Internal Auditing
Chapter Exam Questions
Course Introduction
Internal Auditing explores the principles, processes, and practices of auditing within organizations to ensure compliance, operational efficiency, and effective risk management. The course covers internal control frameworks, the audit cycle, planning and conducting audits, reporting, and the role of internal auditors in governance. Students learn about risk assessment, ethical responsibilities, contemporary audit tools, and communication with management, equipping them with the skills necessary to evaluate and improve business processes and safeguard organizational assets.
Recommended Textbook
Auditing A Risk Based Approach to Conducting a Quality Audit 10th Edition by Karla Johnstone
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Page 2
Chapter 1: Auditing: Integral to the Economy
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Q1) Management may have incentive to bias financial information, but the various users of the statements are not likely to have conflicting interests in the financial information.
A)True
B)False
Answer: False
Q2) In the United States,what is the most common criteria against which the auditor measures the fairness of financial statement presentation?
A) Auditing standards.
B) Generally accepted accounting principles.
C) Generally accepted accounting standards.
D) Governmental accounting principles.
Answer: B
Q3) An Integrated Audit Report provides opinion(s) on which of the following?
A) The financial statements.
B) Internal controls.
C) Both financial statements and internal controls.
D) Neither financial statements or internal controls.
Answer: C
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3
Chapter 2: The Auditors Responsibilities Regarding Fraud
and Mechanisms to Address Fraud: Regulation and Corporate Governance
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Q1) Which of the following statements about the Bernie Madoff ponzi scheme is false?
A) Madoff too advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and encourage further investments.
B) Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley Act, and the provisions of that Act ultimately led to discovery of the fraud.
C) Madoff was sentenced to 150 years in prison.
D) The estimated amount missing from client accounts, including fabricated gains, was almost $65 billion.
Answer: B
Q2) The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud.
A)True
B)False Answer: False
Q3) Rationalization is one element of the Fraud Triangle.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Internal Control Over Financial Reporting:
Responsibilities of Management and the External Auditors
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Q1) The payroll department should be responsible for signing payroll checks.
A)True
B)False
Answer: False
Q2) Which of the following is an example of a control environment deficiency.
A) A low level of control consciousness within the organization.
B) An audit committee that does not have independent members.
C) An audit committee that is not viewed as the client of the external auditor.
D) All of the above.
Answer: C
Q3) One of the components of internal control, monitoring, refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization's objectives.
A)True
B)False
Answer: False
Q4) Preventive controls are designed to prevent the occurrence of a misstatement. A)True
B)False
Answer: True
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Chapter 4: Professional Liability, Auditor Judgment
Frameworks, and Professional Responsibilities
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Q1) The expectations gap related to shareholders' beliefs about recovery of losses on investments serves as a deterrent to lawsuits filed against audit firms.
A)True
B)False
Q2) Which of the following employment positions could an auditor's spouse hold in a client without violating the independence requirements?
A) Controller.
B) Treasurer.
C) Order entry staff.
D) Internal audit director.
Q3) The Principles of the AICPA Code of Professional Conduct express the accounting profession's recognition of its responsibilities to client management.
A)True
B)False
Q4) Contingent fees are prohibited for tax professionals when preparing tax returns for clients
A)True
B)False
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Chapter 5: Professional Auditing Standards and the Audit
Opinion Formulation Process
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Q1) Which one of the following organizations provides auditing standards for public companies?
A) GAO.
B) AICPA.
C) GAAP.
D) PCAOB.
Q2) Presentation and disclosure assertions imply that all transactions and balances are properly presented, disclosures represent what actually happened, and the footnote disclosures are appropriate and adequate.
A)True
B)False
Q3) When assessing the effectiveness of controls for relevant assertions the auditor tests only transaction controls.
A)True
B)False
Q4) An auditor typically indicates in the engagement letter that the audit will result in an unqualified report on the financial statements.
A)True
B)False
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Chapter 6: A Framework for Audit Evidence
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Q1) An audit program provides an effective means for which of the following?
A) Reviewing the completeness and persuasiveness of procedures performed.
B) Recording the audit work performed and those responsible for performing the work.
C) Organizing and distributing the work.
D) All the above.
Q2) The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.
A)True
B)False
Q3) Directional testing.
Explain the meaning of "directional testing" and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions.
Q4) The primary importance of the audit program is its guidance of the overall conduct of the audit.
A)True
B)False
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8
Chapter 7: Planning the Audit: Identifying and Responding
to the Risks of Material Misstatement
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Q1) What is the typical range for the setting of audit risk?
A) 1% - 10%
B) 1% - 5%
C) 0% - 5%
D) 0% - 10%
Q2) Only public companies have to be concerned with business risk.
A)True
B)False
Q3) News media and web searches can provide useful information related to client management's integrity and the risk of material misstatement in the financial statements.
A)True
B)False
Q4) Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.
A)True
B)False
Q5) Clearly trivial and not material are terms that can be used interchangeably.
A)True
B)False
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Chapter 8: Specialized Audit Tools: Sampling and
Generalized Audit Software
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Q1) When confirming receivables in testing for overstatements, assume that there are few or no misstatements expected and the selection will be based on the dollar value of individual items. Which of the following is the auditor most likely to use?
A) MUS sampling.
B) Stratified mean-per-unit sampling.
C) Ratio estimation sampling.
D) Attribute sampling.
Q2) Which one of the following is not a typical step used to implement an attribute sampling plan?
A) Define the attributes of interest and what constitutes failure(s).
B) Select and test the sample items.
C) Evaluate the sample results.
D) Define the non-statistical sampling method that is most effective and efficient.
Q3) Attribute sampling is used in which of the following situations?
A) Testing rates of deviations of controls.
B) Testing the reasonableness of account balances.
