Internal Auditing Exam Preparation Guide
Course Introduction
Internal Auditing is a comprehensive course that explores the principles, practices, and contemporary issues in the internal audit function within organizations. Students will learn how internal auditing contributes to effective risk management, internal controls, and corporate governance. The course covers audit planning, execution, reporting, and follow-up, while emphasizing ethics, standards, and the use of technology in auditing processes. Case studies and real-world scenarios are used to develop analytical and critical thinking skills, preparing students for professional roles in internal audit and related fields.
Recommended Textbook
Auditing Assurance Services A Systematic Approach 11th Edition by William F Messier Jr
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Q1) Auditing services and attestation services are the same.
A)True
B)False
Answer: False
Q2) Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?
A)To promote an adversarial relationship between the auditor and the corporation's management.
B)To enhance auditor independence from the management of the corporation.
C)To encourage a policy of rotation of the independent auditors.
D)To give management more leverage over the auditor's decisions.
Answer: B
Q3) Testing all transactions that occurred during the period is cost prohibitive. A)True
B)False
Answer: True
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Page 3
Chapter 2: The Financial Statement Auditing Environment
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Q1) Define corporate governance, the board of directors, and the audit committee and explain how they relate to each other.
Answer: Corporate governance is all the people, processes, and activities in place to help ensure proper stewardship over an entity's assets. The board of directors is the body primarily responsible for management oversight in corporations. The audit committee oversees internal and external audit work done for an entity. The board of directors plays a part in ensuring proper corporate governance by holding management responsible for the usage of the entity's assets. The audit committee is made up of members of the board of directors. The audit committee enhances corporate governance by holding management accountable for its activities through audits of its work.
Q2) A financial statement audit must be conducted based on GAAP.
A)True
B)False
Answer: False
Q3) One of the five basic business processes is the warehousing cycle.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Q1) The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:
A)methods of statistical sampling to be used in confirming accounts receivable.
B)pending legal matters to be included in the inquiry of the client's attorney.
C)evidence to be gathered to provide a sufficient basis for the auditor's opinion.
D)timing of the audit.
Answer: D
Q2) Define the engagement letter and discuss its importance.
Answer: An engagement letter formalizes the arrangement reached between the auditor and the client. This letter serves as a contract, outlining the responsibilities of both parties and preventing misunderstandings between the two parties.
Q3) The first phase of audit planning is risk assessment.
A)True
B)False
Answer: False
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Chapter 4: Risk Assessment
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Q1) Using the audit risk model, identify the relationship between the following elements. For each of the items below, highlight whether the two elements have an inverse relationship, a direct relationship, or no relationship. When considering each item, assume that the other components of the risk model remain constant.
Q2) All of the following represent an increased opportunity for management to commit fraud except:
A)significant related party transactions.
B)the auditor's relationship with management is strained.
C)management is dominated by a single person.
D)the financial statements include highly subjective estimates.
Q3) Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A)Inability to generate cash flows from operations while reporting substantial earnings growth.
B)Management's lack of interest in increasing the entity's earnings trend.
C)Large amounts of liquid assets that are easily converted into cash.
D)Inability to borrow necessary capital without granting debt covenants.
Q4) What is the difference between audit risk and engagement risk?
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Page 6
Chapter 5: Evidence and Documentation
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Q1) The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
A)True
B)False
Q2) The auditor generally finds more predictability in the ratio and trend analysis in the examination of the:
A)Statement of Changes in Stockholders' Equity and Retained Earnings.
B)Income Statement.
C)Balance Sheet.
D)Statement of Cash Flows.
Q3) Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
A)Existence or occurrence.
B)Completeness.
C)Rights and obligations.
D)Observation.
Q4) According to the text, what are the three functions of working papers?
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Chapter 6: Internal Control in a Financial Statement Audit
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Q1) Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if:
A)compliance tests were not performed by the internal audit staff during the remaining period.
B)the internal control system provides a basis for reliance in reducing the extent of substantive procedures.
C)the auditor used nonstatistical sampling during interim compliance testing.
D)inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.
Q2) An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the:
A)efficiency of management's decision-making process.
B)appropriate prices that the entity should charge for its products.
C)methods of assigning production tasks to employees.
D)entity's ability to accurately process and summarize financial data.
Q3) What are some typical types of evidence that may be collected in testing an entity's internal controls?
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Q1) CBA Associates is auditing a large publicly traded company. The audit of internal controls over financial reporting has been properly planned and the auditors have already identified controls to test using a top-down, risk-based approach. What is the next step? Give three examples of procedures that may be completed in the next step in the audit.
Q2) IDEA is an example of:
A)an EDI software package.
B)custom Audit Software.
