External Auditing Question
Bank
Course Introduction
External Auditing is a comprehensive course designed to provide students with an in-depth understanding of the principles, procedures, and practices involved in the independent examination of an organizations financial statements. The course covers key topics such as audit planning, risk assessment, audit evidence collection, internal controls evaluation, and the preparation of audit reports in accordance with relevant standards and regulations. Students will also explore ethical considerations, legal responsibilities of auditors, and the role of external audits in fostering transparency and trust in financial reporting. Practical case studies and real-world scenarios are integrated to develop critical thinking and professional judgement skills necessary for a successful career in auditing.
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Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by
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Alvin A. Arens
Chapter 1: The Demand for Audit and Other Assurance Services
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Q1) Which of the following terms best describes the increased likelihood that unreliable information will be provided to decision makers?
A) audit risk
B) information risk
C) inherent risk
D) business risk
Answer: B
Q2) Which of the following is an example of accounting rather than auditing?
A) gathering evidence about the quality of accounts receivable
B) entering sales transactions into the sales order system
C) reviewing sales invoices to see if they have been calculated correctly
D) comparing bank deposit documents to the recorded cash received
Answer: B
Q3) The internal audit group typically reports directly to the
A) board of directors.
B) management of the company.
C) external auditor.
D) audit committee.
Answer: D
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) Which of the following is a typical consequence to a PA or PA firm if practice inspectors find any files or quality control procedures to be unsatisfactory? The PA A) will lose the right immediately to conduct audit engagements.
B) will no longer be allowed to sign audit reports for a period of time (such as a year). C) may be required to revise processes or attend training courses.
D) will be required to rewrite the professional qualification examinations.
Answer: C
Q2) Approximately how many public accounting firms in Canada have more than 50 professional staff?
A) 25
B) 50
C) 75
D) 100
Answer: B
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Chapter 3: Legal Liability
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Q1) There are a number of things that the CPA, representing the profession as a whole, can do to reduce the practitioner's exposure to lawsuits. One of them is to
A) sanction members for improper conduct and performance.
B) deal only with clients possessing integrity.
C) hire qualified auditors and train and supervise them.
D) perform quality audits.
Answer: A
Q2) Small Town Lumberyard Limited (STLL) needed an additional bank loan to finance its operations. To make its financial statements look better, the company overstated its inventory and overstated its accounts payable. The auditors did not detect this deliberate misstatement because they conducted limited tests of inventory and did not confirm accounts payable. Other auditors agreed that the procedures conducted during this audit were inadequate. The auditors of STLL would likely be considered to be
A) guilty of fraud.
B) negligent.
C) contributorily negligent with STLL.
D) guilty of constructive fraud.
Answer: B
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Chapter 4: Professional Judgment and Ethics
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Q1) What should a PA do if approached by a client where he and his firm lack or do not have access to the technical knowledge required to complete the audit?
A) subcontract the audit to another firm
B) indicate that they can do a review engagement, not an audit
C) decline the new audit engagement
D) conduct the engagement, but prepare a qualified audit report
Q2) PAs are members of a professional association that can impose sanctions for violations of the professional code of conduct. What is an example of a severe penalty that can be imposed by a professional association?
A) publication of information about the offence in a newsletter
B) requirement of the completion of training courses
C) requirement to have another peer review conducted within one year
D) expulsion from the professional association
Q3) Identify and describe each of the three parts to the Code of Professional Conduct. Also discuss which parts are officially enforceable and which are not.
Q4) What is the difference between auditors and lawyers with respect to privileged information?
Q5) What are the common judgement traps and how can they be avoided?
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Chapter 5: Audit Responsibilities and Objectives
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Q1) Frankinfurter Limited decided that it wanted to improve earnings. To do this, it understated its expenses by omitting unpaid expenses from the accrued liabilities account at year end. Which management assertion has been violated?
A) existence
B) disclosure
C) rights and obligations
D) completeness
Q2) Camilla is preparing the audit program for the inventory of Summers, a large department store. Camilla listed "select a sample of invoices from suppliers to verify that the risks and rewards of the inventory were transferred to Summers." Camilla is concerned that some of the inventory in the store might be on consignment. The account-balance-related objective that Camilla is concerned about is
A) rights and obligation (ownership).
B) accuracy.
C) valuation.
D) existence.
Q3) A financial statement audit typically consists of three sections. Identify the three sections and discuss the major activities performed by the auditor in each section.
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Chapter 6: Client Acceptance and Planning the Audit
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Q1) Which of the following is an important purpose of an organizational code of ethics and the associated processes to ensure adherence?
A) to ensure that there are no fraudulent or illegal transactions at the company
B) to train employees in acceptable conduct at the organization
C) to prevent unethical employees from acting in unacceptable ways
D) to provide a powerful signal of acceptable organizational conduct
Q2) When reading the corporate minutes, the auditor obtained information regarding loans that were authorized for borrowing. What audit step would the auditor likely conduct with this information?
