Financial Statement Auditing
Study Guide Questions
Course Introduction
Financial Statement Auditing is a comprehensive course designed to introduce students to the fundamental concepts, principles, and procedures involved in auditing financial statements. The course covers the objectives and significance of external audits, the legal and ethical responsibilities of auditors, and the regulatory framework governing audit practices. Students will learn about the audit process, including planning and risk assessment, understanding internal controls, gathering audit evidence, and forming audit opinions. Real-world case studies and practical exercises are used to illustrate common audit scenarios, documentation requirements, and reporting standards. By the end of the course, students will have gained the analytical skills and professional judgment needed to conduct effective and ethical audits in accordance with established auditing standards.
Recommended Textbook
Auditing and Assurance Services 15th Edition by Alvin A Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) The use of the Certified Public Accountant title is regulated by:
A)the federal government.
B)state law through a licensing department or agency of each state.
C)the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees.
D)the Securities and Exchange Commission.
Answer: B
Q2) Which one of the following is more difficult to evaluate objectively?
A)Presentation of financial statements in accordance with generally accepted accounting principles
B)Compliance with government regulations
C)Efficiency and effectiveness of operations
D)All three of the above are equally difficult.
Answer: C
Q3) The criteria by which an auditor evaluates the information under audit may vary with the information being audited.
A)True
B)False
Answer: True
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Chapter 2: The Cpa Profession
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Sample Questions
Q1) A report that is filed when a company wishes to issue new securities.
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: F
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Chapter 3: Audit Reports
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Sample Questions
Q1) When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be: I.an unqualified opinion with an explanatory paragraph. II)a disclaimer of opinion.
A)I only
B)II only
C)I or II
D)Neither I nor II
Answer: C
Q2) An audit of historical financial statements most commonly includes the:
A)balance sheet, statement of retained earnings, and the statement of cash flows. B)income statement, the statement of cash flows, and the statement of net working capital.
C)statement of cash flows, balance sheet, and the statement of retained earnings. D)balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders' equity.
Answer: D
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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) In the AICPA Code of Professional Conduct, interpretations of rules are more specific than ethical rulings.
A)True
B)False
Q3) Which of the following services is not prohibited by the SEC whenever a CPA also audits the company?
A)Actuarial services
B)Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K)
C)Investment banker services
D)Bookkeeping services
Q4) Describe the methods used by the AICPA and State Boards of Accountancy to enforce the rules of conduct.
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Chapter 5: Legal Liability
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Sample Questions
Q1) To succeed in an action against the auditor, the client must be able to show that:
A)the auditor was fraudulent.
B)the auditor was grossly negligent.
C)there was a written contract.
D)there is a close causal connection between the auditor's behavior and the damages suffered by the client.
Q2) Which of the following auditor's defenses usually means nonreliance on the financial statements by the user?
A)Lack of duty
B)Nonnegligent performance
C)Absence of causal connections
D)Contributory negligence
Q3) A CPA is subject to criminal liability if the CPA:
A)refuses to turn over requested audit documentation to a client.
B)performs an audit in a negligent manner.
C)is knowingly involved with false financial statements.
D)willfully breaches a contract with a client.
Q4) Define ordinary negligence, gross negligence, and constructive fraud.
Q5) Distinguish between constructive fraud and fraud.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) In describing the cycle approach to segmenting an audit, which of the following statements is not true?
A)All general ledger accounts and journals are included at least once.
B)Some journals and general ledger accounts are included in more than one cycle.
C)The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods and services and payment" cycle.
D)The "inventory and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
Q2) Which of the following is the auditor least likely to do when aware of an illegal act?
A)Discuss the matter with the client's legal counsel.
B)Obtain evidence about the potential effect of the illegal act on the financial statements.
C)Contact the local law enforcement officials regarding potential criminal wrongdoing.
D)Consider the impact of the illegal act on the relationship with the company's management.
Q3) List the four phases of a Financial Statement Audit
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Chapter 7: Audit Evidence
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Sample Questions
Q1) Which of the following statements regarding the appropriateness of evidence is correct?
A)The effectiveness of a client's internal control has no influence on the reliability of most types of evidence.