C) Need to estimate some amount.
D) Both A and B.
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Chapter 9: Auditing the Revenue Cycle
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Q1) Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses.
A)True
B)False
Q2) When the auditor seeks evidence concerning the allowance for doubtful accounts he or she would most likely use an aged trial balance to help identify past due balances.
A)True
B)False
Q3) Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales.
A)True
B)False
Q4) It is beneficial in the testing of notes receivable to confirm not only the balance of the notes, but also their terms.
A)True
B)False
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Chapter 10: Auditing Cash and Marketable Securities
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Q1) The auditor obtains the current market value of marketable securities by confirmation with the holder of the security.
A)True
B)False
Q2) Working capital may be tied to certain debt covenants causing cash to be considered significant for audit purposes.
A)True
B)False
Q3) Which of the following controls over cash would an auditor expect to observe?
A) Reconciliation of the general ledger to the subsidiary ledger.
B) Checks permanently marked "for deposit only" with the proper routing information.
C) Internal audits of marketable securities held in the company's lockbox.
D) Authorization privileges given only to those employees using the accounting system.
Q4) The auditor may discover evidence of lapping by preparing an interbank transfer schedule.
A)True
B)False
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Chapter 11: Auditing Inventory, Goods and Services, and
Accounts Payable: the Acquisition and Payment Cycle
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Q1) Many frauds are committed by overstating inventory accounts.
A)True
B)False
Q2) Preparing for an inventory observation.
In the audit of inventory the auditor must perform important procedures prior to the actual observation. Identify the steps the auditor must take prior to the day the inventory is actually counted.
Q3) Which of the following would the auditor most likely do when testing the valuation assertion for inventory?
A) Confirm inventory on consignment.
B) Examine receiving reports for inventory, tracing the recorded amounts.
C) Observe the taking of physical inventory.
D) Vouch inventory purchases to vendor invoices.
Q4) A new vendor should be added to an authorized vendor database by an individual in the purchasing department.
A)True
B)False
Q5) Acquisition and payment processes. What are the five major phases of the acquisition and payment process?
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Chapter 12: Auditing Long-Lived Assets: Acquisition, Use, Impairment, and
Disposal
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Q1) The tour of the manufacturing plant may best assist the auditor in determining which of the following?
A) Whether all purchases are authorized.
B) Whether any machinery is inoperative in the production cycle.
C) Management's strategy for assessing impairment.
D) Estimates of depreciation expense.
Q2) In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets?
A) Completeness.
B) Existence.
C) Rights.
D) Presentation and disclosure.
Q3) Internal controls over fixed assets should provide reasonable assurance that all purchases are authorized and reasonably valued.
A)True
B)False
Q4) Fraud Risks.
List potential fraud schemes related to long-lived assets.
Page 14
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Chapter 13: Auditing Debt Obligations and Stockholders
Equity Transactions
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Q1) Which assertion is generally the most relevant when auditing the restrictions contained in debt obligations?
A) Completeness.
B) Valuation.
C) Proper presentation and disclosure.
D) Existence.
Q2) Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure?
A) Determine average interest rates.
B) Determine average debt outstanding.
C) Examine disaggregated data by type of debt.
D) Examine an interest revenue schedule.
Q3) As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform?
A) Trace the proceeds of stock sold to the cash receipts journal.
B) Review the minutes of the board of directors meetings.
C) Examine documentation maintained by the transfer agent.
D) Review a copy of the client's articles of incorporation.
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Chapter 14: Activities Required in Completing a Quality Audit
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Q1) If an audit firm accepts or continues to provide audits to a client firm with ineffective internal controls over financial reporting, the management representation letter will note that an adverse opinion will likely be issued.
A)True
B)False
Q2) Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for this purpose.
A)True
B)False
Q3) Analytical procedures conducted at the end of an audit are performed to examine trends and changes. What is typically another purpose of analytical procedures at the end of the audit?
A) To document planning in accordance with GAAS.
B) To provide the client with a value added service in conjunction with audit activities.
C) To ask "hard questions" about the company's results and its relationship to external factors.
D) To increase the amount of items reported in the management letter.
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Chapter 15: Audit Reports on Financial Statements
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Q1) For the last several years, both the Financial Accounting Standards Board (FASB) and the International Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard unqualified audit report.
A)True
B)False
Q2) When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures, a disclaimer of opinion will be rendered.
A)True
B)False
Q3) In which one of the following instances would an auditor most likely issue a disclaimer of opinion?
A) Management will not sign a management representation letter.
B) Management declines to provide a statement of cash flow.
C) The auditor is independent of the client.
D) The auditor is unable to confirm receivables but performs alternative procedures.
Q4) Adverse opinions.
Under what circumstances would an auditor issue an adverse opinion?
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Chapter 16: Advanced Topics Concerning Complex Auditing Judgments
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Q1) Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement?
A) Rollover method.
B) Iron curtain method.
C) Percentage approach.
D) Judgmental method.
Q2) The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective?
A) Level 0.
B) Level 1.
C) Level 2.
D) Level 3.
Q3) A best practice is to have an oversight of the internal audit function as a responsibility of which of the following?
A) Management.
B) Internal auditors.
C) Audit committee.
D) External auditors.
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Chapter 17: Other Services Provided by Audit Firms
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Q1) Which of the following engagements is sometimes referred to as bookkeeping services?
A) Reviews.
B) Special reports.
C) Compilations.
D) Audits.
Q2) The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued, but does not require that the auditor's review report be included with the quarterly information, although many companies do include the auditor's report.
A)True
B)False
Q3) The performance of inquiry and analytical review procedures to provide a reasonable basis for expressing limited assurance is required for a review service.
A)True
B)False
Q4) Special reports would include compliance with contractual agreements.
A)True
B)False
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