Internal Auditing Exam Bank
Course Introduction
Internal Auditing explores the principles, practices, and roles of internal audit functions within organizations. The course covers audit planning, risk assessment, internal control evaluation, evidence collection, and reporting techniques. Students learn to examine business processes for efficiency, effectiveness, and compliance with regulations and policies. Emphasis is placed on the ethical responsibilities of internal auditors, the application of auditing standards, and the use of technology in internal audits. By the end of the course, students will be prepared to contribute to improving organizational governance, risk management, and control processes.
Recommended Textbook Principles of Auditing Other Assurance Services 21st Edition by Ray Whittington
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Chapter 1: The Role of the Public Accountant in the American Economy
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Q1) An operational audit differs in many ways from an audit of financial statements.Which of the following is the best example of one of these differences?
A)The usual audit of financial statements covers the four basic statements,whereas the operational audit is usually limited to either the balance sheet or the income statement.
B)Operational audits are more subjective and often involve evaluating efficiency and effectiveness of operations.
C)Operational audits do not ordinarily result in the preparation of a report.
D)The operational audit deals with pre-tax income.
Answer: B
Q2) Historically,which of the following has the AICPA been most concerned with providing?
A)Professional standards for CPAs.
B)Professional guidance for regulating financial markets.
C)Standards guiding the conduct of internal auditors.
D)Staff support to Congress.
Answer: A
Q3) Issue CPA certificates.
Answer: State Boards of Accountancy.
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Chapter 2: Professional Standards
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Q1) Which of the following is explicitly included as a part of the description of management's responsibility in a nonpublic company unmodified audit report?
A)Management is responsible for making a judgment on which misstatements are material vs.immaterial.
B)Management is responsible for providing auditors with all relevant evidence.
C)Management is responsible for the maintenance of internal control.
D)Management is responsible for listing all illegal acts with a direct effect on financial statement amounts and disclosures.
Answer: C
Q2) Generally accepted auditing standards established by the AICPA through April of 2003:
A)Were accepted as interim standards by the Public Company Accounting Oversight Board.
B)Provide accounting guidance for nonpublic companies.
C)Were also adopted as international auditing standards at that date.
D)Are now developed by the Securities and Exchange Commission.
Answer: A
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Chapter 3: Professional Ethics
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Q1) Which of the following is <b>not </b>a broad category of safeguards that mitigate or eliminate threats to independence?
A)Safeguards created by the profession,legislation,or regulation.
B)Safeguards created to assure proper training within both the client and attest environment.
C)Safeguards implemented by the attest client.
D)Safeguards implemented by the firm,including policies and procedures to implement professional and regulatory requirements.
Answer: B
Q2) Which of the following acts by a CPA would most likely be considered a violation of the AICPA Code of Professional Conduct?
A)Assisting a client in preparing a financial forecast.
B)Forming a professional corporation to practice as a CPA.
C)Accepting a fee in a tax matter relating to an administrative proceeding.
D)A "covered member" owns an immaterial amount of stock in an audit client.
Answer: D
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Chapter 4: Legal Liability of Cpas
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Q1) The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.
A)True
B)False
Q2) Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:
A)Lack of due diligence.
B)Intent to deceive or defraud.
C)Ordinary negligence.
D)Auditors have no liability to security purchasers under this act.
Q3) Negligence is defined as failure to use reasonable care in the performance of services.
A)True
B)False
Q4) Most charges made against auditors under common law are criminal. A)True B)False
Q5) Most of the burden of affirmative proof is on the defendant under common law. A)True
B)False
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Chapter 5: Audit Evidence and Documentation
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Q1) The management representation letter date should coincide with the:
A)Date of the auditor's report.
B)Balance sheet date.
C)Date of the latest subsequent event referred to in the notes to the financial statements.
D)Date of the engagement agreement.
Q2) Even though the quantity,type,and content of working papers will vary,the working papers generally would include:
A)Copies of those client records examined by the auditor during the course of the engagement.
B)An evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit.
C)Auditor's comments concerning the efficiency and competence of client management personnel.
D)Auditing procedures followed and the testing performed in obtaining audit evidence.
Q3) The use of data analytics in auditing requires large,error-free populations.
A)True
B)False
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Chapter 6: Audit Planning, understanding the Client, assessing
Risks, and Responding
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Q1) A successor auditor is required to make an effort to communicate with the predecessor auditor prior to:
A)Performing test of controls.
B)Testing beginning balances for the current year.
C)Making a proposal for the audit engagement.
D)Accepting the engagement.
Q2) Which of the following is <b>not</b> an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist?
A)Apply increased professional skepticism about material transactions.
B)Increase the assessed level of detection risk.
C)Assign personnel with particular skill to areas of high risk.
D)Obtain increased evidence about the appropriateness of management's selection of accounting principles.
Q3) Preliminary arrangements with clients should be set forth in the management letter.
A)True
B)False
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Chapter 7: Internal Control
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Q1) Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?
A)The complexity of the information processing system.
B)Human judgment in the decision making process.
C)The ineffectiveness of the board of directors.
D)The lack of management incentives to improve the control environment.
