Financial Statement Auditing
Final Exam Questions
Course Introduction
Financial Statement Auditing explores the principles, standards, and procedures used to examine and verify the financial statements of organizations. The course covers the audit process from planning and risk assessment to evidence gathering and the issuance of the audit report. Students learn about ethical and legal responsibilities of auditors, internal control evaluation, sampling techniques, and the use of technology in auditing. Emphasis is placed on identifying material misstatements, understanding generally accepted auditing standards (GAAS), and applying critical thinking to resolve real-world auditing issues.
Recommended Textbook
Auditing and Assurance Services 6th Edition by Grant Gay
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681 Verified Questions
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Page 2
Chapter 1: Assurance and Auditing: An Overview
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Sample Questions
Q1) Independent auditors perform audits on the financial reports of public companies.This type of auditing can best be described as:
A)a discipline that assures financial information presented by management.
B)an activity whose purpose is to search for irregularities.
C)a regulatory function that prevents the issuance of improper financial information.
D)a professional activity that measures and communicates financial and business data.
Answer: A
Q2) Which of the following is not an element of an assurance engagement?
A)Three-party relationship.
B)Approved assurance standards.
C)Sufficient appropriate evidence.
D)A written assurance report.
Answer: B
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Chapter 2: Audit Regulation, Structure of the Profession and
Auditors Liability
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Q1) A claim for a breach of duty of care might arise against an auditor if:
A)an existing shareholder suffered losses because he increased his investment in the company based on figures in the audited financial report.
B)a bank made a loss due to a loan made to the company based on figures in an audited financial report commissioned by the bank.
C)a new investor suffered losses because she purchased shares in the company based on figures in the annual audited financial report.
D)a finance company made a loss due to a loan made to the entity based on figures in an audited financial report commissioned by the entity.
Answer: B
Q2) Which of the following types of companies can only be used by an audit firm with the consent of the National Council of Chartered Accountants Australia and New Zealand?
A)Nominee company.
B)Service company.
C)Practice company.
D)All of the given answers are correct. Answer: C
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Chapter 3: Ethics, Independence and Corporate Governance
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Q1) You are the auditor of Blue Haze Ltd and are nearing the completion of the audit work for the current year when the audit senior, Travis Dean, advises you that he has been offered a job at Blue Haze Ltd as soon as the current audit is finished.What type of threat to the auditor's independence does this situation constitute?
A)Intimidation.
B)Self-interest.
C)Self-review.
D)Advocacy.
Answer: B
Q2) Which of the following is not a principle of professional conduct as defined by APES 110?
A)Professional behaviour.
B)True and fair reporting.
C)Integrity.
D)Professional competence and due care.
Answer: B
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Chapter 4: Overview of Elements of the Financial Report
Audit Process
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Sample Questions
Q1) Audit evidence can come in different forms with different degrees of persuasiveness.Which of the following is the least persuasive type of evidence?
A)Documents mailed by outsiders to the auditor.
B)Correspondence between the auditor and suppliers.
C)Sales invoices inspected by the auditor.
D)Calculations made by the auditor.
Q2) You are concerned about whether all sales have occurred.The procedure that will be most effective in verifying this assertion is:
A)selecting a sample of invoices and vouching them to delivery dockets.
B)selecting a sample of customers' orders and tracing them to delivery dockets.
C)checking the sequence of delivery dockets.
D)selecting a sample of delivery dockets and tracing them to invoices.
Q3) Audit documentation:
A)must be in electronic form.
B)must be only in paper form.
C)is not required, but is strongly recommended.
D)may be in paper, electronic or some other form.
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Page 6
Chapter 5: Planning, Understanding the Entity and Assessing Business Risk
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Q1) One reason why the independent auditor performs analytical procedures of the client's operations is to identify:
A)deficiencies of a material nature in the internal control.
B)unusual transactions.
C)non-compliance with prescribed control procedures.
D)improper separation of accounting and other financial duties.
Q2) An auditor obtains knowledge about a new client's business and its industry in order to:
A)make constructive suggestions concerning improvements to the client's internal control.
B)develop an attitude of professional scepticism concerning management's financial report assertions.
C)evaluate whether the aggregation of known misstatements causes the financial report taken as a whole to be materially misstated.
D)understand the events and transactions that may have an effect on the client's financial report.
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Chapter 6: Assessing Inherent Risk, and Other Specific
Business Risks
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Q1) Which of the following situations does not represent an opportunity to commit fraud?
A)Significant related-party transactions exist.
B)The auditor's relationship with management is strained.
C)Management is dominated by a single person.
D)The financial report includes highly subjective estimates.
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.
Q3) ASA 240 (ISA 240) provides that the primary day-to-day responsibility for prevention of fraud rests with:
A)the internal auditor.
B)management.
C)the external auditor.
D)the audit committee.
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Page 8
Chapter 7: Understanding and Assessing Internal Control
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Q1) How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk?
A)Randomly.
B)Disproportionately.
C)Directly.
D)Inversely.
Q2) When the auditor has assessed the level of control risk at less than high, the auditor should document:
A)the understanding of the entity's internal control elements obtained to plan the audit.
B)the conclusion and the basis for that conclusion.
C)the implications for the overall audit strategy.
D)All of the given answers are correct.
Q3) Which of the following activities would most likely be performed in the IT department?
A)Initiation of changes to master records.
B)Conversion of information to machine-readable form.
C)Correction of transactional errors.
D)Initiation of changes to existing applications.
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9
Chapter 8: Tests of Controls
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Q1) Tests designed to detect payroll payments made after the end of the year that have been incurred in the current year provide assurance about management's assertion of:
A)Inspection
B)Accuracy
C)Occurrence.
