Internal Auditing Exam Bank
Course Introduction
Internal Auditing provides students with a comprehensive understanding of the internal audit function within organizations, emphasizing its role in enhancing corporate governance, risk management, and internal control processes. The course explores frameworks, standards, and best practices within internal auditing, including risk-based auditing, evidence gathering, reporting, and follow-up procedures. Through case studies and practical examples, students learn to plan and conduct audits, assess operational effectiveness, recommend improvements, and navigate ethical and legal considerations faced by internal auditors.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by Alvin A. Arens
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) Who is responsible for developing financial statement audit and assurance standards in Canada?
A) AASB (Auditing and Assurance Standards Board)
B) standards staff at the CICA (Canadian Institute of Chartered Accountants)
C) national accounting bodies such as CGA Canada
D) the accounting firms who conduct financial statement audits
Answer: A
Q2) A major type of assurance service performed by large public accounting firms is
A) auditing.
B) reviewing.
C) compilation.
D) management consulting.
Answer: A
Q3) Because an external auditor is paid a fee by a client company, he or she
A) is absolutely independent and may conduct an audit.
B) may be sufficiently independent to conduct an audit.
C) is never considered to be independent.
D) must receive approval from the relevant provincial securities commission before conducting an audit.
Answer: B
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) Adequate technical training and proficiency in auditing is a requirement of which category of generally accepted auditing standards?
A) general
B) examination
C) reporting
D) quality control
Answer: A
Q2) The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in the creation of the PCAOB to oversee listed companies' auditors and develop audit standards. The impact of this requirement in Canada was
A) the creation of new auditing standards to ensure better quality control for audits.
B) revision to the rules of professional conduct for CPAs.
C) additional training requirements for becoming an auditor.
D) the creation of the CPAB to oversee Canadian audit professionals.
Answer: D
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Chapter 3: Legal Liability
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Sample Questions
Q1) An example of an audit failure is when the
A) auditor issues an erroneous audit opinion as the result of a failure to comply with the requirements of GAAS.
B) audit opinion is qualified.
C) company files for bankruptcy less than 12 months after receiving an unqualified opinion.
D) auditor issues an erroneous audit opinion as the result of an undiscovered fraud that took place in the period being audited.
Answer: A
Q2) The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called
A) separate and proportionate liability.
B) joint and several liability.
C) shared liability.
D) unitary liability.
Answer: B
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Independence is assessed in the eyes of external users and regulators. Which of the following is a tool that helps the auditor identify whether the auditor is independent for a particular audit engagement?
A) completion of independence forms at time of employment
B) an independence threat analysis
C) an audit risk model assessment for each engagement
D) professional skepticism when assessing control risks
Q2) Which of the following situations best describes an advocacy threat? PA has been hired to
A) consult with the corporate controller and the bank manager about the conditions for financing a loan.
B) manage the accounting department for three weeks while the corporate controller is on vacation.
C) complete the personal tax returns of all executive management.
D) prepare the year end journal entries for a subsidiary company.
Q3) List the components of the auditor's professional judgment framework.
Q4) 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.
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Q1) In testing for cutoff, the objective is to determine
A) whether all of the current period's transactions are recorded.
B) that no transactions from the prior period are included in the current period's balances.
C) that no transactions of the current period have been delayed and recorded in a future period.
D) whether transactions are recorded in the proper period.
Q2) Formamould Inc. sells plastic moulds to a variety of companies. Some moulds are custom made and cost thousands of dollars. To help customers finance these purchases, Formamould uses a variety of methods, such as payment terms stretched over three years, delayed payment, and pay-as-you-produce models tailored to individual customer needs. The outstanding balance is included in current accounts receivable. The general balance-related audit objective affected by this activity is A) completeness.
B) accuracy.
C) allocation to accounts.
D) existence.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) The official record of the meetings of the board of directors and shareholders is contained in the corporate
A) bylaws.
B) charter.
C) minutes.
D) license.
Q2) Which of the following is a factor that relates to "attitudes or rationalization" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt repayment requirements
C) management's practice of making overly aggressive forecasts
D) high turnover of accounting, internal audit, and information technology staff
Q3) One of the purposes of developing a client risk profile is to assist the auditor in
A) developing the pertinent audit procedures for tests of internal controls.
B) assessing the client's business risk.
C) locating related parties that need to be disclosed.
D) deciding whether fraud or illegal acts have taken place.
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8
Chapter 7: Materiality and Risk
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Q1) When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will
A) potentially differ from each other.
B) require the same level of unanticipated misstatements.
C) require the same amount of audit work.
