time cards that have been approved by supervisory personnel.Which of the following assertions for payroll expense does this test?
A) Occurrence.
B) Completeness.
C) Accuracy.
D) Cut-off.
Q2) Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control procedures over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control procedures could cause an:
A) understatement of revenues, receivables and inventory.
B) overstatement of revenues and receivables and an understatement of inventory.
C) understatement of revenues and receivables and an overstatement of inventory.
D) overstatement of revenues, receivables and inventory.
Q3) For effective internal control, the billing function should be performed by the:
A) accounting department.
B) sales department.
C) shipping department.
D) credit and collection department.
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Page 11
Chapter 10: Substantive Tests of Transactions and Balances
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Sample Questions
Q1) To verify that all sales transactions have been recorded (the completeness assertion), a test of transactions should be completed on a representative sample drawn from:
A) the billing clerk's file of sales orders.
B) entries in the sales journal.
C) the shipping clerk's file of duplicate copies of bills of lading (goods shipped notices).
D) a file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been accounted for.
Q2) The accuracy of perpetual inventory records may be established, in part, by comparing entries on the perpetual records with details from:
A) receiving reports.
B) purchase requisitions.
C) vendor payments.
D) purchase orders.
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12
Chapter 11: Audit Sampling Part Four: Completion and Communication
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65 Verified Questions
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Sample Questions
Q1) All of the following are true for dollar-unit sampling except:
A) it is not necessary to estimate the standard deviation of the population.
B) large items have a higher probability of selection.
C) several account balances can be combined and treated as one sampling unit.
D) understated items have a lower probability of selection than they would otherwise.
Q2) An advantage of using statistical over non-statistical sampling methods in tests of controls is that the statistical methods:
A) provide an objective basis for quantitatively evaluating sampling risk.
B) afford greater assurance than a non-statistical sample of equal size.
C) eliminate the need to use judgment in determining appropriate sample sizes.
D) can more easily convert the sample into a dual-purpose test useful for substantive testing.
Q3) A sample selection procedure that is beneficial for helping ensure that items are continuously sampled over the period of interest is:
A) haphazard sampling.
B) random sampling.
C) block sampling.
D) systematic sampling.
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Chapter 12: Completion and Review
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Sample Questions
Q1) Lisa Tan has audited the financial report of Basalt Ltd for the year ended 30 June 2012. Although Lisa's audit fieldwork was completed on 25 August 2012, her auditor's report was signed on 28 August 2012 and sent to management that Day) The management of Basalt Ltd advised Lisa that their annual report, which will be mailed to shareholders on 8 October 2012, will also include an unaudited financial report for the first quarter ended 30 September 2012. Under The circumstances, Lisa is responsible for undertaking subsequent events audit procedures through to:
A) 25 August 2012.
B) 28 August 2012.
C) 30 September 2012.
D) 8 October 2012.
Q2) Which of the following auditing procedures is ordinarily performed last?
A) Reading the mins of the directors' meetings.
B) Confirming accounts payable.
C) Obtaining a management representation letter.
D) Testing the purchasing function.
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14
Chapter 13: The Auditors Reporting Obligations Part Five:
Other Assurance Services
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Sample Questions
Q1) All of the following are true with respect to the auditor's consideration of information other than the audited financial report that are included in a client's annual report except:
A) the auditor must consider whether the other information is consistent with the information contained in the audited financial statements.
B) the auditor is under no obligation to perform audit procedures on this other information.
C) the auditor must perform audit procedures on this other information.
D) the auditor must request that material inconsistencies be corrected.
Q2) Your audit client has not written inventory down to net realisable value in accordance with approved accounting standards. The write-down would reduce current assets by 15 per cent and net profit before income tax by 11 per cent. What type of auditor's report should you issue?
A) An unmodified opinion with an Emphasis of Matter paragraph.
B) A disclaimer of opinion.
C) An adverse opinion.
D) A qualified opinion.
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Page 15
Chapter 14: Internal Auditing
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Sample Questions
Q1) Which of the following statements is true to ensure individual objectivity of internal auditors as per IIA Standards?
A) Internal audit should be involved in the design of internal control systems, because of the knowledge of controls, but should not operate such systems.
B) It is not appropriate for internal auditors to design, install or operate systems or write procedures manuals for systems.
C) It is permissible for the internal auditor to be involved in designing and installing internal control systems (but not be involved in their operation) providing the head of internal audit reports to the board of directors or audit committee.
D) The internal auditor should prepare procedures manuals for systems, but should not be involved in their design, installation or operation.
Q2) The types of operational audit reports given by an internal auditor are:
A) examination report, review report, or compilation report.
B) unqualified, qualified, adverse, or a disclaimer of opinion.
C) financial report or compliance report.
D) varied and are based on auditor judgment of how best to present the findings.
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16
Chapter 15: Auditing and Assurance Services in the Public Sector
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Sample Questions
Q1) The Auditor-General is appointed by:
A) the Governor-General.
B) the Parliament.
C) the Public Service Board.
D) the Minister of Finance
Q2) Which of the following statements best describes the term 'outcomes' in a performance audit?
A) Number of units produced.
B) Service provided by a particular government program.
C) Consequences for the community of the government program.
D) Economy and efficiency of resources used in achieving outputs.
Q3) Why is it important to establish performance audit criteria?
A) They are a basis for communication with management.
B) They indicate the scope of the performance audit.
C) They are a basis for developing audit programs and questionnaires.
D) All of the given answers are correct.
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Chapter 16: Other Assurance Services and Advanced Topics
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Sample Questions
Q1) Inquiry and analytical procedures ordinarily performed during a review of an entity's half-yearly financial report include:
A) inquiries concerning actions taken at meetings of the board of directors.
B) analytical procedures designed to identify material weaknesses in internal accounting control.
C) inquiries of knowledgeable outside parties such as the client's attorneys and bankers.
D) analytical procedures designed to test the accounting records by obtaining corroborating evidential matter.
Q2) A review engagement provides:
A) reasonable assurance.
B) high but not absolute assurance.
C) low assurance.
D) limited assurance.
Q3) Forensic audits include all of the following except:
A) employee fraud.
B) criminal investigations.
C) matrimonial disputes.
D) manufacturers' claims about product quality.
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