Q2) Which of the following is most likely to be considered a risk assessment procedure relating to internal control?
A)Confirm accounts receivable.
B)Perform a test of a control relating to payroll.
C)Take test counts of the year-end inventory.
D)Trace a transaction through the information system relevant to financial reporting.
Q3) Which of the following is<b> least</b> likely to be considered a risk assessment procedure relating to internal control?
A)Counting marketable securities at year-end.
B)Inquiries of client personnel.
C)Inspecting documents and reports.
D)Observing the application of specific controls.
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Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Q1) Which of the following is likely to be of <b>least</b> importance to an auditor in considering the internal control in a company with computer processing?
A)The segregation of duties within the computer center.
B)The control over source documents.
C)The documentation maintained for accounting applications.
D)The cost/benefit of data processing operations.
Q2) A fast-growing service company is developing its information technology internally.What is the first step in the company's systems development life cycle?
A)Analysis.
B)Implementation.
C)Testing.
D)Design.
Q3) For good internal control,programmers should not be given access to program documentation for the programs they work on.
A)True
B)False
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Chapter 9: Audit Sampling
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Q1) Audit sampling is used in conjunction with many audit tests,and may be performed on a statistical or nonstatistical basis.
a.Define the term audit sampling.
b.List and explain two advantages of the use of statistical sampling as compared to nonstatistical sampling.
Q2) The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:
A)Statistical error.
B)Sampling misstatement.
C)Standard error of the mean.
D)Nonsampling error.
Q3) Which of the following may be used to reduce the risk of nonsampling errors?
A)Increasing the size of audit samples.
B)Stratifying audit samples.
C)Adequately planning audit samples.
D)Using statistical sampling techniques.
Q4) Statistical sampling can be used to test all control activities.
A)True
B)False
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Chapter 10: Cash and Financial Investments
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Q1) In which of the following areas are the auditors <b>least</b> likely to use the work of a specialist?
A)Determining the value of complex financial instruments.
B)Assessing control risk for clients using complex derivatives for hedging.
C)Determination of the existence of a complex financial instrument.
D)Valuing an equity investment that must be valued using a complex valuation model.
Q2) When a client engages in transactions involving derivatives,the auditor should:
A)Review agreements underlying the derivative.
B)Confirm with the client's broker whether the derivatives are for trading purposes.
C)Notify the audit committee about the risks involved in derivative transactions.
D)Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.
Q3) Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another.
A)True
B)False
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Chapter 11: Accounts Receivable, notes Receivable, and Revenue
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Q1) Which of the following procedures would probably be most effective in identifying duplicate billing of customers during the year?
A)Analytical procedures.
B)Confirmation of accounts at year end.
C)Data analytics applied to sales transactions.
D)Review of contracts.
Q2) When scheduling the audit work to be performed on an engagement,the auditors should consider confirming accounts receivable balances at an interim date if:
A)Subsequent collections are to be reviewed.
B)Internal control over receivables is good.
C)Negative confirmation requests are to be used.
D)There is a simultaneous examination of cash and accounts receivable.
Q3) Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.
A)True
B)False
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Chapter 12: Inventories and Cost of Goods Sold
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Q1) To measure how effectively a client employs its assets,an auditor calculates inventory turnover by dividing the average inventory into:
A)Net sales.
B)Cost of goods sold.
C)Operating income.
D)Gross sales.
Q2) Which of the following best describes the reason for the auditors' review of the client's cost accounting system?
A)To obtain evidence regarding the quantities of good described as work in process.
B)To obtain evidence about the valuation of work in process,finished goods,and cost of goods sold.
C)To obtain evidence about the profit margin on specific jobs.
D)To obtain evidence about compliance with Cost Accounting Standards.
Q3) For good internal control over purchase transactions,purchases should be documented by a purchase requisition by the department needing the goods.
A)True
B)False
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Chapter 13: Property,plant,and Equipment: Depreciation and Depletion
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Q1) The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client:
A)Confirmation.
B)Observation.
C)Recomputation.
D)Inquiry.
Q2) In violation of company policy,Miller Company erroneously capitalized the cost of painting its warehouse.The auditors examining Miller's financial statements would most likely detect this when:
A)Discussing capitalization policies with Miller's controller.
B)Examining maintenance expense accounts.
C)Observing,during the physical inventory observation,that the warehouse had been painted.
D)Examining the construction work orders supporting items capitalized during the year.
Q3) The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.
A)True
B)False
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Chapter 14: Accounts Payable and Other Liabilities
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Q1) When the auditors select a sample from the vouchers payable register at the end of the period and trace them to underlying documents,the auditors are gathering evidence primarily to support that:
A)Recorded obligations were paid.
B)Incurred obligations were recorded in the correct period.
C)Recorded obligations occurred prior to year-end.
D)Cash disbursements were recorded as incurred obligation.
Q2) Auditors should be aware that a voucher system may result in which of the following at year-end:
A)Understatement of liabilities.
B)Overstatement of assets.
C)Understatement of owners' equity.
D)Overstatement of expenses.
Q3) Which statement is correct with respect to accounts payable confirmations?