D) be the same for each account audited.
Q2) If audit risk is increased, what happens to detection risk?
A) It stays the same.
B) It increases.
C) It changes based upon the audit procedures conducted.
D) It decreases.
Q3) A PA is working on the audit of a publicly held corporation. At what level will the auditor likely set audit risk?
A) low
B) medium
C) high
D) very high
Q4) Discuss three factors that affect client business risk and therefore audit risk.
Q5) A) Explain how auditors use the audit risk model when planning an audit.
B) Describe the audit risk model and each of its components.
Page 9
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) An essential characteristic of the persons performing internal check procedures is A) independence from the original data preparer.
B) a thorough knowledge of accounting.
C) an analytical and inquisitive mind.
D) competence in data entry skills.
Q2) Paul is in the process of performing procedures to obtain the necessary understanding of the client's internal controls. As part of this process, Paul received from the client completed narratives, flowcharts, and internal control questionnaires. Paul can use this information from the client
A) if the entity-level controls and tone at the top were found to be effective.
B) if there has not been any significant change in the internal controls since the prior year.
C) as long as any subsequent reliance on controls is adequately substantiated with testing.
D) since it was prepared by management, which is unbiased.
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Renaldo compared shipping reports to sales documents, checking to see that the sales invoice dates matched the shipping dates, and that quantities invoiced matched quantities shipped. On his working paper, he said that he vouched invoices. What else should his working paper include with respect to the audit procedure conducted?
A) details of tests conducted, with results
B) results of analytical review procedures on the aging of accounts receivable C) employee numbers and wage rates of the employees he spoke to D) a statement that the information will be held confidential
Q2) The new Canadian Auditing Standards require the auditor to complete the audit working papers within how many days of the audit report date?
A) 45
B) 60
C) 90
D) 183
Q3) Identify and explain the three determinants of the persuasiveness of evidence.
Q4) Identify the characteristics that working papers should have. For each characteristic, briefly explain why it is important.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Donna sees a large variation in the gross margin percentage as a result of analytical procedures she performed. This means that
A) Donna should perform more tests.
B) the financial statements contain an error.
C) Donna cannot rely on the company's internal controls.
D) Donna should document this difference.
Q2) Which of the following audit tests is usually the most costly to perform?
A) analytical procedures
B) tests of controls
C) tests of details of balances
D) procedures to obtain an understanding of internal control
Q3) 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
Q4) 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) An auditor used sampling that has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars. The auditor is using what type of sampling?
A) attribute sampling
B) discovery sampling
C) monetary unit sampling
D) variable estimation sampling
Q2) The auditor has decided to audit all accounts receivable amounts that are over 120 days old and over $5000. What type of sample selection method is the auditor using?
A) haphazard
B) systematic
C) directed
D) block
Q3) The process that requires the calculation of an interval and then selects the items based on the size of the interval is
A) statistical sampling.
B) random selection.
C) systematic selection.
D) computerized selection.
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Page 13
Chapter 12: Audit of the Revenue Cycle
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Q1) Frag Jones Company has a December year end with a tight reporting deadline, so the auditors confirmed the accounts receivable as of November 30 using positive confirmations. In addition to following up confirmation discrepancies, the auditor should
A) test December transactions.
B) send negative confirmations as of the end of December.
C) test November transactions.
D) do cutoff testing for the month of October.
Q2) Stefano is performing a review of the accounts receivable for large and unusual amounts. Of the following accounts receivables, Stefano should pay special attention to an account receivable
A) from a related party.
B) for a large dollar amount.
C) recorded close to year end.
D) that is recurring.
Q3) Most companies recognize sales when
A) a customer order is received.
B) the merchandise is shipped.
C) the merchandise is received by the customer.
D) cash is received on account.
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) 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.
Q2) ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances have been converted to the vendor master file (completeness), the auditor would
A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.
Q3) Describe the three types of tests that need to be performed by the auditor when auditing a client's data conversion process.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) Discuss the methodology for designing tests of details of balances for inventory.
Q2) If the auditor is appointed after the year-end of the client, the auditor
A) should qualify the audit opinion for the inventory balance and cost of sales.
B) could attend a current perpetual inventory count and roll backward with the records.
C) should do an inventory count as soon as he is appointed.
D) will inquire with management about the inventory count performed at year-end.
Q3) Dishware Distribution Limited uses average costing to cost its inventory. It keeps a perpetual inventory file that is linked to its sales systems. It orders inventory in for specific customers as needed, and traditionally has a slow time just before its year-end. Accordingly, inventory at the year-end is about $2000, while materiality is about $30 000.
