Financial Statement Auditing Test
Bank
Course Introduction
Financial Statement Auditing is a comprehensive course that explores the principles, standards, and procedures involved in auditing financial statements. The course focuses on the auditors role in expressing an opinion on the fairness and accuracy of an organizations financial records, emphasizing risk assessment, internal controls, evidence gathering, and audit planning. Students will learn about audit methodologies, professional ethics, legal responsibilities, and contemporary issues such as fraud detection, sampling techniques, and the use of technology in the audit process. Through case studies and practical exercises, the course prepares students to critically analyze financial disclosures and understand the regulatory environment governing audits.
Recommended Textbook
Auditing and Assurance Services 16th Edition by Alvin A. Arens
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26 Chapters
2955 Verified Questions
2955 Flashcards
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Chapter 1: The Demand for Audit and Other Assurance Services
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60 Verified Questions
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Sample Questions
Q1) Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period.
A)True
B)False
Answer: True
Q2) One criteria used by an external auditor to evaluate published financial statements is known as generally accepted auditing standards.
A)True
B)False
Answer: False
Q3) When auditing accounting data,auditors focus on
A)determining whether recorded information properly reflects the economic events that occurred during the accounting period.
B)determining if fraud has occurred.
C)determining if taxable income has been calculated correctly.
D)analyzing the financial information to be sure that it complies with government requirements.
Answer: A
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Chapter 2: The Cpa Profession
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Sample Questions
Q1) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB).What are the PCAOB's primary functions?
Answer: The PCAOB provides oversight for auditors of public companies;establishes auditing,attestation,and quality control standards for public company audits;and performs inspections of audit engagements as well as the quality controls at audit firms performing those audits.
Q2) Form 10-K must be filed with the SEC whenever a public company experiences a significant event.
A)True
B)False
Answer: False
Q3) In which type of service does the CPA assemble the financial statements but provide no assurance to third parties?
A)audit
B)compilation
C)review
D)bookkeeping
Answer: B
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Chapter 3: Audit Reports
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Sample Questions
Q1) PCAOB standards use the term "unqualified opinion" to refer to the standard unmodified opinion audit report.
A)True
B)False
Answer: True
Q2) What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented?
A)disclaimer
B)qualified
C)standard unmodified opinion
D)adverse
Answer: D
Q3) A restriction on the scope of the auditor's examination requires
A)a qualifying paragraph to be included in the introduction.
B)a qualifying paragraph preceding the opinion paragraph.
C)a disclaimer opinion.
D)a basis for a qualified opinion paragraph.
Answer: B
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Page 5
Chapter 4: Professional Ethics
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Sample Questions
Q1) Ethical frameworks help identify the ethical issues and will always lead to the appropriate course of action.
A)True
B)False
Q2) For which of the following professional services must CPAs be independent?
A)management advisory services
B)audits of financial statements
C)preparation of tax returns
D)all of the above
Q3) Interpretations of the rules regarding independence allow an auditor to serve as
A)a director or officer of an audit client.
B)an underwriter for the sale of a client's securities.
C)a trustee of a client's pension fund.
D)an honorary director for a not-for-profit charitable or religious organization.
Q4) Adverse interest is the threat that a member will not act with objectivity because their interests are opposed to the client's interests.
A)True
B)False
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Chapter 5: Legal Liability
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Sample Questions
Q1) The Sarbanes-Oxley Act of 2002 makes it a felony to destroy or create documents to impede or obstruct a federal investigation.Those provisions were adopted following which of the following legal cases?
A)United States v.Natelli
B)United States v.Andersen
C)ESM Government Securities v.Alexander Grant & Co.
D)United States v.Simon
Q2) One significant result of the Escott et al.v.BarChris Construction Corporation case was
A)a greater emphasis on subsequent events procedures.
B)new standards for unaudited statements.
C)a broader definition of third party beneficiaries.
D)a requirement that more companies file annual reports with the SEC.
Q3) CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases include United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred in each case.
Q4) Discuss some of the steps practicing auditors can take to minimize their legal liability.
Q5) Distinguish between what is meant by business failure and audit failure.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?
A)Generally,the auditor is under no obligation to notify parties other than personnel within the client's organization.
B)Generally,the auditor is under an obligation to inform the PCAOB.
C)Generally,the auditor is obligated to disclose the relevant facts in the auditor's report.
D)Generally,the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.
Q2) Tests of details of balances typically involve the use of comparisons and relationships to assess the overall reasonableness of account balances.
