Internal Auditing Exam Review
Course Introduction
Internal Auditing provides an in-depth exploration of the principles, practices, and standards governing the internal audit function within organizations. The course covers the role of internal auditing in risk management, control, and governance processes, examining frameworks such as the International Standards for the Professional Practice of Internal Auditing. Students learn about planning and conducting audit engagements, assessing internal controls, and reporting audit findings, while emphasizing ethical considerations, independence, and the evolving use of technology in auditing. Through case studies and practical examples, the course prepares students to contribute to organizational accountability, efficiency, and integrity.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by Alvin A. Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) When readers are cautioned that the financial statements may not be appropriate for their purposes, the non-assurance service is called a(n)
A) SysTrust.
B) compilation.
C) review.
D) audit.
Answer: B
Q2) Which of the following is an example of an attestation engagement?
A) accounting and bookkeeping services for the accounts
B) an audit of internal controls over financial reporting
C) preparation of the annual financial statements with notes
D) completion of provincial and federal tax returns
Answer: B
Q3) Who is responsible for developing financial statement audit and assurance standards in Canada?
A) AASB (Auditing and Assurance Standards Board)
B) standards staff at the CICA (Canadian Institute of Chartered Accountants)
C) national accounting bodies such as CGA Canada
D) the accounting firms who conduct financial statement audits
Answer: A
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) How do practice inspections affect the ability of a PA firm to have articling students work at the firm? Practice inspectors
A) only permit students to work there if the quality controls are good.
B) review the ability of the office to provide sufficient, appropriate hours.
C) require that students work only on audit engagements, not reviews.
D) consider only work completed by qualified PAs, not students.
Answer: B
Q2) CPAB's purpose is to
A) develop auditing standards.
B) provide training and continuing education to auditors.
C) clarify and communicate the role of the auditor to the public.
D) improve the public's confidence in independent auditing.
Answer: D
Q3) Canadian Auditing Standards (CASs) require that an audit be conducted using
A) a controls-testing approach.
B) a risk-assessment approach.
C) a substantive approach.
D) a standard approach.
Answer: B
Page 4
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Chapter 3: Legal Liability
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Sample Questions
Q1) Small Town Lumberyard Limited (STLL) needed an additional bank loan to finance its operations. To make its financial statements look better, the company overstated its inventory and overstated its accounts payable. The auditors did not detect this deliberate misstatement because they conducted limited tests of inventory and did not confirm accounts payable. Other auditors agreed that the procedures conducted during this audit were inadequate. The auditors of STLL would likely be considered to be A) guilty of fraud.
B) negligent.
C) contributorily negligent with STLL.
D) guilty of constructive fraud.
Answer: B
Q2) The standard of due care to which the auditor is expected to be held is referred to as the
A) prudent person concept.
B) common law doctrine.
C) due care concept.
D) reckless regard doctrine.
Answer: A
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Page 5
Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? The
A) auditor's chequing account, which is fully insured by CDIC, is held at a client financial institution.
B) client comprises 75% of the auditor's fees.
C) auditor does not have enough employees to meet the client's reporting deadline.
D) client owes the auditor fees for two consecutive annual audits.
Q2) Kimora is a senior manager at a public accounting firm. Kimora was assigned to the audit of Toble Corp. Upon arriving at the client, Kimora met with the controller, Brad, who was a classmate in college, 20 years ago. She had not been in contact with Brad since college, but they realized that they still had many friends in common. Brad invited Kimora to go to the company box to watch a hockey game and catch up.
Discuss the issue of independence between Kimora and Toble Corp.
Q3) What are the common judgement traps and how can they be avoided?
Q4) List the components of the auditor's professional judgment framework.
Q5) What are the qualities of professional skepticism?
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) Camilla is preparing the audit program for the inventory of Summers, a large department store. Camilla listed "select a sample of invoices from suppliers to verify that the risks and rewards of the inventory were transferred to Summers." Camilla is concerned that some of the inventory in the store might be on consignment. The account-balance-related objective that Camilla is concerned about is
A) rights and obligation (ownership).
B) accuracy.
C) valuation.
D) existence.
Q2) Professional skepticism during the financial statement audit requires an appropriate state of mind, being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind?
A) not having any ownership in the client's shares or being a debt-holder
B) carefully assessing documents and not being the company's advocate
C) matching documents to make sure that they are accurate and fair
D) being aware that there could be material misstatements in the financial statements
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) In addition to direct impacts on the financial statements, the auditor also needs to consider indirect effects. An assessment of client objectives and strategies can reveal issues that could lower income or cause contingent liabilities. Which of the following could cause lost sales, increases in warranty expenses, and product liability claims?
A) poor product quality
B) excessive advertising
C) ineffective projections
D) inaccurate budgets
Q2) There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing prepaid expenses and related expense accounts with those of prior years?
A) to understand the client's industry and business
B) to assess going concern
C) to identify possible misstatements
D) to reduce tests of controls
Q3) The Canadian Auditing Standards state that the auditor must develop an audit plan. List and explain the components that must be included in the auditor's plan.
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8
Chapter 7: Materiality and Risk
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Sample Questions
Q1) The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?