A) trace the authorized amounts to the bank statements
B) verify that notes payable have been recorded
C) calculate interest payable as of the end of the year
D) contact a credit rating agency to determine the rating of the lender
Q3) Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt covenant requirements
C) management's practice of making overly achievable forecasts
D) high turnover of accounting, internal audit, and information technology staff
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Chapter 7: Materiality and Risk
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Q1) In addition to representing an assessment of whether a client's internal control is effective for preventing or detecting misstatements, control risk also represents the
A) reliability of management in preventing or detecting fraud.
B) auditor's intention to rely on internal controls.
C) likelihood that the auditor will detect illegal acts.
D) possibility of collusion occurring between two employees.
Q2) If from last year to the current year's audit, inherent risk has stayed constant but control risk is higher (it is more likely that controls do not detect material errors), what is the likely effect on detection risk?
A) Detection risk will increase.
B) Detection risk will decrease.
C) Detection risk will stay the same.
D) Detection risk will need less documentation.
Q3) Audit risk is ordinarily set by the auditor during planning and A) held constant for each major cycle and account.
B) held constant for each major cycle but varies by account.
C) varies by each major cycle and by each account.
D) varies by each major cycle but is constant by account.
Q4) Discuss three factors that affect client business risk and therefore audit risk.
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Chapter 8: Internal Controls and Control Risk
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Q1) Which of the following controls would be of concern to management but not to the auditor?
A) controls over the collection of accounts receivable amounts
B) controls over the entry of payroll wage rates into the computer systems
C) controls over the distribution of promotional information to potential clients
D) controls over the cost of inventory items as recorded in the perpetual inventory system
Q2) The auditor may identify some risks that cannot be effectively tested by substantive tests alone. For example, when there are paperless transactions (perhaps using EDIelectronic data interchange). To address these risks, the auditor is required to
A) assess the design effectiveness of relevant controls and test them.
B) obtain an understanding of the controls and test them if reliance is intended.
C) obtain an understanding of the controls and assess their design effectiveness.
D) test the controls that address the paperless aspects of the transactions.
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Chapter 9: Audit Evidence
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Q1) Last year, the client's internal controls were weak. This year, the internal controls are stronger. This means that information recorded on internal documentation is
A) more timely.
B) less reliable.
C) more reliable.
D) less timely.
Q2) Identify and explain the three determinants of the persuasiveness of evidence.
Q3) Gina is performing the audit of the payables section of Reno Inc. She wants to confirm the payables from an independent source. Which of the following actions would achieve this?
A) Confirm an interco payable with the CEO of the US branch of Reno Inc.
B) Confirm the account payable with Clarkson Corp. The CFO of Clarkson is the wife of the controller of Reno.
C) Confirm the line of credit balance with Citizen Bank. Reno does all its banking with Citizen and it also has a long-term loan there.
D) Confirm the account payable to Suco Inc. The CEO of Reno owns 30% of the outstanding shares of Suco.
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Chapter 10: Audit Strategy and Audit Program
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Q1) Control risk has been assessed at 100% for your client. What audit approach will you follow?
A) a combined approach
B) a substantive approach
C) reliance on analytical review and tests of controls
D) reliance on tests of controls and tests of details
Q2) After completing tests of key controls, the auditor should review the results and consider whether
A) the planned degree of reliance on internal controls is justified.
B) the audit evidence obtained from the study of internal controls can provide a reasonable basis for an opinion.
C) further study of internal controls is likely to justify any restriction of tests of details of balances.
D) sufficient knowledge has been obtained about the entity's entire internal control structure.
Q3) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Q1) A sample in which the characteristics of the sample are the same as those of the population is a(n)
A) random sample.
B) variables sample.
C) attribute sample.
D) representative sample.
Q2) Sampling risk (sampling error) is an inherent part of sampling that results from
A) inappropriate audit procedures.
B) failure to recognize exceptions.
C) testing less than the entire population.
D) weaknesses in the client's internal control system.
Q3) A common use of block testing is testing
A) cutoff.
B) existence.
C) authorization.
D) valuation.
Q4) Kyle is performing a test of detail using a non-statistical sample.
A) Can Kyle formally measure sampling error?
B) What should Kyle consider in determining the sampling error?
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Chapter 12: Audit of the Revenue Cycle
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Q1) An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting A) kiting.
B) lapping.
C) illicit write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.
Q2) When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider
A) access controls as being poor.
B) program change controls as poor.
C) program change controls as excellent.
D) access controls as being excellent.
Q3) The two primary classes of transactions in the sales and collection cycle are A) sales and sales returns.
B) sales and sales discounts.
C) sales and accounts receivable.
D) sales and cash receipts.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit area to use
A) attributes sampling.
B) variables sampling.
C) probability-proportional-to-size sampling.
D) block sampling.
Q2) In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the
A) confirmation of accounts payable.
B) tests on long-term liabilities.
C) observation of inventory.
D) cash count.
Q3) To protect against theft of physical assets (such as computer equipment), the company should
A) assign computers to specific individuals at the company.
B) assign computers to specific areas within the company.
C) use strong access controls (such as login passwords) to prevent access.
D) have equipment engraved or otherwise permanently labelled and a subsidiary ledger maintained.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) It is frequently possible to test the physical inventory prior to the balance sheet date when
A) there are accurate perpetual inventory master files.
