External Auditing
Pre-Test Questions
Course Introduction
External Auditing introduces students to the principles, standards, and practices of auditing financial statements performed by independent, third-party auditors. The course covers the audit process from planning and risk assessment to evidence gathering, reporting, and ethics, focusing on regulatory frameworks such as International Standards on Auditing (ISA) and Generally Accepted Auditing Standards (GAAS).
Students learn about internal control evaluation, sampling techniques, detection of errors and fraud, and the preparation of auditors reports, gaining insights into the legal and professional responsibilities of external auditors in ensuring transparency and accountability within organizations.
Recommended Textbook
Auditing and Assurance Services 7th Edition by Timothy J Louwers
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Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) An auditor selected items for test counts from the client's warehouse during the physical inventory observation.The auditor then traced these test counts into the detailed inventory listing that ultimately agreed to the financial statements.This procedure most likely provided evidence concerning management's assertion of
A)completeness.
B)valuation.
C)presentation and disclosure.
D)existence.
E)rights and obligations.
Answer: A
Q2) Assurance services involve all of the following,except
A)relevance as well as the reliability of information.
B)nonfinancial information as well as traditional financial statements.
C)providing absolute rather than reasonable assurance.
D)electronic databases as well as printed reports.
Answer: C
Q3) What are the four basic requirements for becoming a CPA?
Answer: Education,the CPA Examination,experience,and a state certificate.
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3
Chapter 2: Professional Standards
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Sample Questions
Q1) During which stages of an audit examination are auditors required to exhibit the appropriate use of professional judgment? \[\begin{array} { c c c }
& \text { Gathering } & \text { Drawing } \\ & \text { evidence } & \text { conchusions } \\
\text { A. }&\text { Yes } & \text { No } \\
\text {B. }&\text { Yes } & \text { Yes } \\
\text { C. } & \text { No } & \text { Yes } \\
\text { D } & \text { No } & \text { No } \end{array}\]
Answer: B
Q2) A vendor's invoice received and held by the client would be considered what type of evidence?
A)External.
B)Internal.
C)External-internal.
D)Written representation.
Answer: C
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4
Chapter 3: Engagement Planning
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Sample Questions
Q1) Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit?
A)Performing tests of details of transactions and balances
B)Reviewing prior year audit documentation and the permanent file for the client
C)Reading specialized industry journals
D)Reevaluating the client's internal control environment
Answer: B
Q2) The confirmation of a cash balance provides primary evidence regarding which management assertion?
A)Existence
B)Valuation
C)Allocation
D)Completeness
Answer: A
Q3) Management's responsibility in a computer system would not include
A)ensuring that the documentation of the system is complete and up to date.
B)maintaining a system of transaction processing that includes an audit trail.
C)assessing the control risk.
D)making computer resources and knowledgeable personnel available for questions.
Answer: C
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Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) The existence of audit risk is recognized by the statement in the auditor's standard report that the
A)auditor is responsible for expressing an opinion on the financial statements,which are the responsibility of management.
B)financial statements are presented fairly,in all material respects,in conformity with applicable financial reporting framework.
C)audit includes examining,on a test basis,evidence supporting the amounts and disclosures in the financial statements.
D)auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
Q2) When an auditor becomes aware of possible noncompliance by a client,the auditor should obtain an understanding of the nature of the act to
A)evaluate the effect on the financial statements.
B)determine the reliability of management's representations.
C)consider whether other similar acts may have occurred.
D)recommend remedial actions to the audit committee.
Q3) Why is it important for auditors to understand their clients' business risks?
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) When the audit team increases the planned assessed level of control risk because certain control activities were determined to be ineffective,the audit team would most likely increase the A)extent of substantive tests of details.
B)level of inherent risk.
C)extent of tests of controls.
D)level of detection risk.
Q2) After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company,an auditor decided to perform tests of controls.The auditor most likely decided that A)it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
B)additional evidence to support a further reduction in control risk is not available.
C)an increase in the assessed level of control risk is justified for certain financial statement assertions.
D)there were many internal control weaknesses that could allow errors to enter the accounting system.
Q3) List and explain briefly the phases of an internal control evaluation.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) To gather evidence regarding the bank's balance in a bank reconciliation,an auditor would examine all of the following except the A)cutoff bank statement.
B)general ledger.
C)bank confirmation.
D)year-end bank statement.
Q2) Describe how a lockbox works and indicate the advantages of such a system.
Q3) At the end of each business day,Safe Company sends its bank a listing of all checks written during the day including the check number,payee,and amount.When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company.This system is called
A)PayChex.
B)Pay-As-You-Go.
C)Positive Pay.
D)Pay Master.
Q4) What kind of error or fraud could happen if the inventory warehouse manager also had responsibility for making the physical inventory count and reconciling discrepancies to the perpetual inventory records?
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Page 8
Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) Credit checks should be performed by the sales department before credit is approved.
