Internal Auditing Exam Questions
Course Introduction
Internal Auditing is a comprehensive course designed to introduce students to the principles, procedures, and practices of auditing within organizations. The course explores the role of internal auditors in risk management, governance, and internal control processes, emphasizing their contribution to organizational effectiveness and integrity. Topics include audit planning and reporting, evaluation of internal controls, performing audit fieldwork, and communicating audit results. Students will also examine ethical considerations and standards relevant to the internal audit profession, as well as the use of technology in auditing practices. The course combines theoretical frameworks with practical case studies to prepare students for real-world auditing environments.
Recommended Textbook
Auditing and Assurance Services 6th Edition by Timothy J. Louwers
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Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) Assurance services involve all of the following,except
A) relevance as well as the reliability of information.
B) nonfinancial information as well as traditional financial statements.
C) providing absolute rather than reasonable assurance.
D) electronic databases as well as printed reports.
Answer: C
Q2) Which of the following is not included in The American Accounting Association (AAA)definition of auditing?
A) Potential conflict of interest
B) Systematic process
C) Assertions about economic actions
D) Established criteria
Answer: A
Q3) In performing an attestation engagement,a CPA typically
A) supplies litigation support services.
B) assesses control risk at a low level.
C) expresses a conclusion on an assertion about some type of subject matter.
D) provides management consulting advice.
Answer: C
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Chapter 2: Professional Standards
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Sample Questions
Q1) Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards?
A) The PCAOB issues auditing standards for the audit of public entities, subject to SEC approval
B) Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities
C) If not superseded by the PCAOB, Statements on Auditing Standards issued prior to 2003 are applicable to the audit of public entities
D) Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both public and private entities
Answer: B
Q2) The Public Company Accounting Oversight Board was established by which of the following?
A) The Financial Accounting Standards Board
B) The American Institute of Certified Public Accountants
C) The Sarbanes-Oxley Act of 2002
D) The International Accounting Standards Board
Answer: C
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Chapter 3: Engagement Planning
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Sample Questions
Q1) Which of the following is not considered an accounting estimate?
A) Allowance for loan losses
B) Credit sales
C) Net realizable value of inventory
D) Percentage-of-completion revenue to be recorded
Answer: B
Q2) Which of the following factors should an external auditor obtain updated information about then assessing an internal auditor's competence?
A) The reporting status of the internal auditor within the organization.
B) The educational level and professional experiences of the internal auditor.
C) Whether policies prohibit the internal auditor from auditing areas where relatives are employed.
D) Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.
Answer: B
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Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) The acceptable level of detection risk is inversely related to the A) assurance provided by substantive tests.
B) risk of misapplying audit procedures.
C) preliminary judgment about materiality levels.
D) risk of failing to discover material misstatements.
Q2) Which of the following accounts tends to be most predictable for purposes of analytical procedures?
A) Accounts receivable
B) Travel and entertainment expense
C) Interest expense
D) Income taxes payable
Q3) Analytical procedures are most appropriate when testing which of the following types of transactions?
A) Payroll and benefit liabilities
B) Acquisitions and disposals of fixed assets
C) Operating expense transactions
D) Long-term debt transactions
Q4) What are the independent auditor's responsibilities to detect and report errors and frauds?
Q5) Why is it important for auditors to understand their clients' business risks?
Page 6
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) In an audit of financial statements,an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity
A) reflects management's philosophy and operating style.
B) affects management's financial statement assertions.
C) provides adequate safeguards over access to assets.
D) enhances management's decision making processes.
Q2) Which of the following procedures is considered a test of controls?
A) An auditor reviews the entity's check register for unrecorded liabilities.
B) An auditor evaluates whether a general journal entry was recorded at the proper amount.
C) An auditor interviews and observes appropriate personnel to determine segregation of duties.
D) An auditor reviews the audit workpapers to ensure proper sign-off.
Q3) Which of the following is an Information Technology General Control?
A) Check digit
B) Run-to-run totals
C) Distribution of computerized output
D) Separation of duties in the IT department
Q4) List and explain briefly the phases of an internal control evaluation.
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Chapter 6: Employee Fraud and the Audit of Cash
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Q1) What kind of error or fraud could happen if the inventory warehouse manager also had responsibility for making the physical inventory count and reconciling discrepancies to the perpetual inventory records?
Q2) To provide assurance that each voucher is submitted and paid only once,an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is
A) supported by a vendor's invoice.
B) stamped "paid" by the check signer.
C) prenumbered and accounted for.
D) approved for authorized purchases.
Q3) An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion.The auditor need not perform this omitted procedure if
A) the results of alternative procedures that were performed compensate for the omission.
B) the auditor's assessed level of detection risk is low.
C) the omission is documented in a communication with the audit committee.
D) no individual investment is material to the financial statements taken as a whole.
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Chapter 7: Revenue and Collection Cycle
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Q1) While performing interim audit procedures of accounts receivable,numerous unexpected errors are found resulting in a change of risk assessment.Which of the following audit responses would be most appropriate?
A) Move detailed analytical procedures from year end to interim.
B) Increase the dollar threshold of vouching customer invoices.
C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations.