How should the auditor approach the audit of physical inventory?
A) Exclude testing of physical inventory from the audit program.
B) Use attribute sampling to select a sample of items to count.
C) Use dollar-unit sampling to select a sample of items to count.
D) Count only those items that have a dollar value in excess of $100.
Q4) What are inventory price tests and inventory compilation tests? Provide an example of each.
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16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) Which of the following controls helps to prevent error with set up of access rights, and also helps to prevent unauthorized changes to the access rights?
A) independent comparison to check that they have been set up properly
B) access rights forms that are signed by the user's manager
C) tracking all accesses in an access log by user identification code
D) using audit software to provide a list of who has accessed sensitive data
Q2) Which of the following is a test of controls?
A) reviewing the payroll journal, general ledger, and payroll earnings records for large or unusual amounts
B) examining time cards for indication of supervisor approval
C) comparing cancelled cheques with payroll journal for name, amount, and date
D) examining cancelled cheques for proper endorsement
Q3) Which of the following internal controls helps ensure that recorded payroll payments are for work actually performed by existing employees?
A) procedures requiring the recording of transactions as soon as possible
B) only valid employees from the computer data files are accepted for processing
C) internal verification of payroll file contents
D) independent preparation of payroll bank reconciliation
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) For publicly held corporations, the verification of owners' equity is more complex due to the
A) fact that there are many more equity accounts to audit.
B) larger numbers of shareholders and frequent changes in the individuals holding the shares.
C) problem of having to confirm shares held with many more different individuals.
D) need to consider that audit risk will be lower, and different shareholders have different points of view with respect to materiality.
Q2) Most large corporations employ the services of a stock transfer agent for the purpose of
A) maintaining the shareholder records.
B) recording share capital in the accounts.
C) issuing the shares for the company.
D) ensuring that stock issuances are complying with federal and provincial laws.
Q3) Identify three analytical procedures commonly performed for notes payable.
Q4) Describe the audit procedures and related audit assertions for the audit of dividends.
Q5) Describe the risks of error and fraud in the debt or equity accounts.
Page 18
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) Sandra is analyzing the cash cycle of her audit client. Which of the following could indicate a liquidity problem?
A) obsolete inventory
B) high level of inventory
C) inventory on consignment
D) backordered inventory
Q2) Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and noticed it is usually empty. When you came in to do the audit, you were surprised to see that they had a large cash balance and high sales. Toasted Tomato might
A) have a going concern issue.
B) be engaging in money laundering.
C) have lower business risk than initially anticipated.
D) have weak internal controls.
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.
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19
Chapter 18: Completing the Audit
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Sample Questions
Q1) A) Discuss the purposes of performing analytical procedures during the audit completion phase.
B) State the two purposes of the client representation letter.
Q2) Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
A) sale of long-term debt or capital stock
B) loss of a plant as a result of a flood
C) major purchase of a business that is expected to double the sales volume
D) settlement of litigation in excess of the recorded liability
Q3) If a potential loss on a contingent liability is unlikely and the event will not likely have a significant adverse financial effect, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
Q4) Describe the items the auditor is required to report to the audit committee.
Q5) Discuss the purpose of a management letter.
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Chapter 19: Audit Reports on Financial Statements
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Q1) 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.
Q2) It is management's responsibility to select the accounting policies that are used in the preparation of the financial statements. What is the auditor's responsibility with respect to these accounting policies?
A) approve the accounting policies that are used, so that an opinion can be stated on the fairness of the financial statements
B) evaluate the appropriateness of the accounting policies that are used and of the associated estimates made
C) tell management which accounting policies should be selected so that accurate estimates can be made for year-end adjustments
D) recalculate the estimates that are used for the accounting policies (such as bad debt allowance and warranty expenses)
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.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) When assessing the plausibility of the financial statements for a review engagement, the auditor will use which of the following criteria for auditing a small, privately held company?
A) standards of efficiency and effectiveness
B) the audit objectives associated with the audit of financial statements
C) an acceptable reporting framework such as ASPE
D) an enterprise risk-management framework to help detect fraud
Q2) Four different engagements that the auditor can complete are compilation, bookkeeping, audit, and review. Rank these engagements with respect to the level of assurance provided from highest assurance level to lowest assurance level.
A) audit, review, compilation, bookkeeping
B) audit, compilation, review, bookkeeping
C) review, audit, compilation, bookkeeping
D) review, audit, bookkeeping, compilation
Q3) What is the title of a compilation report?
A) Opinion
B) Criteria Schedule
C) Engagement Report
D) Notice to Reader
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Page 22