Internal Auditing Exam Materials
Course Introduction
Internal Auditing is a comprehensive course that explores the principles, practices, and methodologies used to evaluate the effectiveness of an organizations risk management, control, and governance processes. Students will learn the standards and ethical requirements that guide internal audits, develop skills in audit planning, evidence collection, reporting, and follow-up, and examine the role of the internal auditor in supporting organizational objectives. Through case studies and practical exercises, the course emphasizes critical thinking and problem-solving abilities necessary for identifying control weaknesses and recommending process improvements across various business functions.
Recommended Textbook
Auditing and Assurance Services 15th Edition by Alvin A Arens
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26 Chapters
2759 Verified Questions
2759 Flashcards
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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46 Verified Questions
46 Flashcards
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Sample Questions
Q1) Three common types of attestation services are:
A)audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting.
B)audits of historical financial information, verifications of historical financial information, and attestations regarding internal controls.
C)reviews of historical financial information, verifications of future financial information, and attestations regarding internal controls.
D)audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information.
Answer: A
Q2) A correct relationship among the auditor, the client, and the external users is:
A)management of a public company hires the independent auditor.
B)the audit committee of a private company hires the independent auditor.
C)the client provides capital to the external users.
D)the external users can rely upon the auditor's report to reduce information risk.
Answer: D
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3
Chapter 2: The Cpa Profession
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) Which of the following is a true statement regarding auditing standards?
A)Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S.public companies.
B)PCAOB auditing standards are applicable to entities outside the U.S.
C)There are no similarities between PCAOB standards and International Standards on Auditing.
D)The Auditing Standards Board has revised most of its standards to converge with the international standards.
Answer: D
Q2) Professional skepticism must be maintained only if the auditor suspects fraud. A)True
B)False
Answer: False
Q3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.
A)True
B)False
Answer: True
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Chapter 3: Audit Reports
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) When a qualified or adverse opinion is issued, the qualifying paragraph is inserted:
A)between the introductory and scope paragraphs.
B)between the scope and opinion paragraphs.
C)after the opinion paragraph, as a fourth paragraph.
D)immediately after the address, as the first paragraph.
Answer: B
Q2) Auditing standards for public companies are established by the: A)SEC.
B)FASB.
C)PCAOB.
D)IRS.
Answer: C
Q3) A pervasive exception is one that affects different parts of the financial statements. A)True
B)False
Answer: True
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Chapter 4: Professional Ethics
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119 Flashcards
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Sample Questions
Q1) All owners of a CPA firm must be CPAs who are qualified to practice.
A)True
B)False
Q2) The Code of Professional Conduct is established by the membership of the AICPA, and the Interpretations of the Rules of Conduct are prepared by the:
A)Financial Accounting Standards Board.
B)Securities and Exchange Commission.
C)CPA licensing agencies within each state.
D)Professional Ethics Executive Committee of the AICPA.
Q3) A CPA firm:
A)can sell securities to a client for whom they perform an attestation service.
B)can receive a commission for a client that they are engaged to perform an attestation service for.
C)cannot receive a referral fee for recommending the services of another CPA.
D)can receive a commission from a nonattestation client as long as the situation is disclosed.
Q4) Identify and describe each of the four parts to the AICPA's Code of Professional Conduct.Also discuss which parts are officially enforceable and which are not.
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Page 6
Chapter 5: Legal Liability
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113 Verified Questions
113 Flashcards
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Sample Questions
Q1) The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the:
A)prudent person concept.
B)common law doctrine.
C)constructive care concept.
D)vigilant person concept.
Q2) Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?
A)Private Securities Litigation Reform Act
B)Public Securities Damages and Settlements Act
C)Racketeer Influenced and Corrupt Organization Act
D)U)S.Securities Claims Reform Act
Q3) The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.
A)True
B)False
Q4) Distinguish between constructive fraud and fraud.
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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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should:
A)plan and perform the engagement with an attitude of professional skepticism.
B)not rely on internal controls that are designed to prevent or detect errors or fraud.
C)design audit tests to detect unrecorded transactions.
D)extend the work to audit the majority of the recorded transactions and records of an entity.
Q2) For a private company audit, tests of controls are normally performed only on those internal controls the auditor believes have not been operating effectively during the period under audit.