A) an error in accounts receivable cutoff of $50 000
B) an overstatement of accounts payable by $15 000
C) an error in allocation between accounts receivable and accounts payable by $75 000
D) an illegal payment of $15 000
Q2) An inherent risk (IR) of 40% and a control risk (CR) of 60% affect detection risk and planned evidence differently than an
A) IR of 60% and CR of 40%.
B) IR of 100% and CR of 24%.
C) IR of 80% and CR of 30%.
D) IR of 70% and CR of 30%.
Q3) Further possible misstatement considers
A) possible presence of management fraud.
B) possible lack of knowledge of the audit team.
C) imprecision in the sampling process.
D) imprecision in the audit procedures.
Q4) Discuss three factors that affect client business risk and therefore audit risk.
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) FiddleWare Limited uses a purchased software package to handle the processing of its transactions. An important control that management should implement with respect to information systems is the A) use of a formal systems development methodology.
B) evaluation of potential new systems against organizational objectives.
C) use of appropriate checkpoints and milestones during development.
D) tracking of routine program maintenance changes.
Q2) Once an understanding of internal controls is obtained that is sufficient for audit planning, then the auditor must first assess A) whether a lower level of control risk could be supported.
B) whether the financial statements are auditable.
C) the level of control risk supported by the understanding obtained.
D) the level of control risk to use.
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Evidence is usually more persuasive for balance sheet accounts when it is obtained
A) from various time periods throughout the client's year.
B) only from transactions occurring on the balance sheet date.
C) as close to the balance sheet date as possible.
D) from the time period when transactions in that account were most numerous during the fiscal period.
Q2) An example of vouching would be to trace from
A) receiving reports to the acquisitions journal.
B) the acquisitions journal to supporting vendor invoices.
C) duplicate bank deposit slips to the cash receipts journal.
D) cancelled cheques to the cash disbursement journal.
Q3) When the current year's unaudited trial balance amounts are compared to the prior year's audited trial balance amounts,
A) errors are identified.
B) discrepancies are discovered.
C) irregularities become apparent.
D) significant changes in balances are highlighted.
Q4) Identify and explain the three determinants of the persuasiveness of evidence.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) A planned approach to the conduct of audit testing, taking into account assessed risks, is called an
A) audit approach.
B) audit plan.
C) audit program.
D) audit strategy.
Q2) There will be heavy emphasis on tests of controls when
A) controls are ineffective and assessed control risk is high.
B) controls are effective and assessed control risk is low.
C) the auditor is doing a "fraud audit."
D) it is a first-year audit.
Q3) Which of the following audit tests is usually the most costly to perform?
A) analytical procedures
B) tests of controls
C) tests of details of balances
D) procedures to obtain an understanding of internal control
Q4) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) You have just been given the approval to conduct statistical sampling for the audit of capital assets acquisitions. Previously, this work was completed using a judgmental sample.
Required:
Explain the key areas where decisions need to be made when conducting audit work using a statistical sample.
Q2) The auditor wants to trace credits from the accounts receivable transaction history files to the duplicate bank deposit slips and other authorized sources as a test for fictitious credits in the data files. Which of the following sampling methods would be the least costly to use in this situation?
A) simple random
B) block
C) systematic
D) probability proportionate-to-size
Q3) The most common method used for performing statistical tests of controls is
A) variables sampling.
B) attribute sampling.
C) judgment sampling.
D) random selection of samples.
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Page 13
Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) A) State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for sales.
Q2) There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective?
A) avoiding recording of returns and allowances for the year
B) recording subsequent period sales as current period sales
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue
Q3) Audit risk is assessed for
A) the financial statements as a whole and is not usually allocated to various accounts or objectives.
B) the financial statements as a whole and then allocated to various accounts.
C) various accounts but not for the financial statements as a whole.
D) various accounts and objectives, and the sum is then assigned to the financial statements as a whole.
Q4) Outline the key areas that the auditor would review as part of general controls.
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The tests of details of balances procedure for manufacturing equipment that requires the auditor to examine vendors' invoices of closely related accounts (such as repairs and maintenance) to uncover items that should be manufacturing equipment would satisfy the audit objective of
A) detail tie-in.
B) existence.
C) classification.
D) accuracy.
Q2) Segregation of duties has an important role in providing for good quality internal controls. Which of the following segregation of duties improve controls over the inventory and distribution cycle?
A) the purchasing department should not be responsible for updating the economic order quantity
B) the accounting staff should not be responsible for the data entry of supplier invoice detail
C) the inventory transaction processing systems should not be accessible to the receiving department
D) the purchasing department should not be responsible for authorizing the acquisition of or receiving the goods
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory. The audit objective being achieved by this procedure is
A) inventory as recorded on tags exists (existence).
B) existing inventory is counted and tagged (completeness).
C) inventory is counted accurately (accuracy).
D) inventory is classified correctly (classification).
Q2) A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-covered, or located in inappropriate places. The balance-related audit objective achieved by this procedure is A) classification.
B) cutoff.
C) valuation.
D) rights.
Q3) A) Discuss the key control procedures relating to the client's physical count of inventory.