D) Use more experienced audit team members to perform year-end testing.
Q2) Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?
A) "This amount was paid on December 30<sup>th</sup>."
B) "We received this shipment on January 2<sup>nd</sup>."
C) "These goods were returned for credit on November 15<sup>th</sup>."
D) "The balance does not reflect our sales discount for paying by January 5<sup>th</sup>."
Q3) Confirmations provide evidence of _________________________________ and,to a limited extent,________________________________ of accounts and notes receivable.
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Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) If internal controls over the expenditure cycle are weak,auditors will need to design substantive procedures to try to detect whether control failures have produced misleading financial statement account balances.
A)True
B)False
Q2) Which of the following accounts would most likely be audited in connection with a related balance sheet account?
A) Property tax expense.
B) Payroll expense.
C) Research and development.
D) Legal expense.
Q3) The ________________________________________ is a set of procedures designed to yield audit evidence of liabilities that were not recorded in the reporting period.
Question also found in study guide
Q4) Purchases are requisitioned by a purchasing department that seeks the best prices and quality.
A)True
B)False
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Chapter 9: Production Cycle
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Q1) Which of the following is the assertion with the highest inherent risk in auditing inventory?
A) Completeness.
B) Rights.
C) Existence.
D) Properly classification on the balance sheet.
Q2) Inventory observation must be observed if inventory is one of the major assets listed on the balance sheet.
A)True
B)False
Q3) Your client counts inventory three months before the end of the fiscal year.Internal controls over inventory are excellent.Which procedure is not necessary for the inventory roll-forward?
A) Check that shipping documents for the last three months agree with perpetual records.
B) Tracing receiving reports for the last three months to perpetual records.
C) Compare gross margin percentages for the last three months.
D) Request the client to recount inventory at the end of the year.
Q4) A production order usually includes a
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Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) In auditing intangible assets,an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of A) valuation.
B) existence.
C) completeness.
D) rights and obligations.
Q2) Which of the following would not be a place in which owners' equity transactions would be documented?
A) Capital budget.
B) Minutes of the meetings of the board of directors.
C) Proxy statements.
D) Securities offering registration statements.
Q3) The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to
A) evaluate internal control over securities.
B) determine the validity of prepaid interest expense.
C) ascertain the reasonableness of imputed interest.
D) detect unrecorded liabilities.
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Chapter 11: Completing the Audit
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Sample Questions
Q1) Which of the following procedures is not used in auditors' examination of litigation,claims,and assessments?
A) Obtaining a description and evaluation of litigation, claims, and assessments from management
B) Examining documentary evidence regarding litigation, claims, and assessments
C) Reading minutes of meetings of stockholders, directors, and appropriate committees
D) Performing analytical procedures
Q2) Auditors try to identify predictable relationships when using analytical procedures.Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
A) Accounts receivable
B) Interest expense
C) Accounts payable
D) Travel and entertainment expense
Q3) Define what is meant by the term "subsequent event".In addition,identify the two types of subsequent events and indicate how auditors should modify the engagement for the discovery of subsequent events.
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Chapter 12: Reports on Audited Financial Statements
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Sample Questions
Q1) SEC registrants' financial statements should be accompanied by all of the following reports except
A) auditors' report on internal control over financial reporting.
B) management's report on internal control over financial reporting.
C) auditors' report on financial statements and related disclosures.
D) management's report on financial statements and related disclosures.
Q2) If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable,the opinion on the entity's financial statements should be unmodified and would
A) disclose the fact that alternative procedures were used due to client-imposed scope limitation.
B) disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
C) not mention the alternative procedures.
D) include an other-matter paragraph that discloses the performance of alternative procedures.
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Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) The procedures used in a review engagement are
A) physical examination, reperformance, and obtaining a management representation letter.
B) analytical procedures, reperformance, and obtaining a management representation letter.
C) analytical procedures, inquiry, and obtaining a management representation letter.
D) physical examination, inquiry, and obtaining a management representation letter.
Q2) During a review engagement,which of the following is NOT a required inquiry of management?
A) The accounting principles and practices used
B) Significant transactions occurring near the end of the reporting period
C) Status of uncorrected misstatements identified in previous engagements
D) The changes made to internal controls during the period under review
Q3) In an agreed-upon procedures engagement,an accountant
A) follows all of the Fundamental Principles of GAAS.
B) restricts the report to specified users.
C) includes negative assurance in the report.
D) gives a qualified audit report.
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Chapter 14: Professional Ethics
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Sample Questions
Q1) Dara & Co.Audit Hill Corporation.Ellie is the engagement partner on the audit with an office in Buffalo Grove.Which of the following would NOT be considered a covered member?
A) Jason, who is a member of the attest engagement team with an office in Elmhurst
B) Adam, who is a tax partner and provided 50 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst
C) Ben, a partner in Dara & Company, with an office in Buffalo Grove
D) Julie, a partner in Dara & Company, with an office in Elmhurst
Q2) According to Rule 203,Accounting Principles,requires the auditor to adhere to official pronouncements except when
A) complying would violate client confidentiality.
B) pending legislation may change the reporting requirements of the client.
C) adherence to a pronouncement would be misleading.
