Internal Auditing Exam Preparation Guide
Course Introduction
Internal Auditing provides students with a comprehensive understanding of the processes and principles involved in evaluating and improving the effectiveness of an organizations risk management, control, and governance systems. The course covers key topics such as audit planning, execution, and reporting, as well as ethical considerations and regulatory requirements. Students will engage with frameworks and standards like the International Professional Practices Framework (IPPF) and learn to identify internal control weaknesses, recommend improvements, and communicate findings effectively. Practical case studies and real-world scenarios are incorporated to develop analytical, problem-solving, and communication skills essential for internal audit professionals.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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26 Chapters
3526 Verified Questions
3526 Flashcards
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Chapter 1: The Demand for Audit and Other Assurance Services
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period.
A)True
B)False
Answer: True
Q2) Which one of the following is more difficult to evaluate objectively?
A) presentation of financial statements in accordance with generally accepted accounting principles
B) compliance with government regulations
C) efficiency and effectiveness of operations
D) All three of the above are equally difficult.
Answer: C
Q3) The GAO reports to the Public Company Accounting Oversight Board, which reports to the Securities and Exchange Commission.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The CPA Profession
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100 Flashcards
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Sample Questions
Q1) How often is the AICPA Peer Review Program performed of an AICPA member CPA firm administered by a State CPA Society under the overall direction of the AICPA Peer Review Board?
A) every year
B) every 2 years
C) every 3 years
D) every 5 years
Answer: C
Q2) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor fulfills several performance responsibilities, including
A) complying with the AICPA Code of Professional Conduct.
B) issuing a written report on the financial statements.
C) determining and applying materiality levels.
D) having the appropriate competence to perform the audit.
Answer: C
Q3) Membership in the AICPA is mandatory for all licensed practicing CPAs.
A)True
B)False
Answer: False
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Chapter 3: Audit Reports
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170 Verified Questions
170 Flashcards
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Sample Questions
Q1) AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report.
A)True
B)False
Answer: True
Q2) A lack of independence will override any other scope limitations and requires a disclaimer of opinion.
A)True
B)False
Answer: True
Q3) PCAOB audit report requirements require the auditor to include the auditor's signature, tenure, city and state where the audit firm is located, as well as the audit report date.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Professional Ethics
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Sample Questions
Q1) Due to a shortage of personnel, the client asks a member firm to assist with the authorization of accounting transactions. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?
A) management participation
B) self-interest
C) self-review
D) undue influence
Q2) The European Commission has a rule that generally requires, with some exceptions, audit firm rotation after how many years?
A) 5
B) 10
C) 12
D) 15
Q3) Discuss the Confidential Client Information Rule, including the four exceptions to the rule.
Q4) Threats to compliance with the AICPA's Code of Professional Conduct fall into seven broad categories. List and explain three of these categories.
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Chapter 5: Legal Liability
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Sample Questions
Q1) If an auditor is unsuccessful in using the lack of duty defense to have a case dismissed in a third-party suit, the preferred defense is
A) lack of duty to perform.
B) nonnegligent performance.
C) absence of causal connection.
D) client fraud.
Q2) The Foreign Corrupt Practices Act (FCPA) of 1977
A) requires auditors to review and evaluate systems of internal control as a part of an audit.
B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control.
C) requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA.
D) requires auditors to file a report with the SEC if client's internal control system is inadequate.
Q3) Discuss some of the steps practicing auditors can take to minimize their legal liability.
Q4) Distinguish between what is meant by business failure and audit failure.
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Page 7
Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) In describing the cycle approach to segmenting an audit, which of the following statements is not true?
A) All general ledger accounts and journals are included at least once.
B) Some journals and general ledger accounts are included in more than one cycle.
C) The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods and services and payment" cycle.
D) The "inventory and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
Q2) When an auditor believes that an illegal act may have occurred, the auditor should first
A) obtain an understanding of the nature and circumstances of the act.
B) consult with legal counsel or others knowledgeable about the illegal act.
C) discuss the matter with the audit committee.
D) withdraw from the engagement.
Q3) In the context of the audit of sales, distinguish between the occurrence and completeness transaction-related audit objectives. State the effect on the sales account (overstatement or understatement) of a violation of each objective.
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Chapter 7: Audit Evidence
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164 Flashcards
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Sample Questions
Q1) It is important for the auditor to standardize the sample size from client to client and from audit to audit.