B)Analytical procedures will be reliable evidence even if the client's internal controls are weak.
C)One type of evidence is generally sufficient by itself to provide appropriate evidence.
D)The objectivity of evidence obtained through inspection is high.
Q2) Accounts receivable confirmations must be controlled by the client from the time they are prepared until the time they are returned to the auditor.
A)True
B)False
Q3) Inquiries of clients and recalculations normally have a low cost associated with them.
A)True
B)False
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Chapter 8: Audit Planning and Analytical Procedures
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Sample Questions
Q1) What documents do auditors routinely obtain to aid in their understanding of a client's governance system?
Briefly discuss each of these documents.
Q2) An auditor should examine minutes of the board of directors' meetings:
A)through the date of the financial statements.
B)through the date of the audit report.
C)only at the beginning of the audit.
D)on a test basis.
Q3) An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:
A)engage financial experts familiar with the nature of the business entity.
B)obtain a knowledge of matters that relate to the nature of the entity's business.
C)refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D)first inform management that an unqualified opinion cannot be issued.
Q4) Discuss several reasons why an auditor may not wish to continue a relationship with an existing audit client.
Q5) Discuss the required communications between predecessor and successor auditors.
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) Which of the following statements regarding inherent risk is correct?
A)Inherent risk is unaffected by the auditor's experience with client's organization.
B)Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect.
C)Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.
D)Inherent risk is dependent upon the strengths in client's internal control system.
Q2) Net income before tax is the normal base used to determine materiality in a not-for-profit company.
A)True
B)False
Q3) An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence, assignment of more experienced personnel, and/or a more extensive review of audit files.
A)True
B)False
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Chapter 10: Internal Control, Control Risk, and Section 404
Audits
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Sample Questions
Q1) The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.
A)True
B)False
Q2) When determining what type of report to issue on internal control under Section 404: A)an adverse opinion on internal control must be given if any weaknesses in a key internal control is discovered.
B)a scope limitation requires the auditor to disclaim an opinion on internal controls.
C)if the auditor gives a qualified opinion on the financial statements, they must give a qualified opinion on internal controls.
D)a scope limitation requires the auditor to express a qualified opinion or a disclaimer of opinion on internal controls.
Q3) The internal control framework developed by COSO includes five so-called "components" of internal control.Discuss each of these five components.
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Chapter 11: Fraud Auditing
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Sample Questions
Q1) Auditors should rely on original, rather than duplicate, copies of documents.
A)True
B)False
Q2) Upon discovering information that indicates a material misstatement due to fraud, the auditor must assume that the misstatement is an isolated incident.
A)True
B)False
Q3) Fraud awareness training should be:
A)broad and all-encompassing.
B)extensive and include details for all functional areas.
C)specifically related to the employee's job responsibility.
D)focused on employees understanding the importance of ethics.
Q4) Information and idea exchange sessions by the audit team are required by current auditing standards.
A)True
B)False
Q5) Financial statements of all companies are potentially subject to manipulation.
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) Many clients have outsourced their IT functions.The difficulty the independent auditor faces when a computer service center is used is to:
A)gain the permission of the service center to review their work.
B)find compatible programs that will analyze the service center's programs.
C)determine the adequacy of the service center's internal controls.
D)try to abide by the Code of Professional Conduct to maintain the security and confidentiality of client's data.
Q2) An internal control deficiency occurs when computer personnel:
A)participate in computer software acquisition decisions.
B)design flowcharts and narratives for computerized systems.
C)originate changes in customer master files.
D)provide physical security over program files.
Q3) Knowledge of both general and application controls is crucial for auditors in understanding how accounting information is recorded and reported.
A)True
B)False
Q4) IT controls are classified as either input controls or output controls.
A)True
B)False
Page 14
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) Tests of controls are generally more costly to perform than analytical procedures.
A)True
B)False
Q2) Describe the five types of audit tests.Identify which of the five types are substantive tests, and which are used to reduce assessed control risk.
Q3) Analytical procedures:
A)involve comparisons of recorded amounts to expectations developed by management.
B)are only performed during the planning stage of the audit.
C)are required to be performed when auditing an account balance.