D) it has been established that financial statement users prefer an alternative presentation of information.
Q3) What is the role of the PCAOB's Division of Enforcement and Investigation in dealing with independence violations involving accountants engaged to audit public companies?
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Chapter 15: Legal Liability
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Sample Questions
Q1) Lauren hires Humphrey,a CPA,to audit her financial statements.The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan.Humphrey completes the audit and issues an unqualified opinion.Based on the audited financial statements,Key Largo Bank approves the loan to Lauren.Four months later,Lauren files for bankruptcy.Key Largo Bank would most likely sue Humphrey claiming A) it was in privity of the contract. B) it was a primary beneficiary. C) it was a foreseen party.
D) it was a foreseeable party.
Q2) Failure to provide any level care in fulfilling a duty owed to another party,including reckless disregard for the truth,is called A) breach of contract. B) ordinary negligence. C) privity.
D) constructive fraud.
Q3) Briefly explain the concept of proportionate liability.Why is the adoption of proportionate liability important to the accounting profession?
Q4) What are the legal liabilities of auditors under common law?
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Chapter 16: Internal Audits governmental Audits and Fraud
Examinations
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Sample Questions
Q1) What are the different types of government audits?
Q2) Explain briefly the purpose and requirements under the Single Audit Act.
Q3) Fraud examiners have four main objectives in performing an investigation.Which of the following is not one of those objectives?
A) Determine whether a fraud exists.
B) Determine who was involved in the fraud.
C) Determine how the fraud occurred.
D) Determine the effect on financial statement users.
Q4) Senior management has ordered a compliance audit of the organization's employee benefits package.Which of the following do both the chief audit executive and senior management consider a primary engagement objective?
A) The level of the organizational contributions is adequate to meet the program's demands.
B) Individual programs are operating in accordance with contractual requirements and government regulations.
C) Participation levels support continuation of individual programs.
D) Benefits payments, when appropriate, are accurate and timely.
Q5) What are the different types of internal audits?
Q6) How do government auditors achieve objectivity?
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Chapter 17: Overview of Sampling
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Q1) Select the description that best illustrates sampling risk.
A) Applying audit procedures, which are inappropriate for the audit objectives
B) Failing to recognize misstatements or deviations in the documents examined
C) Arriving at incorrect statistical conclusions due to computational errors
D) Choosing a sample which has proportionately more errors than the population
Q2) In sampling,an individual makes a statement about a _____ of interest by examining a _____ (or subset)of items.
A) sample; population
B) sampling unit; population
C) population; sample
D) population; sampling unit
Q3) Place the following steps in the sampling process in the order in which they are performed. 1 = Measure sample items
2 = Select sample items
3 = Define the population
A) 1, 2, 3
B) 3, 1, 2
C) 2, 1, 3
D) 3, 2, 1
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Chapter 18: Attributes Sampling
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Q1) For which of the following audit tests would an auditor most likely use attributes sampling?
A) Inspecting purchase orders for proper approval by supervisors
B) Making an independent estimate of recorded payroll expense
C) Determining that all payables are recorded at year end
D) Selecting accounts receivable for confirmation of account balances
Q2) The sampling plan for nonstatistical sampling is the same as statistical sampling except for which of the following steps?
A) Define the characteristic of interest.
B) Define the population.
C) Measure the sample items.
D) Evaluate the sample results.
Q3) A sampling plan in which an initial sample is selected and the audit team either draws a final conclusion or selects additional items before drawing a final conclusion is called
A) attributes sampling.
B) discovery sampling.
C) sequential sampling.
D) statistical sampling.
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Chapter 19: Variables Sampling
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Sample Questions
Q1) Which of the following statements is not true regarding variables sampling?
A) Two approaches to variables sampling are monetary unit sampling and classical variables sampling.
B) Both statistical and nonstatistical approaches to variables sampling can be used under GAAS.
C) The objective of variables sampling is to estimate either the true balance or the extent of misstatement in an account balance or class of transactions.
D) Variables sampling is appropriate when the distribution of the population is binary in nature.
Q2) A number of factors influence the sample size for a variables sampling application.All other factors held constant,which of the following would lead to a larger sample size?
A) A lower assessed level of risk of material misstatement
B) Increased use of analytical procedures to obtain evidence about particular assertions
C) Lower frequency and magnitude of misstatements
D) Lower levels of tolerable misstatement
Q3) You are planning to use monetary unit sampling to evaluate accounts receivable for
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Chapter 20: Auditing and Information Technology
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Q1) Which of the following is a category of general controls?
A) Detective controls
B) Input controls
C) Processing controls
D) Program change controls
Q2) Which of the following is not an example of a general control?
A) The organization's use of the systems development life cycle when implementing or modifying computerized processing systems
B) The organization's use of check digits to ensure accurate input of transaction data
C) Periodic and preventative maintenance performed on the computer and related equipment
D) The existence of appropriate separation of duties within the computer department
Q3) Audit teams would least likely use computer-assisted audit techniques to
A) access client data files.
B) prepare spreadsheets.
C) assess control risk related to computerized processing systems.
D) construct and perform parallel simulations.
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