B) State the primary determinants of the amount of time needed to perform the physical observation of inventory.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) A) Discuss three important differences between the human resources and payroll cycle and other cycles in a typical audit.
B) Describe each of the six business functions in a typical human resources and payroll cycle.
C) Describe each of the primary documents and records used in the timekeeping and payroll preparation function in the payroll and personnel cycle.
D) Discuss each of the primary documents and records used in 1) the payment of payroll function, and 2) the preparation of employee withholdings and benefits remittance forms function in the payroll and personnel cycle.
Q2) The internal auditor is running a computer-assisted audit test that compares names and wage rates in the personnel files (stored on optical disk) with the wage rates in the payroll master file and the whole year's payroll transaction files. What is the purpose of these tests?
A) to determine whether any employees were not paid in the most recent pay
B) to check for wage rates that are under the amount specified by the union contract
C) to help with the reconciliation of wage rates to the T4 summary
D) to determine whether terminated employees are still being paid
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Page 17
Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) When a dividend is declared by the board, the source for determining who should receive dividend cheques is the
A) shareholders' capital stock register or master file.
B) stock certificate books.
C) common stock account in the general ledger.
D) corporate directory.
Q2) The normal starting point for the audit of notes payable is
A) a discussion with management of any new notes payable for the year.
B) a schedule of notes payable and accrued interest obtained from the client.
C) the assessment of materiality.
D) the minutes of the board of directors.
Q3) The emphasis in the audit of dividends is on
A) ending equity balance.
B) transactions.
C) opening dividends payable balance.
D) confirming the number of shares outstanding.
Q4) Discuss the overall objectives of the audit of notes payable.
Q5) State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.
Q6) Describe the risks of error and fraud in the debt or equity accounts. Page 18
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Page 19
Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) Which of the following is a common analytical procedure that may detect misstatements in cash?
A) calculation of inventory turnover and gross profit
B) review of amounts included in the earnings-per-share calculations
C) comparison of outstanding cheques and deposits in transit with the prior year bank reconciliation
D) comparison of gross sales on a month by month basis with the prior year
Q2) Testing to ensure that bank transfers are recorded in both the receiving and disbursing banks helps to detect evidence
A) that would reduce inherent risk to a minimum.
B) associated with an attempt to conceal a theft of cash.
C) that increases reliability with respect to the accuracy of the transfer schedule.
D) that would warrant decreasing control risk to a minimum.
Q3) A) Describe each of the major types of cash accounts maintained by business entities.
B) Discuss the advantages of using an imprest bank account for payroll transactions.
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Chapter 18: Completing the Audit
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Sample Questions
Q1) In addition to the financial statements, MD&A (management discussion and analysis) are appended to the financial statements to inform users of management's expectations for the foreseeable future, as well as to provide management's assessment of the financial results. MD&A is prepared primarily because it is A) an additional piece of evidence used by auditors to assess the financial statements. B) generally required by securities regulators in Canada.
C) an unbiased view of the prospective future results of the company. D) required so that the company can borrow more funds or sell more shares to the public.
Q2) You sent a legal letter to a lawyer who had invoiced your client. The lawyer replied that "his practice consists of conducting real estate closings, and so he could not respond to the letter." What impact does this have on the financial statement audit?
A) There is no impact upon the financial statement audit.
B) The audit opinion will need to be qualified.
C) The auditor will need to provide a denial of opinion.
D) Additional information is needed by reference to legal invoices from this lawyer.
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Page 21
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) Clark Kent is a PA partner at the firm of Kent, Lane, and Lang, a limited liability partnership. Kent's firm has just completed the audit of a client with a March 31, 2015, year end. How should the audit report be signed?
A) Clark Kent, PA
B) Kent, Lane, and Lang, LLP
C) Clark Kent, LLP
D) Kent, Lane, and Lang, PAs
Q2) The ASPE (Accounting Standards for Private Enterprises) financial reporting framework normally requires the auditor to report using the corresponding figures approach. This means that the auditor reports on
A) the current year's financial statements.
B) both periods under audit: the current and prior year.
C) three years: the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
Q3) According to CAS 700, the standard unqualified report's title should be
A) "Unqualified Report of the Auditor."
B) "Audited Financial Statements."
C) "Auditor's Report."
D) "Independent Auditor's Report."
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Page 22
Chapter 20: Other Assurance and Nonassurance Services
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Q1) Which of the following components of an engagement letter would apply to both a review engagement and a compilation engagement?
A) negative assurance will be provided so there is no assurance that fraud will be detected
B) no assurance will be provided since only mathematical accuracy will be verified
C) procedures used during the engagement will be limited to analytical review and inquiry
D) a statement that an audit is not to be performed and that no opinion will be expressed
Q2) An engagement for applying specified auditing procedures to financial information other than financial statements provides no assurance. This results in
A) a report that can be readily tailored to any type of engagement.
B) a broad set of audit procedures being conducted for specific information.
C) frequent disagreement between auditor and client with respect to results.
D) distribution of the report normally being restricted.
Q3) Define "assurance engagements."
Q4) Identify the reporting standards for compilation engagements.
Q5) Define "attestation engagements."
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