D)provide substantive evidence.
Q4) Which of the following is not a valid basis for omitting an audit test in forming an opinion on the clients financial statements?
A)The difficulty and expense involved in testing a particular item
B)The relative risk involved
C)The degree of reliance on the relevant internal controls
D)The relationship between the cost of obtaining evidence and its usefulness
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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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Sample Questions
Q1) In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.
A)True
B)False
Q2) In converting from a design format audit program to a performance format audit program, procedures are combined.
A)True
B)False
Q3) A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.
A)True
B)False
Q4) Credit should be approved before goods are shipped to a customer.
A)True
B)False
Q5) Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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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) As the auditor you are assessing the proper sample size to use in testing controls.When using attributes sampling which of the following is most correct?
A)A 10% change in population size will have the least effect on sample size.
B)A 10% change in the tolerable deviation rate will have the least effect on sample size.
C)A 10% change in the expected deviation rate will have the least effect on sample size.
D)A 10% change in the tolerable will have the least effect on sample size.
Q3) Sampling risk results from the auditor's failure to recognize exceptions in transaction data.
A)True
B)False
Q4) List the two ways auditors can control sampling risk.
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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Q1) The balance-related audit objectives of realizable value and rights are not affected by assessed control risk.
A)True
B)False
Q2) For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.
A)True
B)False
Q3) Below are listed possible misstatements that could occur in the sales and collections cycle.Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a.Overstatement of sales and accounts receivable
b.Uncollectible accounts receivable that have not been provided for c.Overstatement of sales returns and allowances
Q4) The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.
A)True
B)False
Chapter 17: Audit Sampling for Tests of Details of Balances
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Q1) When using difference estimation, the precision interval is calculated by a statistical formula.
A)True
B)False
Q2) The auditor is concerned with the audited value rather than the error amount of each item in the sample when using:
A)difference estimation.
B)mean-per-unit estimation.
C)ratio estimation.
D)monetary-unit sampling.
Q3) Which of the following is not a problem with monetary unit selection?
A)Population items with a zero recorded balance
B)Population items that should have a zero balance but do not
C)Accounts with negative balances
D)Accounts with small recorded balances that are significantly understated
Q4) How might auditors include negative balances when using monetary unit sampling to evaluate a population?
Q5) Consider the steps in sampling for tests of details and for tests of controls.Explain the differences in applying sampling to these two types of tests.
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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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Q1) A document indicating a reduction in the amount owed to a vendor because of returned goods is:
A)a debit memo.
B)a credit memo.
C)a receiving report.
D)a contractual adjustment form.
Q2) Which of the following is not a key control in the acquisition and payment cycle?
A)Authorization of purchases
B)Authorization of credit
C)Timely recording and independent review of transactions
D)Authorization of payments
Q3) A vendor invoice is normally prepared at the time tangible goods are received and indicates the description of goods, the quantity received, the date received, and other relevant data.
A)True
B)False
Q4) A vendor's statement is unreliable and auditors rarely use it.
A)True
B)False
20
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Chapter 19: Completing the Tests in the Acquisition and Payment Cycle:
Verification of Selected Accounts
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Q1) The primary characteristic that distinguishes property, plant, and equipment from inventory, prepaid expenses, and investments is the intention to use property, plant, and equipment as a part of the operations of the client's business over their expected life.
A)True
B)False
Q2) The company's choices for determining the fixed asset's useful life and residual value impact the amount of depreciation recorded.
A)True
B)False
Q3) You are auditing Manufacturing Company and testing the audit related objective of completeness for the equipment accounts.Which of the following audit procedures is most likely to achieve your objective?
A)Examine vendor invoices and receiving reports.
B)Physically examine assets.
C)Examine vendor invoices of closely related accounts such as repairs and maintenance.
D)Trace individual acquisitions to the fixed asset master file.
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Q1) Which of the following is the best way for an auditor to determine that every name on a company's payroll for the Rodgers factory is that of a bona fide employee presently on the job?
A)Examine personnel records for accuracy and completeness.
B)Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.
C)Make a surprise observation of the company's regular distribution of paychecks.
D)Visit the working areas and confirm with employees their badge or identification numbers.