A)True
B)False
Q3) When an auditor believes that an illegal act may have occurred, the first step he or she should take is to gather additional evidence to determine the extent of the illegality and if there is a direct impact on the financial statements.
A)True
B)False
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8
Chapter 7: Audit Evidence
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103 Verified Questions
103 Flashcards
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Sample Questions
Q1) Which of the following statements is not correct?
A)It is possible to vary the sample size from one unit to 100% of the items in the population.
B)The decision of how many items to test should not be influenced by the increased costs of performing the additional tests.
C)The decision of how many items to test must be made by the auditor for each audit procedure.
D)The sample size for any given procedure is likely to vary from audit to audit.
Q2) The relevance of audit evidence depends on the audit objective being tested.
A)True
B)False
Q3) Audit evidence is often available only in electronic form, and auditors must evaluate how this affects their ability to gather sufficient, appropriate evidence. A)True
B)False
Q4) Inspection consists of looking at a process or procedure being performed by others. A)True
B)False
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Chapter 8: Audit Planning and Analytical Procedures
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) Which of the following is a correct statement regarding analytical procedures?
A)A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals.
B)Common-size financial statements display all items as a percentage change from a base year.
C)Auditors should investigate the most significant differences between budgeted and actual results.
D)In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.
Q2) Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:
A)engagement letter.
B)representation letter.
C)responsibility letter.
D)client letter.
Q3) There are three primary reasons for obtaining a thorough understanding of the client's industry and external environment.What are these reasons?
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) The risk of fraud should be assessed for the entire audit as well as by cycle, account, and objective.
A)True
B)False
Q2) Auditors are ________ to document the known and likely misstatements in the financial statements under audit.
A)permitted
B)required
C)not allowed
D)strongly encouraged
Q3) Why do auditors establish a preliminary judgment about materiality?
A)To determine the appropriate level of staff to assign to the audit
B)So that the client can know what records to make available to the auditor
C)To help plan the appropriate evidence to accumulate
D)To finalize the control risk assessment
Q4) Most practitioners allocate the preliminary judgment about materiality to both the balance sheet and income statement accounts.
A)True
B)False
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Chapter 10: Internal Control, Control Risk, and Section 404
Audits
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Once auditors determine that entity level controls are designed and placed in the operation they:
A)make a preliminary assessment for each transaction-related audit objective for each major type of transaction.
B)make a preliminary assessment of control risk.
C)obtain an understanding of the design and implementation of internal control.
D)prepare audit documentation in order to opine on the company's internal control system.
Q2) An auditor should consider two key issues when obtaining an understanding of a client's internal controls.These issues are:
A)the effectiveness and efficiency of the controls.
B)the frequency and effectiveness of the controls.
C)the design and operating effectiveness of the controls.
D)the implementation and operating effectiveness of the controls.
Q3) List the three steps in management's assessment of risk and then list two of the categories of management assertions that must be satisfied during the risk assessment process.
Q4) Define the following terms: control deficiency, significant deficiency, and material weakness.
Page 12
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Chapter 11: Fraud Auditing
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement?
A)Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period.
B)Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report.
C)Senior management emphasizes that job rotation is a worthwhile corporate objective.
D)Senior management emphasizes that job evaluations are based on performance.
Q2) The "tone at the top" provides a foundation upon which a more detailed code of conduct can be developed to provide specific guidance for the organization and its employees.Components of a code of conduct may include sections on 1)general employee conduct, 2)relationships with clients and suppliers and 3)conflicts of interest.Give a narrative description of what might be included in each of the above components of a code of conduct.
Q3) List and briefly describe examples of risk factors for each condition of fraud for fraudulent financial reporting.
Q4) List and briefly describe the three conditions for fraud.
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Chapter 12: The Impact of Information Technology on the Audit Process
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) "Auditing around the computer" is acceptable only if the auditor has access to the client's data in a machine-readable language.
A)True
B)False
Q2) A database management system:
A)allows clients to create databases that include information that can be shared across multiple applications.
B)stores data on different files for different purposes, but always knows where they are and how to retrieve them.
C)allows quick retrieval of data, but at a cost of inefficient use of file space.
D)allows quick retrieval of data, but it needs to update files continually.
Q3) General controls in smaller companies are usually less effective than in more complex IT environments.