A)True
B)False
Q2) Inquiries of clients and recalculations normally have a low cost associated with them.
A)True
B)False
Q3) Evidence is generally considered appropriate when
A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
C) it is relevant to the audit objective being tested.
D) it consists of written statements made by managers of the company under audit.
Q4) The sample size generally does not depend on client circumstances such as the extent of automated controls in place in the client's accounting information system.
A)True
B)False
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Chapter 8: Audit Planning and Materiality
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Sample Questions
Q1) Because auditors are responsible for having appropriate competence and capabilities to perform an audit, auditors are not normally permitted to consult with outside specialists during an audit engagement.
A)True
B)False
Q2) The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor's work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity.
Q3) Auditors cannot learn about potential related parties for an audit client by reviewing Securities and Exchange Commission (SEC) filings.
A)True
B)False
Q4) Discuss four of the matters that should be specified in an engagement letter.
Q5) Discuss the essential activities involved in the initial planning of an audit.
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Page 10
Chapter 9: Assessing the Risk of Material Misstatement
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Sample Questions
Q1) An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence, assignment of more experienced personnel, and/or a more extensive review of audit files.
A)True
B)False
Q2) Auditors respond to risk primarily by I. changing the extent of testing.
II) changing the types of audit procedures.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) If planned detection risk is reduced, the amount of evidence the auditor accumulates will
A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.
Q4) The most important element of the audit risk model is control risk.
A)True
B)False
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) The risk of management override of controls exists in just about every audit. Therefore, auditors must perform certain features in every audit, including examining management's estimates, judgments, and assumptions that may indicate a potential for bias.
A)True
B)False
Q2) Material frauds are frequent compared to the number of financial statement audit conducted annually in the U.S.
A)True
B)False
Q3) If auditors determine that there is not a significant risk of material improper revenue recognition, no documentation of this decision is required.
A)True
B)False
Q4) The discovery that fraud exists has implications for the public company auditor's report on internal control over financial reporting.
A)True
B)False
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Page 12
Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.
Q2) Backup and contingency plans should also identify alternative hardware that can be used to process company data.
A)True
B)False
Q3) Which of the following is not an underlying principle related to risk assessment?
A) The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives.
B) The auditors should determine how the company's risks should be managed.
C) The organization should consider the potential for fraudulent behavior.
D) The organization should monitor changes that could impact internal controls.
Q4) Firewalls can protect company data and software programs.
A)True
B)False
Q5) Describe each of the three broad objectives management typically has for internal control. With which of these objectives is the auditor primarily concerned?
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) Flowcharts have two advantages over narratives: typically, they are easier to read and easier to update.
A)True
B)False
Q2) An example of substantive testing and also a test of controls is using audit software to identify purchases where the vendor's invoice, the receiving report, and the purchase order did not match prior to payment of the vendor's invoice.
A)True
B)False
Q3) Name three types of documents which auditors commonly use to obtain and to document their understanding in the audit working paper of the design of internal controls.
Q4) The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would A) constitute a deficiency in operation of internal controls. B) constitute a deficiency in design of internal controls. C) constitute a deficiency of management. D) not constitute a deficiency.
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) One factor that determines the amount of additional evidence required for tests of controls is the planned reduction in control risk.
A)True
B)False
Q2) Which of the following is generally not included in the "evidence mix"?
A) tests of controls
B) substantive tests of transactions
C) risk assessment procedures
D) tests of details of balances
Q3) Only tests of details of balances involve physical examination and confirmation.
A)True
B)False
Q4) Procedures to obtain an understanding of internal control generally provide sufficient appropriate evidence that a control is operating effectively.
A)True
B)False
Q5) List each of the five types of audit tests.
Q6) Discuss the major activities and procedures performed by the auditor in the plan and design of the audit approach.
Page 15
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) You are an audit manager for Rodgers & Co. and have recently taken on a new client, Manufacturing Company. You are in the initial stages of planning the audit and have decided to start gathering information about the sales/collection cycle of the business. List below the classes of transactions that you need to gather audit evidence for in designing your audit procedures.
Q2) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room?
A) The cashier prepares the daily deposit.
B) The cashier makes the daily deposit at a local bank.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the checks.
Q3) A bill of lading is a special type of sales invoice used when goods are shipped interstate.