C)a GAS program that is widely used in practice.
D)a type of networking.
Q3) Most public companies must follow Sarbanes-Oxley requirements.
A)True
B)False
Q4) A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is:
A)a material weakness.
B)a significant deficiency.
C)an insignificant deficiency.
D)a probable deficiency.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Q1) Confidence level and sampling risk are related to sample size.
A)True
B)False
Q2) Which of the following risks is related to efficiency of testing?
A)The risk of incorrect rejection.
B)Inherent risk.
C)The risk of incorrect acceptance.
D)None of these.
Q3) Define Type I and Type II errors.
Q4) If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to:
A)have a large sample size.
B)set control risk at the maximum without sampling.
C)set control risk at the minimum without sampling.
D)pick a lower risk of assessing control risk too low to increase sample size.
Q5) Audit sampling is commonly used to gather scanning audit evidence.
A)True
B)False
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Q6) Identify the types of audit evidence that are tested using audit sampling techniques.
Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) An accounts receivable account balance is $500,000 and the auditor determines a sample size of 30 would provide adequate assurance. The auditor plans to use a monetary-unit sampling plan with systematic sample selection. The auditor notices that there are six customer accounts of at least $15,000 and would like the systematic selection technique to select all items that are at least $15,000, even if that means the sample size is slightly larger than 30. To achieve the auditor's objectives, the sampling interval should be:
A)6)
B)20.
C)16,666.
D)15,000.
Q2) In statistical or nonstatistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:
A)monetary-unit sampling (MUS)is used.
B)classical variables sampling is used in order to focus on large items.
C)the auditor's estimated tolerable misstatement is extremely small.
D)the standard deviation of recorded amounts is relatively small.
Q3) Summarize the concept behind monetary-unit sampling (MUS). How does MUS use attribute-sampling theory?
Page 11
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Chapter 10: Auditing the Revenue Process
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Q1) Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?
A)Tracing audited cash receipts to accounts receivable credits.
B)Selecting accounts to be confirmed on a random basis.
C)Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts.
D)Resolving differences reported by customers on confirmation requests.
Q2) According to FASB ASC 606, which of the following is not part of the five-step approach for revenue recognition?
A)Identify the contract(s)with a customer.
B)Determine the transaction price.
C)Determine whether the buyer will take a discount.
D)Identify the performance obligations in the contract.
Q3) According to the Association of Certified Fraud Examiners, there are eight common methods for committing financial statement fraud. List 4 of the 8 methods.
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Chapter 11: Auditing the Purchasing Process
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Q1) Purchase cutoff procedures should be designed to test whether or not all inventory:
A)purchased and received before the year-end was recorded before year-end.
B)on the year-end balance sheet was carried at lower of cost or market.
C)on the year-end balance sheet was paid for by the company.
D)owned by the company is in the possession of the company.
Q2) Review entity's competitive bidding procedures
A)Completeness
B)Occurrence
C)Accuracy
D)Cutoff
E)Authorization
F)Classification
Q3) A voucher:
A)is a bill from the vendor.
B)is a document that records the receipt of goods.
C)is a document that requests goods from an authorized individual in the entity.
D)serves as the basis for recording a vendor's invoice in the purchases journal.
Q4) There are several important disclosure items to consider when auditing the purchasing process. Discuss what they are and why they are important.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) A substantive test of transactions to test the completeness assertion includes:
A)tracing a sample of time sheets to the payroll register.
B)testing a sample of payroll checks for the presence of an authorized time sheet.
C)testing postings to the payroll register for a sample of payroll checks.
D)recomputing the accuracy of a sample of payroll checks.
Q2) Listed below are descriptions of various types of documents used in the payroll process. Identify the document being described for each of the following:
1)The document used to record hours worked by an employee.
2)The document that summarizes all payroll payments issued to employees.
3)The document that contains information on an employee's work history.
4)The form used to authorize deductions from an employee's pay.
5)The computer file that contains all the entity's records related to payroll.
Q3) Inherent risk associated with officer compensation is frequently set high because officers have motive and opportunity to take advantage of their high-ranking offices in the form of excessive compensation.
A)True
B)False
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Chapter 13: Auditing the Inventory Management Process
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Q1) Inherent risk is typically assessed at a low to moderate level for inventory due to the nature of the asset.
A)True
B)False
Q2) The three components that make up the cost of producing a product include materials, direct labor, and indirect labor.
A)True
B)False
Q3) The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference?
A)Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
B)Credit memos for several items returned by customers had not been prepared.
C)No journal entry had been made on the retailer's books for several items returned to its suppliers.
D)An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Inherent risk for prepaid expenses would generally be assessed as low because these accounts do not usually include complex transactions.