Q2) "Physical control over assets" is not a type of control that is applicable to the payroll cycle.
A)True
B)False
Q3) What key separation of duties should the auditor expect to find within the payroll and personnel cycle?
Q4) What types of audit procedures are typically emphasized during the audit of the payroll cycle?
Q5) How do auditors commonly verify sales commission expense?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Q1) The main difference between job order and process costing systems is that:
A)one accumulates costs by materials issued and the other by labor incurred.
B)one accumulates costs by individual jobs and the other by particular processes.
C)one emphasizes costs accumulated in completed products and the other emphasizes costs associated with work-in-process.
D)one emphasizes costs adding value to the product and the other emphasizes costs incurred because of waste, scrap, and obsolescence.
Q2) There must be a periodic physical count by the client of the inventory items on hand:
A)only if the client uses the LIFO method.
B)only if the client uses a lower-of-cost-or-market method.
C)regardless of the client's inventory valuation method.
D)only if the client uses either the LIFO or FIFO method.
Q3) The physical observation of the inventory and the acquisition of raw materials are part of the inventory and warehousing cycle.
A)True
B)False
Q4) What are two factors affecting the complexity of the audit of inventory?
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Performance materiality is often set at a(n)________ level for notes payable.
A)high
B)moderate
C)low
D)unknown
Q2) The three most important balance-related audit objectives for notes payable are existence, realizable value, and accuracy.
A)True
B)False
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) Why are analytical procedures essential for notes payable?
Q5) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
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Chapter 23: Audit of Cash and Financial Instruments
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Q1) Explain the purpose of testing the client's bank reconciliation, and discuss the major audit procedures involved.
Q2) ________ is an automated fraud detection tool offered by most banks.
A)Positive pay
B)A bank confirmation
C)Fraud buster
D)Check matching
Q3) When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective.
A)True
B)False
Q4) A major consideration in the audit of the general cash balance is the possibility of fraud.The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are:
A)large cash balances at the end of the year.
B)large cash receipts and disbursements during the year.
C)no imprest accounts used for payroll.
D)inadequate internal controls.
Q5) Explain kiting, and discuss how it is performed.
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Chapter 24: Completing the Audit
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Q1) Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least:
A)one quarter beyond the balance sheet date.
B)one quarter beyond the date of the auditor's report.
C)one year beyond the balance sheet date.
D)one year beyond the date of the auditor's report.
Q2) The audit firm issues an audit report for its client.The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless:
A)a development occurs that may affect the company's long term viability as a company.
B)final resolution was made on disclosed contingency for which no liability needed to be accrued.
C)new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.
D)a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.
Q3) State the three purposes of the client letter of representation.
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Chapter 25: Other Assurance Services
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Q1) When performing a review of interim information for a public company, the accountant ordinarily does not perform tests of the accounting records, independent confirmations, or physical examinations.
A)True
B)False
Q2) When performing an attestation engagement a CPA is required to adhere to the Statements on Standards for Attestation Engagements.Describe below the Standards of Field Work for attestation engagements.
Q3) An accountant who reviews the financial statements of a nonpublic entity should issue a report stating that a review:
A)is substantially equivalent in scope to an audit.
B)is substantially more in scope than a compilation.
C)is substantially less in scope than an audit.
D)provides only limited assurance that the financial statements are fairly presented.
Q4) CPAs must be independent to issue a review report.
A)True
B)False
Q5) Define forecast and projection.
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Q1) Discuss three major differences between operational and financial auditing.
Q2) Effectiveness refers to the degree to which costs are reduced without reducing efficiency.
A)True
B)False
Q3) The international standards for the professional practice of internal auditing include which two categories of standards?
A)Attribute and performance
B)Competency and professional skepticism
C)Performance and integrity
D)Ethics and rules of conduct
Q4) Which of the following is not a purpose of a program audit as performed by government auditors?
A)Determination of the extent to which the desired results established by the legislature are being achieved
B)Determination of the causes of inefficiencies in sponsored programs
C)Determination of the effectiveness of organizations, programs and activities
D)Determination as to whether the entity has complied with laws and regulations applicable to the program
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