Question also found in study guide
A)True
B)False
Q2) Auditors sometimes use comparisons of ratios as audit evidence.An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
A)Unrecorded purchases.
B)Unrecorded sales.
C)Merchandise purchases being charged to selling and general expense.
D)Fictitious sales.
Q3) An auditor noted that client sales had increased 10 percent for the year.At the same time,cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent.The auditor is most likely concerned about
A)unrecorded costs.
B)improper credit approvals.
C)improper sales cut-off.
D)fictitious sales.
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Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) A CPA learns that his client has paid a vendor twice for the same shipment; once based upon the original invoice and once based upon the monthly statement sent from the vendor.A control procedure that should have prevented this duplicate payment is
A)Prenumbering of disbursement vouchers.
B)Attachment of the receiving report to the disbursement report.
C)Use of a limit or reasonableness test.
D)Prenumbering of receiving reports.
Q2) Auditors can compare the ________________________________ file to the _________________________________ to determine whether the company has material unrecorded liabilities on the financial statement date. Reference: Question also found in study guide
Q3) The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
A)Human resources function from the controllership function.
B)Administrative controls from the internal accounting controls.
C)Authorization of transactions from the custody of related assets.
D)Operational responsibility from the record keeping responsibility.
Q4) ...
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Page 10
Chapter 9: Production Cycle
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Sample Questions
Q1) Maple Company has an increase in purchases from specific vendors and an increase in raw materials inventory for the items purchased from these vendors.Sales for the company have not increased and are not forecast to increase.From this information an auditor might suspect
A)An increase in obsolete raw material inventory.
B)Theft of raw material inventory.
C)Kickbacks from vendors
D)Poor security over raw material inventory.
Q2) Which of the following internal control activities most likely addresses the completeness assertion for inventory?
A)The work-in-process account is periodically reconciled with subsidiary inventory records.
B)Employees responsible for custody of finished goods do not perform the receiving function.
C)Receiving reports are prenumbered and the numbering sequence is checked periodically.
D)There is a separation of duties between the payroll department and inventory accounting personnel.
Q3) Prepare an audit plan for the observation of an inventory count.
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Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) The typical assertion relating to investments and related accounts in a manufacturing company would not include the assertion that
A)all investments are valued at cost.
B)investment securities are on hand or held in safekeeping by a trustee.
C)investment income has been properly recorded.
D)investments are adequately classified and described in the balance sheet,including disclosures.
Q2) Documentation of a count of equity securities should include all of the following except
A)interest rate.
B)serial numbers.
C)number of shares.
D)market value.
Q3) An important test for unrecorded debt is to compare the interest expense accounts with long-term debt.
A)True
B)False
Q4) What are "off-balance-sheet" financing transactions? Explain and provide two or more examples.
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Chapter 11: Completing the Audit
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Sample Questions
Q1) Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?
A)Determine that changes in employee pay rates after year end were properly authorized.
B)Recompute depreciation charges for plant assets sold after year end.
C)Inquire about payroll checks that were recorded before year end but cashed after year end.
D)Investigate changes in long-term debt occurring after year end.
Q2) Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity?
A)Statements related to management's responsibility for the entity's financial statements.
B)Statements related to management's responsibility for designing internal control to prevent and detect fraud.
C)An indication that all subsequent events have been disclosed to the auditors.
D)Management's opinion as to the effectiveness of its internal control over financial reporting.
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13
Chapter 12: Reports on Audited Financial Statements
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Sample Questions
Q1) Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as
A)Additional use reports
B)Reissued reports
C)Subsequent use reports
D)Updated reports
Q2) When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation,the report would not
A)Identify management's responsibility for the financial statements.
B)Refer to any scope limitation in an additional paragraph.
C)Modify the Auditor's Responsibility section to identify the basis for the disclaimer.
D)Indicate that the auditors were engaged to audit the financial statements.
Q3) Define a scope limitation and distinguish between client-imposed and circumstance-imposed scope limitations.What reporting options are available to auditors when scope limitations are encountered during the engagement?
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Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonpublic entity?
A)Communicate reportable conditions discovered during the assessment of control risk.
B)Obtain a client representation letter from members of management.
C)Send bank confirmation letters to the entity's financial institutions.
D)Examine cash disbursements in the subsequent period for unrecorded liabilities.
Q2) Compiled financial statements of a nonpublic entity should be accompanied by a report stating that
A)the scope of the accountant's procedures has not been restricted in testing the financial information that is the representation of management.
B)the accountant assessed the accounting principles used and significant estimates made by management.
C)the accountant does not express an opinion or any other form of assurance on the financial statements.
D)a compilation consists primarily of inquiries of entity personnel and analytical procedures applied to financial data.
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Chapter 14: Professional Ethics
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Sample Questions
Q1) Red and Green,CPAs are the external auditors for Blue Corporation,a publicly-held company.Blue Corporation has outsourced its internal audit function to Red and Green.Which of the following statements is true?