D)Cut-off.
Q2) When undertaking tests of controls for revenues, auditors are more concerned with controls associated with the occurrence assertion than they are with the completeness assertion because:
A)clients are more likely to overstate than understate revenues.
B)clients are more likely to understate than overstate revenues.
C)it is difficult to determine when services have been performed.
D)the allowance for doubtful accounts is often understated.
Q3) Purchase cut-off procedures should be designed to test whether all inventory:
A)on the statement of financial position was carried at lower of cost or market.
B)purchased and received before the year-end was recorded at year-end.
C)owned by the company is in the possession of the company.
D)on the year-end statement of financial position was paid for by the company.
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Page 10
Chapter 9: Substantive Tests of Transactions and Balances
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Q1) An auditor using audit software would probably be least interested in which of the following fields in a computerised perpetual inventory file?
A)Quantity sold.
B)Date of last purchase.
C)Warehouse location.
D)Economic order quantity.
Q2) The physical count of inventory of Clyers Pty Ltd, a medium-sized retailer, was higher than shown by the perpetual records.Which of the following could explain the difference?
A)Credit memos for several items returned by customers had not been recorded.
B)Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
C)An item purchased 'FOB shipping point' had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
D)No journal entry had been made on the retailer's books for several items that the retailer returned to its suppliers.
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11
Chapter 11: Completion and Review
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Q1) A major customer of an audit client suffers a fire just after year-end and the audit client believes that this event could have a significant direct effect on the financial report.The auditor should:
A)advise management to disclose the event in notes to the financial report.
B)disclose the event in the auditor's report.
C)withhold submission of the auditor's report until the extent of the direct effect on the financial report is known.
D)advise management to adjust the financial report.
Q2) A solicitor's response to an auditor's request for information concerning litigation, claims and assessments will ordinarily contain which of the following?
A)An explanation regarding limitations on the scope of the response.
B)A statement of concurrence with the client's determination of which unasserted possible claims warrant specification.
C)Confidential information that would be prejudicial to the client's defence if publicised.
D)An assertion that the list of unasserted possible claims identified by the client represents all such claims of which the solicitor may be aware.
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Chapter 12: The Auditors Reporting Obligations
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Q1) Muir Ltd is required to but does not wish to prepare and issue a statement of cash flows as part of its financial report.In these circumstances, the auditor's report should include:
A)an adverse opinion stating that the financial report, taken as whole, is not fairly presented because of the omission of the required statement.
B)an unmodified opinion with a statement of cash flows prepared by the auditor included as part of the auditor's report.
C)an unmodified opinion with an Emphasis of Matter section explaining that the company declined to present the required statement.
D)a disclaimer of opinion with a separate explanatory paragraph stating why the company declined to present the required statement.
Q2) An auditor's report on comparative financial reports should be dated as of the date of the:
A)last subsequent event disclosed in the financial report.
B)latest financial report being reported on.
C)completion of the auditor's recent evidence collection procedures.
D)issuance of the report.
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Page 13
Chapter 13: Other Assurance Services and Advanced Topics
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Q1) Negative assurance is permissible in:
A)reports relating to the results of agreed-upon procedures to one or more specified elements, accounts or items of a financial report.
B)reports based on a performance audit of a government department.
C)reports based upon an audit of the interim financial report of a closely held business entity.
D)reports based upon a review engagement.
Q2) Whenever special reports, filed on a printed form designed by authorities, call upon the independent auditor to make an assertion that the auditor believes is not justified, the auditor should:
A)reword the form or attach a separate report.
B)submit a standard auditor's report with explanations in a separate paragraph of the report.
C)withdraw from the engagement.
D)submit the form with questionable items clearly omitted.
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Chapter 14: Internal Auditing
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Sample Questions
Q1) Elizabeth Cheng, CIA, works for a large department store.She is performing an audit of her company's cash function.Which of the following is an action in which due professional care is lacking?
A)Cheng flowcharts the work of the cash function but tests only a sample of the transactions.
B)Cheng is extremely pleased with the internal controls and the operation of the cash function and in her report states that she is sure no irregularities are currently present.
C)Cheng reviews company records to ascertain that all employees who handle cash receipts and disbursements are covered by workers compensation.
D)Cheng knows that the work of the cash function can be done effectively with one less employee.She includes this finding in her report even though she knows it will adversely affect employee morale in the cash function.
Q2) Which of the following is not a main goal of internal auditing?
A)Add value to an organisation's operations.
B)Help an organisation accomplish its objectives.
C)Provide reliable information to external users.
D)Improve the effectiveness of risk management of an organisation.
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Page 15
Chapter 15: Audit and Assurance Services in the Public Sector
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Q1) Which of the following statements concerning AASB 1052 'Disaggregated Disclosures' is not correct?
A)AASB 1052 requires that where local governments are required to use fund accounting for grant purposes, they do not need to prepare general-purpose financial reports.
B)AASB 1052 deems each local government to be a reporting entity.
C)AASB 1052 requires local governments to use accrual accounting.
D)AASB 1052 requires each local government to prepare general-purpose financial reports.
Q2) In reporting performance audit findings, why does an auditor evaluate evidence against criteria?
A)To ensure reasonable criteria have been established.
B)To develop conclusions relative to the audit objectives.
C)To develop the audit scope.
D)To determine risk.
Q3) The Auditor-General is ultimately responsible to:
A)the Public Accounts Committee.
B)the Parliament.
C)the Public Service Board.
D)the Minister of Finance.
Page 16
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