A)True
B)False
Q4) Output controls focus on preventing errors during processing.
A)True
B)False
Page 14
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Chapter 13: Overall Audit Strategy and Audit Program
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94 Verified Questions
94 Flashcards
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Sample Questions
Q1) Tests of controls are directed toward the control's:
A)efficiency.
B)effectiveness.
C)cost and effectiveness.
D)cost benefit ratio.
Q2) Management implements internal controls to ensure that all required footnote disclosures are accurate.Auditors tests those controls to provide evidence supporting the ________ presentation.
A)completeness and valuation
B)completeness and accuracy
C)rights and obligations and existence
D)occurrence and accuracy
Q3) Many auditors perform extensive analytical procedures on audits because:
A)they are required by GAAS.
B)they pinpoint errors in accounts.
C)they indicate areas of potential risk and misstatement.
D)they are required for tests of controls.
Q4) 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.
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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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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:
A)the original invoices.
B)an approved master price list.
C)the amounts recorded in the sales journal for that transaction.
D)the amounts posted to the customer's account in the accounts receivable master file.
Q2) The document that requires adjustments to the customers subsidiary ledger account is the:
A)bill of lading.
B)sales invoice.
C)credit memo.
D)monthly statement.
Q3) When assessing planned control risk for sales:
A)the key internal controls and deficiencies for sales will be the same for every company.
B)the audit objectives for sales will differ from company to company.
C)a flowchart is required to help assess control risk for sales.
D)assessing control risk for sales is a highly subjective decision.
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Page 16
Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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118 Verified Questions
118 Flashcards
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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) Which of the following statements best expresses the impact that the performance of audit procedures has on statistical vs.nonstatistical sampling?
A)Audit procedures on the sample item will vary as a result of using either statistical or nonstatistical sampling.
B)The audit procedures will be the same for either statistical or nonstatistical sampling but they must be performed differently for each.
C)Statistical sampling requires quantitative audit procedures, whereas nonstatistical sampling requires judgmental audit procedures.
D)Audit procedures on the sample item will not vary as a result of using either statistical or nonstatistical sampling.
Q3) 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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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.
A)True
B)False
Q2) The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.
A)True
B)False
Q3) An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared.This test is to satisfy the audit objective of: A)accuracy.
B)existence.
C)control.
D)completeness.
Q4) When an auditor uses negative confirmations, several factors must be considered.What are those factors?
Q5) Describe how the auditor tests the accuracy objective for accounts receivable.
Page 18
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Chapter 17: Audit Sampling for Tests of Details of Balances
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113 Verified Questions
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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) Why do auditors find MUS appealing?
A)MUS increases the likelihood of selecting a balance of high and low dollar items. B)MUS is easy to use in the audit environment.
C)MUS provides a nonstatistical, rather than a statistical, conclusion.
D)When misstatements are found, MUS rarely produces bounds in excess of materiality.
Q3) 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.
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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Page 19
Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
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Sample Questions
Q1) The audit procedure "Examine canceled check for authorized signature, proper endorsement, and cancellation by the bank" is used to test the occurrence objective for cash disbursements.
A)True
B)False
Q2) What typically initiates the acquisitions and payment cycle?
A)Issuance of a purchase requisition or request for purchase of goods/services
B)Issuance of payment to vendor
C)Approval of a new vendor
D)Purchase requisition
Q3) A vendor's statement is unreliable and auditors rarely use it.
A)True
B)False
Q4) Authorization for accepting goods in the receiving department should be based on the:
A)vendor invoice.
B)requisition request.
20
C)purchase order from the purchasing department.
D)vendor statement.
Q5) What are the three most important controls over cash disbursements?
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Page 21
Chapter 19: Completing the Tests in the Acquisition and Payment Cycle:
Verification of Selected Accounts
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101 Verified Questions
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Sample Questions
Q1) Explain the audit objective allocation and why it is important to have accurate allocation within the financial statements, particularly for property, plant, and equipment
Q2) You are auditing the acquisition and payment cycle and note the presence of excessive recurring losses on retired assets.You may conclude that:
A)insured values are greater than book values.
B)there are a large number of fully depreciated assets.
C)depreciation charges may by insufficient.
D)company has a policy of selling relatively new assets.