A)True
B)False
Q3) Discuss the actions an auditor should take when an illegal act is identified or suspected.
Q4) Describe what analytical procedures and tests of details of balances are and give an example of each.
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Chapter 7: Audit Evidence
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Sample Questions
Q1) An auditor can use engagement management software to facilitate tracking audit progress.
A)True
B)False
Q2) Physical examination
A)is a direct means of verifying that an asset really exists.
B)is sufficient evidence to verify that the existing assets are owned by the client.
C)can be used for both tangible assets and documents.
D)is not generally a reliable type of audit evidence.
Q3) Which of the following statements relating to the competence of evidential matter is always True?
A)Evidence from outside an enterprise is always reliable.
B)Accounting data developed under satisfactory conditions of internal control is not reliable.
C)Oral representations made by management are not reliable evidence.
D)Evidence must be both reliable and relevant to be considered appropriate.
Q4) Audit documents are the joint property of the auditor and the audit client.
A)True
B)False
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Chapter 8: Audit Planning and Analytical Procedures
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Sample Questions
Q1) Management's philosophy and operating style influence the risk of material misstatements in the financial statements.
A)True
B)False
Q2) The written communication stating the auditor cannot guarantee that all acts of fraud will be discovered is found in the
A)engagement letter.
B)representation letter.
C)responsibility letter.
D)client letter.
Q3) A 100 % audit risk is complete certainty.
A)True
B)False
Q4) The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.
A)True
B)False
Q5) Discuss the required communications between predecessor and successor auditors.
Q6) Discuss the essential activities involved in the initial planning of an audit.
Page 10
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) Which of the following would not increase the risks of material misstatement at the overall financial statement level?
A)effective oversight by the board of directors
B)deficiencies in management's integrity
C)inadequate accounting systems
D)all of the above
Q2) Using your knowledge of the relationships among acceptable audit risk,inherent risk,control risk,planned detection risk,performance materiality,and planned evidence,state the effect on planned evidence (increase or decrease)of changing each of the following factors,while the other factors remain unchanged.
1. an increase in acceptable audit risk ________
2. an increase in inherent risk ________
3. a decrease in control risk ________
4. an increase in planned detection risk ________
5. an increase in performance materiality ________
Q3) The most important element of the audit risk model is control risk.
A)True
B)False
Q4) Describe the audit risk model and each of its components.
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) Auditors are required to perform certain procedures in every audit to address the risk of management override of internal controls.What are these procedures?
Q2) When assessing fraud risk,
A)fraud risk is assessed only at the overall financial statement level.
B)the auditor's assessment of fraud risk should be ongoing throughout the audit.
C)if the auditor concludes that there is a risk of material misstatement due to fraud,auditing standards require that the risks be treated as pervasive.
D)auditing standards require that the auditor presume there is a risk of fraud in the inventory account.
Q3) Upon discovering information that indicates a material misstatement due to fraud may have occurred,auditors should
A)acquire additional evidence as needed.
B)thoroughly probe the issues.
C)consult with other team members.
D)all of the above
Q4) Briefly discuss the brainstorming session required by current auditing standards.Be sure to include a list of ideas that should be addressed in the session.
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Page 12
Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the
A)cost/benefit relationship of the system of internal control.
B)achievement of the objectives of internal control.
C)comparison of recorded accountability with assets.
D)timing of the tests to be performed.
Q2) The effectiveness of automated controls depends solely on the competence of the personnel performing the controls.
A)True
B)False
Q3) Which of the following statements related to application controls is correct?
A)Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions.
B)Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles.
C)Application controls relate to all aspects of the IT function.
D)Application controls relate to the processing of individual transactions.
Q4) List the four underlying principles of risk assessment per the COSO framework
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Page 13
Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system,the auditor is said to be
A)tracing.
B)vouching.
C)performing a walkthrough.
D)testing controls.
Q2) A five-step approach can be used to identify deficiencies,significant deficiencies,and material weaknesses.The first step in this approach is
A)identify the absence of key controls.
B)consider the possibility of compensating controls.
C)determine potential misstatements that could result.
D)identify existing controls.
Q3) A design deficiency exists if the person performing the control is not qualified. A)True
B)False
Q4) Describe three computer auditing techniques available to the auditor.
Q5) Discuss the advantages and benefits of using generalized audit software.
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) The results of tests of controls and substantive tests of transactions affect the design of tests of details of balances.