B) year-end sales are small.
C) the internal control system is no better at year-end than at an earlier point in time.
D) client counts inventory at interim dates.
Q2) The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with an acceptable financial reporting framework and is consistent with previous years. The audit procedures used to verify these costs are referred to as inventory
A) price tests.
B) compilation tests.
C) cost allocation tests.
D) consistency tests.
Q3) Discuss the methodology for designing tests of details of balances for inventory.
Q4) What are inventory price tests and inventory compilation tests? Provide an example of each.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) "Recorded payroll transactions are for the amount of time actually worked and at the proper pay rate; withholdings are properly calculated" relates to which control objective?
A) authorization
B) completeness
C) existence
D) accuracy
Q2) General controls must be evaluated and their impact considered upon the human resources and payroll transaction cycle because
A) there are frequently weaknesses in internal controls in the payroll cycle.
B) automated techniques are normally used to prepare and post payroll transactions.
C) the best way to test payroll transactions is usually by using test data.
D) the best way to test payroll transactions is usually by using generalized audit software.
Q3) Discuss the two most common ways in which employees can defraud a company in the payroll area.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Two of the audit objectives for notes payable are important because a misstatement could be material even if one note is omitted or incorrect. Which assertions are they?
A) completeness and valuation
B) existence and completeness
C) accuracy and existence
D) completeness and accuracy
Q2) If a company employs a capital stock registrar and/or transfer agent, the registrar or agent (or both) should be requested to confirm directly to the auditor the number of shares of each class of stock
A) surrendered and cancelled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) authorized, issued, and outstanding during the year.
Q3) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q4) Identify three analytical procedures commonly performed for notes payable.
Q5) State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.
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Chapter 17: Audit of Cash Balances
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Q1) A) Distinguish between i) risks of error, ii) risks of fraud, and iii) risks of inadequate presentation or disclosure of financial information.
B) For each of the three types of risks described in A) provide three examples of major risks of error or fraud in the cash cycle.
Q2) Bank reconciliations are normally verified on a 100-percent basis. Testing the reasonableness of the cash balance is therefore A) less important than for most other audit areas. B) more important than for other audit areas.
C) equally as important as other audit areas.
D) less important than for the audit of other assets but more important than the audit of liabilities.
Q3) During the audit of cash, the focus of the audit is to A) do substantive tests of payments for supplies. B) conduct control tests of sales transactions. C) verify the bank reconciliation.
D) conduct control tests over payments.
Q4) Outline the audit procedures that would be performed when testing electronic receipts and payments.
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Chapter 18: Completing the Audit
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Q1) A client representation letter is a written statement from a non-independent source and therefore
A) cannot be regarded as reliable evidence on its own.
B) can be regarded as reliable evidence only if the auditor finds strong internal controls.
C) can be regarded as reliable evidence if the high-level corporate officials who sign it are trustworthy.
D) needs to be confirmed by an outside, independent source such as a financial institution or law firm.
Q2) The initial review of the working papers prepared by any given auditor is normally done by the
A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.
Q3) Discuss three audit procedures commonly used to search for contingent liabilities.
Q4) Discuss the purpose of a management letter.
Q5) Describe the items the auditor is required to report to the audit committee.
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Chapter 19: Audit Reports on Financial Statements
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Q1) The new IAASB Auditors report, is effective for audits and will be mandatory for listed companies for audits with year ending
A) 31 December 2017.
B) 31 December 2016.
C) 31 December 2015.
D) 31 December 2014.
Q2) The "unqualified report with explanatory paragraph" or the "unqualified report with modified wording"
A) arise as a result of an incomplete audit.
B) arise when the financial statements are not quite "presented fairly."
C) meet the criteria of a complete audit with satisfactory results but further explanation is required.
D) meet the criteria of a complete audit but with unsatisfactory results.
Q3) There are five conditions that must be met before an auditor can issue a standard unqualified report. Discuss each of these five conditions.
Q4) Discuss how materiality affects audit reporting decisions.
Q5) Explain four different variations that could occur in unqualified audit reports. For each variation, state how the auditor's report is affected and provide an example.
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Chapter 20: Other Assurance and Nonassurance Services
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Q1) You are a public accountant retained by the manager of a cooperative retirement village to do "write-up work." You are expected to prepare unaudited financial statements with each page marked "unaudited" and accompanied by a disclaimer of opinion stating no audit was made. In performing the work, you discover that there are no invoices to support $25 000 of the manager's claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?
A) Submit the expected statements but omit $25 000 of unsupported disbursements.
B) Include the unsupported disbursements in the statements since you are not expected to make an audit.
C) Obtain from the manager a written statement that you informed him of the missing invoices and include his assurance that the disbursements are proper.
D) Obtain further information about the $25 000 of unsupported items and withdraw if the situation is not satisfactorily resolved.
Q2) Define "direct reporting engagements."
Q3) Identify the reporting standards for compilation engagements.
Q4) A financial statement review emphasizes four broad areas, one of which is to "perform analytical procedures." State the other three areas emphasized.
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