Q3) 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
Q4) In testing acquisitions, the auditor must understand the relevant accounting standards to insure the client adheres to accepted accounting practices for property, plant, and equipment.Describe three of the auditor's concerns in this area.
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) Tests of controls and tests of details of balances are the auditor's most important means of verifying account balances in the payroll and personnel cycle.
A)True
B)False
Q2) Hiring personnel initiates the payroll and personnel cycle.
A)True
B)False
Q3) An auditor is verifying that the recorded payroll payments are for work actually performed by existing employees, the occurrence transaction-related audit objective.List three key internal controls that a company should have in place in this area.
Q4) If an auditor wishes to test the completeness transaction-related audit objective in the payroll and personnel cycle, which of the following would be a reasonable test of control?
A)Account for a sequence of payroll checks.
B)Examine the procedures manual and observe the recording of transactions.
C)Examine the payroll records for indication of pay rate approval.
D)Reconcile the payroll bank account.
Q5) What events initiate and terminate the payroll and personnel cycle?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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116 Verified Questions
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Sample Questions
Q1) When performing price tests for purchased inventory, the auditor would not be concerned with the most recent vendors' invoices if the client uses the FIFO valuation method.
A)True
B)False
Q2) If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?
A)Compilation tests
B)Price tests
C)Confirmation of inventory held by outside parties
D)Physical examination of the inventory
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.
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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Sample Questions
Q1) What are two important internal control procedures that companies should implement to prevent misstatements in owners' equity when a company maintains its own records of stock transactions and outstanding stock?
Q2) The shareholders' capital stock master file is used as the basis for the payment of dividends and also acts as a check on the accuracy of the common stock balance in the general ledger.
A)True
B)False
Q3) The auditor's independent estimate of interest expense from notes payable uses average interest rates and:
A)average notes payable outstanding.
B)year-end notes payable outstanding.
C)only notes payable above the level of materiality.
D)only notes payable to major lenders.
Q4) The two most important balance related objectives in notes payable are:
A)completeness and accuracy.
B)existence and completeness.
C)accuracy and classification.
D)existence and occurrence.
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) The auditor needs to have an understanding of the client's internal controls over determining fair value estimates.
A)True
B)False
Q2) An auditor is reviewing the minutes of board meetings to determine whether any securities are pledged as collateral.This test of the detail of balances relates to the audit objective of:
A)rights.
B)cutoff.
C)realizable value.
D)classification.
Q3) Explain kiting, and discuss how it is performed.
Q4) A proof of cash receipts is not useful for uncovering the theft of cash receipts or the recording and deposit of an improper amount of cash.
A)True
B)False
Q5) A proof of cash includes four reconciliation tasks.List below two of those tasks.
Q6) What should be audited on an interbank transfer schedule?
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Chapter 24: Completing the Audit
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Q1) Because a management representation letter is a written statement from a nonindependent source, it cannot be regarded as reliable evidence.
A)True
B)False
Q2) If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: accumulate additional evidence or issue either a qualified or an adverse opinion.
A)True
B)False
Q3) What are the three required conditions for a contingent liability to exist?
Q4) Audit procedures related to contingent liabilities are initially focused on:
A)accuracy.
B)completeness.
C)existence.
D)occurrence.
Q5) List four specific matters that should be included in a client representation letter.
Q6) State the three purposes of the client letter of representation.
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) 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.
Q2) As a CPA, you have been engaged to perform an attestation engagement.You would typically:
A)express a conclusion about an assertion.
B)provide management consulting services.
C)prepare financial forecasts to secure in preparation for receiving debt funding.
D)compile financial statements for the client.
Q3) A nonaudit engagement in which the accountant undertakes to present, in the form of financial statements, information that is the representation of management, without undertaking to express any assurance on the statements is called a review engagement.
A)True
B)False
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Q1) The two most important qualities for an operational auditor to possess are independence and competence.
A)True
B)False
Q2) The Institute of Internal Auditors has established Ethical Principles for its members.List each of the principles.
Q3) Discuss each of the three broad categories (types)of operational audits.
Q4) Discuss three major differences between operational and financial auditing.
Q5) Independence is a fundamental ethical principle for internal auditors.
A)True B)False
Q6) For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management.
A)True B)False
Q7) Benchmarking is one source of evaluation criteria for completing an operational audit.
A)True B)False
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