A)True
B)False
Q2) Risk assessment procedures are performed by auditors during an audit in order to
A)determine the risk of material misstatement in the financial statements.
B)determine the amount of testing of internal control.
C)determine the extent of testing of details of balances.
D)determine the extent of testing of transactions.
Q3) One factor that determines the amount of additional evidence required for tests of controls is the planned reduction in control risk.
A)True
B)False
Q4) A deficiency uncovered in the audit of internal control is explained by which of the following in relation to a financial statement misstatement?
A)the amount of the misstatement
B)the likelihood of the misstatement
C)the amount,likelihood,and classification of the misstatement
D)the amount and the classification of the misstatement
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing.The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned.The most effective procedure for preventing this activity is to A)prenumber and account for all credit memorandums.
B)require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
C)have independent sales and accounts receivable departments.
D)mail monthly statements to customers.
Q2) Explain what lapping means,and discuss the internal control deficiency that allows it to occur.Also discuss the procedures the auditor can perform to detect lapping.
Q3) Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?
A)company personnel
B)temporary employees in the town where the lockbox is located
C)bank employees
D)company controller
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Page 16
Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) The use of haphazard sample selection is encouraged under professional auditing standards.
A)True
B)False
Q2) If the auditor decides to assess control risk at the moderate level in a private company audit,when in previous years the auditor set control risk at the maximum level,then tests of controls for the current year would be
A)increased in number.
B)reduced in number.
C)not performed.
D)unchanged from prior planned settings.
Q3) When using statistical sampling,the auditor would most likely require a smaller sample if the
A)population increases.
B)desired reliability decreases.
C)desired precision interval narrows.
D)expected exception rate increases.
Q4) What types of exceptions are auditors most concerned with when evaluating populations of accounting data?
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Chapter 16: Completing the Tests in the Sales and Collection Cycle:
Accounts Receivable
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Sample Questions
Q1) Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?
A)Auditors must perform substantive tests related to assertions deemed to have significant risks.
B)The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk.
C)The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions.
D)All of the above are accurate statements.
Q2) The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is A)confirmations.
B)recalculation of the aged receivables and uncollectible accounts.
C)tracing credit memos for returned merchandise to receiving room reports.
D)tracing from shipping documents to journals to the accounts receivable ledger.
Q3) When an auditor uses negative confirmations,several factors must be considered.What are those factors?
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Page 18
Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) Identify each of the seven factors that influence sample size for nonstatistical tests of details of balances,and state whether each factor is directly or inversely related to sample size.
Q2) Stratified sampling is applicable to difference,mean-per-unit,and ratio estimation,but it is most commonly used with A)ratio estimation.
B)discovery sampling.
C)difference estimation.
D)mean-per-unit estimation.
Q3) As the amount of misstatements expected in the population approaches tolerable misstatement,the planned sample size will A)decrease.
B)increase.
C)vary based on characteristics of the population.
D)be unaffected.
Q4) There are four steps to generalize from the sample to the population using difference estimation sampling.Identify each of these four steps.
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19
Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls,
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Sample Questions
Q1) You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities.You have decided to vouch a sample of entries in the accounts payable master file to supporting documents.Which assertion is this test of controls most likely to support?
A)accuracy
B)classification
C)completeness
D)occurrence
Q2) When determining the methodology for designing tests of details of balances for accounts payable,
A)the focus by many companies on improving their supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities.
B)it is relatively inexpensive to audit accounts payable.
C)performance materiality for accounts payable is set relatively low.
D)inherent risk is often set at low.
Q3) How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?
Q4) List the four business functions in the acquisition and payment cycle.
Page 20
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Chapter 19: Completing the Tests in the Acquisition and Payment
Cycle:
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Sample Questions
Q1) Discuss the key internal controls for prepaid insurance that affect the auditor's extent of testing of the prepaid insurance account.
Q2) Which of the following accounts would normally not be a part of the acquisition and payment cycle of prepaid insurance?
A)cash
B)insurance payable
C)insurance expense
D)prepaid insurance
Q3) Discuss the key internal controls related to the disposal of property,plant,and equipment.
Q4) The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for making decisions.
A)balance sheet
B)income statement
C)statement of cash flows
D)statement of stockholders' equity
Q5) The most important audit objective for depreciation expense is detail tie-in.
A)True
B)False
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) On most audits,the calculation for payroll tax expense is costly and is not necessary unless analytical procedures indicate a problem that cannot be resolved through other procedures.