A)True B)False
Q4) The sales journal is generated from the sales transaction file. A)True B)False
Page 16
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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151 Verified Questions
151 Flashcards
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Sample Questions
Q1) As the auditor, you are assessing the proper sample size to use in testing controls. When using attributes sampling, which of the following is most correct?
A) A 10% change in population size will have the least effect on sample size.
B) A 10% change in the tolerable deviation rate will have the least effect on sample size.
C) A 10% change in the expected deviation rate will have the least effect on sample size.
D) A 10% change in the tolerable deviation rate will have the most effect on sample size.
Q2) Explain the effect on sample size of increasing each of the following: (1) tolerable exception rate, (2) estimated population exception rate, (3) acceptable risk of overreliance, and (4) population size.
Q3) Describe each of the four types of sample selection methods commonly associated with statistical audit sampling.
Q4) What is the key advantage and disadvantage associated with systematic sample selection?
How must auditors address this disadvantage?
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17
Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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130 Verified Questions
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Sample Questions
Q1) Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.
Q2) If the client's internal control for recording sales returns and allowances is evaluated as ineffective,
A) a larger sample may be needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation. D) all sales returns must be confirmed with the customer.
Q3) The understatement of sales and accounts receivable is best uncovered by A) testing internal controls.
B) testing the aged accounts receivable trial balance.
C) substantive tests of transactions for shipments made but not recorded.
D) substantive tests of transactions for bad debts.
Q4) As a test of the occurrence transaction-related audit objective for sales and the accuracy balance-related audit objective for accounts receivable, auditors can use audit data analytics to match, for example, cash receipts to invoiced sales amounts.
A)True
B)False
Page 18
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) An auditor uses monetary unit sampling with a sampling interval of $20,000 and detects an item with a recorded amount of $10,000 with an audited value of $4,000. The projected misstatement of the sample is
A) $12,000.
B) $6,000.
C) $10,000.
D) $3,000.
Q2) Which of the following would lead to a larger sample size?
A) low inherent risk
B) low control risk
C) larger tolerable misstatement
D) unsatisfactory results in other related substantive procedures
Q3) In monetary unit sampling, the likelihood of high dollar items from the population being included in the sample is lower than the likelihood for small dollar items.
A)True
B)False
Q4) Consider the steps in sampling for tests of details and for tests of controls. Explain the differences in applying sampling to these two types of tests.
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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) How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?
Q2) When reviewing the controls and procedures in the acquisition and payment cycle,
A) companies cannot record the liability for the acquisition until the invoice is received from the vendor.
B) the purchasing department has the responsibility for verifying for appropriateness of the acquisition.
C) personnel who record the acquisitions should not have access to cash or other assets.
D) the accounts payable department should account for all receiving reports to assure that the occurrence objective is satisfied.
Q3) Cutoff procedures for inventory purchased should be designed by companies to assure that
A) inventory owned by the company has been received.
B) inventory included in the year-end inventory count has been paid.
C) inventory received before year-end was recorded before year-end.
D) inventory was correctly valued at year-end.
Page 20
Q4) What are the three most important controls over cash disbursements?
Q5) List the four business functions in the acquisition and payment cycle.
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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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Sample Questions
Q1) Which is not one of the tests that would be used in the audit of equipment, depreciation expense, and accumulated depreciation?
A) Verify the ending balance in the asset account.
B) Send confirmations to the sales personnel who sold the equipment to the company.
C) Perform substantive analytical procedures.
D) Verify current year acquisitions.
Q2) A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of
A) existence.
B) presentation and disclosure.
C) detail tie-in.
D) classification.
Q3) Performance materiality is important for verifying current year additions because these transactions have consistent dollar amounts from year to year.
A)True
B)False
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Page 22
Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) When testing for fraudulent hours or fraudulent expense reports
A) it is easy for the auditor to discover fraudulent hours because of the abundance of available evidence.
B) it is difficult to prevent fraud in these two areas with adequate internal controls.
C) management falsification of expense reports can be an indicator of disregard for internal controls and the potential for fraud in other areas.
D) examining payroll records for approval is an important substantive test of transactions to uncover fraudulent hours.
Q2) The human resources department is considered to be an independent source for interviewing and hiring qualified personnel to work for a company.