A)True
B)False
Q2) In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of:
A)completeness.
B)existence.
C)classification.
D)accuracy.
Q3) List two ways an auditor can test the existence and completeness of insurance policies.
Q4) Auditors will examine the insurance register primarily to:
A)ensure that dollar coverage amounts are adequate.
B)examine policy expiration dates to verify that prepaid insurance is properly stated.
C)ensure that insurance agents are not related parties.
D)ensure that all assets are insured.
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders' Equity, and Income
Statement Accounts
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Q1) What kind of information would typically be found on an income statement account analysis working paper? What kind of tests can an auditor perform using this information? Why would an auditor conduct additional analysis on an income statement account?
Q2) The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.
A)True
B)False
Q3) Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination. The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it shows:
A)only cash used to reduce convertible debt.
B)only cash provided by issuance of stock.
C)cash provided by the issuance of stock and used to reduce convertible debt. D)nothing relating to the conversion because it does not affect cash.
Q4) Notes receivable is a common type of long-term financing.
A)True B)False
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) This account contains a stipulated amount of cash and is used for limited purposes
A)Petty cash account
B)Branch account
C)Imprest cash account
D)General cash account
Q2) To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:
A)cutoff bank statement.
B)year-end bank statement.
C)bank confirmation.
D)general ledger.
Q3) The auditor's use of analytical procedures for auditing cash is limited.
A)True
B)False
Q4) You are auditing cash for Moonbeam, Inc. In meeting with the CFO during the planning stages of the audit, she indicated that there was a high risk of misstatement due to fraud in the cash account, given the lack of proper segregation of duties. As the auditor, what tests could you perform to detect fraudulent activities in the cash account?
Page 18
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Chapter 17: Completing the Audit Engagement
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Q1) A legal letter will include and evaluate all contingent liabilities of the company.
A)True
B)False
Q2) An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was:
A)limited to the specific event referenced.
B)limited to include only events occurring before the date of the last subsequent event referenced.
C)extended to subsequent events occurring through the date of issuance of the report.
D)extended to include all events occurring since the completion of fieldwork.
Q3) While auditing other business processes, an auditor may identify information about contingent liabilities. What specific audit procedures relating to other business processes could uncover these liabilities?
Q4) Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.
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Chapter 18: Reports on Audited Financial Statements
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Q1) A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.
A)True
B)False
Q2) Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(n):
A)qualified report due to a scope limitation.
B)qualified report due to a departure from GAAP.
C)unqualified report with an explanatory paragraph.
D)standard unmodified auditor's report.
Q3) A correction of a material misstatement in previously issued financial statements is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report.
A)True
B)False
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Q1) With respect to ethics, the utilitarian theory:
A)suggests that auditors should always verify ownership of a client's material tangible assets.
B)is primarily concerned with equity and impartiality.
C)suggests that an individual's actions should not violate the rights of any individual.
D)recognizes that decisions involve trade-offs between costs and benefits.
Q2) Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?
A)The SEC.
B)The AICPA.
C)A state CPA society.
D)A state board of accountancy.
Q3) Rules of Conduct are enforceable.
A)True
B)False
Q4) The term "ethics" refers to a person's propensity to follow the laws of the land.
A)True
B)False
21
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Chapter 20: Legal Liability
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Q1) Which of the following is the best statement of the duty owed by an accountant in his or her professional work?
A)To do the job correctly and discover all irregularities.
B)To follow generally accepted accounting principles (GAAP)and generally accepted auditing standards (GAAS).
C)To act as a professional and not commit fraud.
D)To exercise the skill and care of the ordinarily prudent accountant in the same circumstances.
Q2) Rule 10b-5 under Section 10(b)of the Securities Exchange Act of 1934 imposes liability on an accountant for violation of certain duties. Which of the following is an investor not required to prove to recover from a CPA?
A)A material, factual misrepresentation or omission.
B)Reliance by the plaintiff on the financial statements.
C)Damages suffered as a result of reliance on the financial statements.
D)The security price was artificially inflated as a result of the materially misstated financial statements.
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Q1) Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's financial statements include:
A)analytical procedures designed to identify material weaknesses in internal control.
B)inquiries concerning actions taken at meetings of the stockholders and the board of directors.
C)analytical procedures designed to test the accounting records by obtaining corroborating evidential matter.
D)inquiries of knowledgeable outside parties such as the entity's attorneys and bankers.
Q2) Auditing standards do not allow private companies to have an audit of internal control over financial reporting integrated with the audit of their financial statements.
A)True
B)False
Q3) The IIA's professional guidance is organized into an International Professional Practices Framework. This framework consists of two broad categories of guidance. List these categories of guidance and what they include.
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