A)True
B)False
Q2) Auditors should determine whether the client has fulfilled its legal obligation in submitting payments of all payroll withholdings as part of their payroll tests.
A)True
B)False
Q3) Payroll checks should be distributed by someone independent of the payroll and timekeeping functions.
A)True
B)False
Q4) When performing the tests of details of balances for expense accounts,________ is (are)generally not necessary.
A)extensive additional testing
B)analytical procedures
C)tests of controls
D)substantive tests of transactions
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) Auditors test the quantity of materials charged to work-in-process by tracing these quantities to
A)cost ledgers.
B)perpetual inventory records.
C)receiving reports.
D)material requisitions.
Q2) Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?
A)Compare gross margin percentage with that of previous years.
B)Compare unit costs of inventory with previous years.
C)Compare inventory turnover ratio with previous years.
D)Compare current year manufacturing costs with previous years.
Q3) The inventory and warehousing cycle can be thought of as having two separate but closely related systems,one involving the actual physical flow of goods,and the other the A)related costs.
B)storage of the goods.
C)internal control over those goods.
D)prevention of waste,obsolescence,and theft.
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Q1) When a company maintains its own records of stock transactions and outstanding stock,internal controls must be adequate to ensure that
A)actual owners are recorded in the bylaws.
B)the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.
C)the correct amount of dividends is paid to stockholders owning the stock on the declaration date.
D)actual owners are recorded in the minutes.
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 canceled during the year.
B)authorized at the balance sheet date.
C)issued and outstanding at the balance sheet date.
D)sold at a price above par during the year.
Q3) Discuss the four key controls over notes payable.
Q4) Notes payable are generally for a period of sixty days or less.
A)True
B)False
Page 24
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level ________ estimate.
A)1
B)2
C)3
D)1 and 3
Q2) Describe each of the major types of cash accounts maintained by business entities.
Q3) When auditing financial instruments,a confirmation is sent to the broker-dealer
A)only if the client has poor internal controls.
B)to confirm interest and dividends.
C)to provide assurance on realizable value.
D)to confirm year-end holdings.
Q4) Auditors usually design bank confirmations that address the client's specific circumstances.
A)True
B)False
Q5) Explain what is meant by a cutoff bank statement,and discuss the purpose of the cutoff bank statement in the audit of cash.
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Chapter 24: Completing the Audit
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Q1) When dealing with contingencies,
A)all contingencies must be disclosed or footnoted.
B)the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment.
C)it is easy for the auditor to uncover contingencies without management's cooperation.
D)the review for contingent liabilities is only performed at the beginning and the end of the audit.
Q2) Although the letter of representation is typed on the client's letterhead and signed by the client,it is common for the auditor to prepare the letter.
A)True
B)False
Q3) Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee
A)only if the act is immaterial.
B)only if the act is material.
C)only if the act is highly material.
D)regardless of materiality.
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Chapter 25: Other Assurance Services
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Q1) CPAs must be independent to issue a review report.
A)True
B)False
Q2) Discuss the six Statements on Standards for Accounting and Review Services (SSARS)requirements that must be met when an accountant is performing a compilation of financial statements.
Q3) In a preparation service engagement,
A)the CPA's responsibilities are similar to those performed during a review.
B)the CPA does not provide any assurance of the financial statements.
C)the CPA must issue a preparation service engagement report.
D)the CPA must be independent.
Q4) Compilation reports may be of all except which of the following types?
A)compilation with limited independence
B)compilation with full disclosure
C)compilation without independence
D)compilation that omits substantially all disclosures
Q5) Auditors of the financial statements of public companies must follow the guidelines in the SSAEs.
A)True
B)False
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Sample Questions
Q1) A typical objective of an operational audit is to determine whether an entity's A)internal control is adequately operating as designed.
B)financial statements present fairly the results of operations.
C)specific operating units are functioning efficiently and effectively.
D)operational information is in accordance with generally accepted government auditing standards.
Q2) Internal auditors are expected to add value to the organization through improved operational effectiveness.In addition,their responsibilities include all the following except A)reviewing the reliability and integrity of information.
B)ensuring compliance with the company's accounting policies.
C)verifying accounting information for external users.
D)ensuring compliance with applicable governmental regulations.
Q3) Benchmarking is one source of evaluation criteria for completing an operational audit.
A)True
B)False
Q4) The formal name of the Yellow Book is Government Auditing Standards.
A)True
B)False
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