A)True
B)False
Q3) Auditors typically test details of account balances in the audit of payroll. A)True
B)False
Q4) What events initiate and terminate the payroll and personnel cycle?
Q5) How do auditors commonly verify sales commission expense?
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23
Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) It is frequently possible to test the physical inventory prior to the balance sheet date when
A) the perpetual inventory records are accurate and related controls operate effectively.
B) year-end sales are small.
C) the internal control system is no better at year-end than at an earlier point in time.
D) the client counts inventory at interim dates.
Q2) An adequate cost accounting system is an important part of the processing of goods function for all manufacturing companies.
A)True
B)False
Q3) Inventory valuation issues include the estimation of inventory obsolescence and the allocation of manufacturing costs to inventory.
A)True
B)False
Q4) The audit of the inventory and warehousing cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.
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24
Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) When a company maintains its own records of stock transactions and capital stock outstanding, its internal controls must be adequate to accomplish three objectives. List them below.
Q2) An auditor is determining whether an issuance of notes payable for cash was correctly recorded. Her or his best course of action would be to A) confirm with the bond trustee as to the amount of bonds issued. B) confirm with the underwriter as to the appropriate market yield on the bonds. C) trace the cash received from the proceeds to the accounting records.
D) verify that the amount was included in a footnote disclosure.
Q3) The tests of details of balances procedure which requires the auditor to examine notes paid after year-end to determine whether they were liabilities at the balance sheet date is an attempt to satisfy the audit objective of A) existence.
B) completeness.
C) accuracy.
D) classification.
Q4) Name some of the auditing procedures the auditor should consider in auditing hybrid financial instruments.
Page 25
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Chapter 23: Audit of Cash and Financial Instruments
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Q1) Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits on the cutoff bank statement.
A)True
B)False
Q2) Auditing guidance is provided for auditing accounting estimates specifically for fair values estimates as considerable auditor judgment is involved.
A)True
B)False
Q3) Which of the following cycles does not affect cash in bank?
A) capital acquisitions cycle
B) inventory and warehousing
C) payroll and personnel cycle
D) acquisitions and disbursements
Q4) Auditors are likely to prepare a proof of cash when the client has
A) material internal control weaknesses in cash.
B) material internal control weaknesses in accounts receivable and revenue.
C) material internal control weaknesses in accounts payable and inventory.
D) material internal control weaknesses in payroll.
Q5) What should be audited on an interbank transfer schedule?
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Chapter 24: Completing the Audit
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Q1) Many of the audit procedures for finding contingencies are usually performed as an integral part of various segments of the audit rather than as a separate activity near the end of the audit.
A)True
B)False
Q2) If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion.
A)True
B)False
Q3) Although the letter of representation is typed on the client's letterhead and signed by the client, it is common for the auditor to prepare the letter.
A)True
B)False
Q4) Financial statement disclosure is required if the likelihood of occurrence of an event is probable, reasonably possible, or remote.
A)True
B)False
Q5) What are the three required conditions for a contingent liability to exist?
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) Like SSARS reviews, reviews for public companies do not provide a basis for expressing positive opinion level assurance. However, these two types of reviews differ in several areas. Name three of the four differences.
Q2) Statements on Standards for Attestation Engagements (SSAEs) are issued by the Auditing Standards Board of the AICPA.
A)True
B)False
Q3) Attestation standards allow a CPA to perform all but which of the following services for a forecast or projection?
A) compilation
B) review
C) examination
D) agreed-upon procedures
Q4) Which of the following is not one of the five Trust Services categories?
A) security
B) confidentiality
C) completeness
D) availability
Q5) Briefly describe each of the five Trust Services Categories.
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Q1) Unlike financial statement auditors, operational auditors cannot benefit from the use of data analytical tools to identify opportunities for improvements in operational efficiency and effectiveness.
A)True
B)False
Q2) Which of the following groups could be involved in an operational audit?
A) CPA firms
B) internal auditors
C) government auditors
D) All of the above could be involved.
Q3) The International Standards for the Professional Practice of Auditing list seven performance standards. List three.
Q4) Internal auditors are expected to add value to the organization through improved operational effectiveness. In addition, their responsibilities include all the following except
A) reviewing the reliability and integrity of information.
B) ensuring compliance with the company's accounting policies.
C) verifying accounting information for external users.
D) ensuring compliance with applicable governmental regulations.
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