A)Doing internal audit work does not impair the independence of Red and Green.
B)The independence of Red and Green is impaired only if employees of Red and Green act in a management capacity or make management decisions.
C)The independence of Red and Green is impaired only if a member of Red and Green's engagement team is hired to manage an accounting function in Blue Corporation.
D)Public accounting firms cannot be both the internal and external auditors for publicly-held companies and maintain independence.
Q2) Which of the following is NOT one of the AICPA Principles of Professional Conduct?
A)Responsibilities
B)Reliability
C)Objectivity
D)Due Care
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16
Chapter 15: Legal Liability
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Sample Questions
Q1) Under the Securities Act of 1933,which of the following defenses is related to auditors performing a reasonable investigation of the financial statements?
A)Causation
B)Contributory negligence
C)Due diligence
D)Prudent auditor
Q2) Which of the following statements concerning the Ultramares Corp.v.Touche case is not true?
A)This case was brought under common law liability.
B)This case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence.
C)This case established the rights of third parties to bring suits against auditors under common law liability.
D)This case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud.
Q3) What are the legal liabilities of auditors under common law?
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Chapter 16: Internal Audits, Governmental Audits, and Fraud Examinations
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Sample Questions
Q1) The GAO standards go beyond the AICPA's GAAS in a number of respects.
Question also found in study guide
A)True
B)False
Q2) The Government Accountability Office (GAO)is provides auditing standards that are followed by internal auditors and governmental auditors.
A)True
B)False
Q3) Which of the following is mostly concerned with the benefits derived from the expenditure of funds?
A)Operational auditing.
B)Performance auditing.
C)Management auditing.
D)Financial statement auditing.
Q4) The Single Audit Act established an annual audit for all ____________________ and ____________________ units that spend $_____________________ or more of ____________________ funds.
Question also found in study guide
Q5) What are the different types of internal audits?
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) A sample selection method in which items are selected in a nonsystematic manner is referred to as:
A)Block selection
B)Haphazard selection.
C)Systematic random selection.
D)Unrestricted random selection.
Q2) Nonsampling risk can occur in which of the following types of sampling plans:
A)Statistical sampling: Yes; Nonstatistical sampling: Yes
B)Statistical sampling: Yes; Nonstatistical sampling: No
C)Statistical sampling: No; Nonstatistical sampling: Yes
D)Statistical sampling: No; Nonstatistical sampling: No
Q3) The method of sample selection in which a random starting point is selected and a fixed number of items are bypassed prior to the next item being selected is referred to as:
A)Block selection.
B)Haphazard selection.
C)Systematic random selection.
D)Unrestricted random selection.
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Chapter 18: Attributes Sampling
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Sample Questions
Q1) The upper limit rate of deviation in attributes sampling is:
A)The actual deviation rate in the population.
B)Always less than the tolerable rate of deviation.
C)Always greater than the tolerable rate of deviation.
D)A statistical calculation that considers sampling risk.
Q2) Which of the following is not true with regard to the relationship among control risk,the risk of overreliance,and the tolerable rate of deviation?
A)Lower levels of control risk result in a higher level of the risk of overreliance.
B)Lower levels of the risk of overreliance result in a lower tolerable rate of deviation.
C)Lower levels of control risk result in a lower tolerable rate of deviation.
D)All of the above are true.
Q3) When the auditor concludes that a control is functioning properly when,in fact,it is not,the auditor has committed the:
A)Risk of underreliance.
B)Risk of overreliance.
C)Risk of incorrect acceptance.
D)Risk of incorrect rejection.
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Page 20
Chapter 19: Variables Sampling
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Sample
Questions
Q1) Summitt,CPA,performed a nonstatistical sampling plan to examine the inventory balances of Hero,Inc.Which of the following methods of sample selection are available to her?
A)Random and systematic only.
B)Block and haphazard only.
C)Any method she believes will result in a representative sample.
D)Any method where the results can be probabilistically estimated.
Q2) Cruz,CPA decided to use nonstatistical sampling to examine the accounts payable balances of Maverick,Inc.Based on his professional judgment,Cruz judgmentally selected sample invoices from a file,but did so without any intentional bias.The selection method used by Cruz was
A)Haphazard selection
B)Block selection
C)Systematic selection
D)Random selection
Q3) The risk of incorrect acceptance relates to the:
A)Effectiveness of the audit.
B)Efficiency of the audit.
C)Preliminary estimate of materiality.
D)Allowable risk of tolerable misstatement.
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Chapter 20: Auditing and Information Technology
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Sample Questions
Q1) Which of the following organizational positions would evaluate the existing system and design new computerized processing systems and documentation?
A)Programmer.
B)Systems analyst.
C)Computer operator.
D)Data conversion operator.
Q2) 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.
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