A)The negative form is used in most circumstances.
B)Accounts with new suppliers are always confirmed.
C)They are a required auditing procedure.
D)They are more frequently used in situations in which some vendors don't send monthly statements.
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Chapter 15: Debt and Equity Capital
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Q1) In the audit of interest-bearing debt auditors identify audit objectives and then determine appropriate audit procedures.
a.List the audit objectives for substantive tests of interest-bearing debt.
b.List seven substantive tests for interest-bearing debt to help the auditors meet the audit objectives.
Q2) A large corporation entered into a very significant long-term debt agreement during the current year.Which of the following would the auditors most likely be concerned with:
A)Approval by the corporation's CEO.
B)Approval by the corporation's CFO.
C)Approval by the corporation's Board of Directors.
D)Approval by the corporation's Controller.
Q3) A registrar/transfer agent system relating to capital stock is most likely used by:
A)A small,nonpublic company.
B)A large,publicly traded company.
C)All companies must use this type of system.
D)No companies use this system anymore.
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Chapter 16: Auditing Operations and Completing the Audit
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Q1) Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
A)True
B)False
Q2) With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report,the auditors' responsibility for events occurring subsequent to the date of the audit report is:
A)Extended to include all events occurring until the date of the last subsequent event referred to.
B)Limited to the specific event referred to.
C)Limited to all events occurring through the date of issuance of the report.
D)Extended to include all events occurring through the date of submission of the report to the client.
Q3) Auditors must communicate internal control "significant deficiencies" to:
A)The audit committee.
B)The shareholders.
C)The SEC.
D)The Federal Trade Commission.
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Chapter 17: Auditors Reports
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Q1) An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time.In evaluating the entity's plans for dealing with the adverse effects of future conditions and events,the auditor most likely would consider,as a mitigating factor,the entity's plans to:
A)Repurchase the entity's stock at a price below its book value.
B)Issue stock options to key executives.
C)Refinance debt to lower loan payments.
D)Accelerate the due date of an existing mortgage.
Q2) A change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an audit report with unmodified opinion and an emphasis-of-matter paragraph.
A)True
B)False
Q3) PCAOB Form AP involves disclosure of:
A)The engagement partner for the audit.
B)Audit firm's liability for accounts payable to the audit client.
C)Names of all staff members on the audit.
D)Audit client executives.
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Chapter 18: Integrated Audits of Public Companies
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Q1) An auditor identified a material weakness in internal control in August.The client was informed and the client corrected the material weakness prior to year-end (December 31);the auditor agrees that the correction eliminated the material weakness prior to year-end.The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:
A)Adverse.
B)Unqualified.
C)Disclaimer.
D)Qualified.
Q2) A circumstance caused scope limitation in a Sarbanes-Oxley 404 internal control audit is most likely to result in a(n):
A)Withdrawal from the engagement.
B)Disclaimer of opinion.
C)Unqualified opinion with explanatory language.
D)All of these are equally likely.
Q3) Tests of operating effectiveness ordinarily include reperformance of the application of controls.
A)True
B)False
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Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) Which of the following is <b>not</b> an example of financial statements that use a special purpose financial reporting framework?
A)A partnership which follows accounting practices used to file its tax return.
B)Statements prepared for limited purposes such as relating to contract a company has entered into.
C)An organization that has limited the scope of the auditor's examination.
D)An organization that follows procedures of a regulatory agency that oversees the company and its operations.
Q2) A "comfort letter" is ordinarily addressed to:
A)Creditor financial institutions.
B)The client's audit committee.
C)The Securities and Exchange Commission.
D)Underwriters of securities.
Q3) Personal financial statements may be compiled or reviewed,but they should not be audited.
A)True
B)False
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Chapter 20: Additional Assurance Services: Other Information
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Q1) Which of the following are Trust Services principles? \[\begin{array} { c c c }
& \text { Security } & \text { Availability } \\
\text { A } & \text { Yes } & \text { Yes } \\
\text { B. } & \text { Yes } & \text { No } \\
\text { C. } & \text { No } & \text { Yes } \\
\text { D. } & \text { No } & \text { No } \end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q2) Of the following,which is most likely to be the subject matter of an attestation engagement?
A)Physical characteristics.
B)Suitable criteria.
C)Attestation risk.
D)Absolute assurance.
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Chapter 21: Internal, operational, and Compliance Auditing
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Q1) Which of the following is<b> not </b>one of the attribute standards of the IIA's Standards for the Professional Practice of Internal Auditing?
A)Independence and objectivity.
B)Integrity and skepticism.
C)Proficiency and professional care.
D)Purpose,authority,and responsibility.
Q2) In governmental accounting,emphasis is placed on:
A)Total assets owned by the governmental entity.
B)Generating income from funds employed.
C)Expenditures of funds.
D)The flow of funds through the income statement.
Q3) An after-school program provides free healthy snacks to low-income families with funds passed-through the state welfare department from the U.S.Department of Health and Human Services.In this situation,which organization is the primary recipient of the funds?
A)The state welfare department.
B)The Department of Health and Human Services.
C)The after-school program.
D)The families whose children are in the program.
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