Internal Auditing Practice Exam
Course Introduction
Internal Auditing is a comprehensive course that introduces students to the principles and practices of evaluating and improving an organizations operations through independent, objective assurance and consulting activities. Students will explore the internal audit process, risk management, internal control systems, compliance, and governance frameworks. The course covers audit planning, evidence gathering, reporting, and communication with stakeholders, while emphasizing ethical considerations and professional standards such as those outlined by the Institute of Internal Auditors (IIA). Practical case studies and exercises help students develop the analytical and critical thinking skills necessary for effective internal auditing within various organizational contexts.
Recommended Textbook
Auditing and Assurance Services 7th Edition by Timothy J Louwers
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20 Chapters
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Page 2
Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) What type of evidence would provide the highest level of assurance in an attestation engagement?
A)Evidence secured solely from within the entity.
B)Evidence obtained from independent sources.
C)Evidence obtained indirectly.
D)Evidence obtained from multiple internal inquiries.
Answer: B
Q2) If an auditor is performing procedures related to the information that is contained in the client's pension footnote,he/she is most likely obtain evidence concerning management's assertion about A)rights and obligations.
B)existence.
C)valuation.
D)presentation and disclosure.
Answer: D
Q3) What are the four basic requirements for becoming a CPA?
Answer: Education,the CPA Examination,experience,and a state certificate.
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Chapter 2: Professional Standards
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Sample Questions
Q1) A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as
A)Due care
B)Independence
C)Professional judgment
D)Professional skepticism
Answer: A
Q2) Internal evidence
A)Is obtained directly from third parties independent of the client.
B)Originates outside of the client's system but has been received and processed by the client.
C)Consists of documents that are produced,used,and stored within the client's information system.
D)Consists of representations made by the client's officers,directors,owners,and employees.
Answer: C
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4
Chapter 3: Engagement Planning
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Sample Questions
Q1) Which of the following use of computer-assisted audit techniques (CAATs)would most likely be considered a search for fraudulent activities?
A)Selecting customers' accounts receivable for confirmation
B)Recalculating inventory extensions
C)Scanning accounts receivable balances for amounts over the credit limit
D)Comparing a list of vendor addresses to employee address files
Answer: D
Q2) The pre-engagement activities of an audit engagement for a public accounting firm do not include
A)evaluating the public accounting firm's independence with regard to the audit engagement.
B)obtaining predecessor audit documentation.
C)obtaining an engagement letter.
D)ensuring that there are sufficient firm resources to complete the engagement on a timely basis.
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) When determining the inherent risk related to an account balance,an auditor theoretically does not explicitly consider the A)liquidity of the account.
B)degree of management estimation involved in determining the proper account balance.
C)related internal control policies and procedures.
D)complexity of calculations involved.
Q3) Inherent risk and control risk differ from detection risk in which of the following ways?
A)Inherent risk and control risk are calculated by the client.
B)Inherent risk and control risk exist independently of the audit.
C)Inherent risk and control risk are controlled by the auditor.
D)Inherent risk and control risk exist as a result of the auditor's judgment about materiality.
Q4) Why is it important for auditors to understand their clients' business risks?
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) Which of the following statements is correct regarding internal control?
A)A well-designed internal control environment ensures the achievement of an entity's control objectives.
B)An inherent limitation to internal control is the fact that controls can be circumvented by management override.
C)A well-designed and operated internal control environment should detect collusion perpetrated by two people.
D)Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.
Q2) Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control?
A)To serve as a basis for constructive suggestions
B)To plan subsequent substantive tests
C)To identify types of possible misstatements that may occur
D)To consider factors that may affect the risk of material misstatement
Q3) List and explain briefly the phases of an internal control evaluation.
Q4) What is the difference between a significant deficiency and a material weakness?
Q5) List several elements of a company's control environment.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the
A)check register for the last month is reviewed.
B)cutoff bank statement is reconciled.
C)bank confirmation is reviewed.
D)search for unrecorded liabilities is performed.
Q2) An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if
A)the illegal act is a violation of generally accepted accounting principles.
B)the client does not take the remedial action that the auditor considers necessary.
C)the illegal act was committed during a prior year that was not audited.
D)the auditor has already assessed control risk at the maximum level.
Q3) After checks are signed for vendor invoices,why should vouchers be marked "paid" or otherwise mutilated?
Q4) Describe how a lockbox works and indicate the advantages of such a system.
Q5) List,and briefly describe,the three factors that increase the probability of fraud.
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Page 8
Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) To conceal defalcations involving receivables,a dishonest bookkeeper might charge which of the following accounts?
A)Miscellaneous income.
B)Petty cash.
C)Miscellaneous expense.
D)Sales returns.
Q2) Which of the following internal control activities most likely would deter lapping of collections from customers?
A)Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.
B)Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
C)Separation of duties between receiving cash and posting the accounts receivable ledger.
D)Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
Q3) Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.
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9
Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) An audit plan for accounts payable would not include which of the following procedures?
A)Obtaining a trial balance of recorded accounts payable.
B)Sending confirmation to accounts with zero balances.
C)Reviewing cash receipts for the period after year-end.
D)Obtaining written client representations about related-party payables and pledges of assets as collateral for liabilities.
Q2) A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day.This policy was most likely adopted to
A)Ensure that employees who were absent on a payroll distribution day are not paid for that day.
B)Prevent the paymaster from cashing checks that are unclaimed for several weeks.
C)Prevent a bona fide employee's check from being claimed by another employee.
D)Detect any fictitious employee who may have been placed on the payroll.
Q3) ...
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Chapter 9: Production Cycle
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Sample Questions
Q1) With a sample of open and closed production cost reports,vouching labor cost to ________________________________ is a test for
Reference: Question also found in study guide
Q2) Auditors record the last bill of lading used at the time of the inventory count to
A)Search for unrecorded sales.
B)Test cutoff.
C)Verify ownership.
D)All of the above.
Q3) An inventory trial balance can be used to scan for __________________________________ and as a population for sample selection for the ______________________________________.
Reference: Question also found in study guide
Q4) Prepare an audit plan for inventory pricing and compilation.
Q5) The physical observation procedures for inventory are principally designed to audit for the balance assertions of
Reference: Question also found in study guide
Q6) Prepare an audit plan for the observation of an inventory count.
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Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) A derivative instrument is designed to remove risk of adverse price movements from a transaction.
A)True
B)False
Q2) Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for
A)accounting.
B)valuation or allocation.
C)completeness.
D)existence or occurrence.
Q3) Records of stock and bond certificates are usually maintained by the company's A)treasurer.
B)chief financial officer.
C)transfer agent.
D)registrar.
Q4) The ASB balance assertion of _____________________________ is paramount in the verification of long-term liabilities and determination that all liabilities are recorded.
Question also found in study guide
Q5) ...
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Chapter 11: Completing the Audit
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Sample Questions
Q1) Management letters are not a means of
A)Reporting recommendations to the client.
B)Assisting the client in improving its operations.
C)Satisfying professional requirements to communicate matters related to the client's internal control.
D)Developing rapport with the client.
Q2) Which of the following events or activities may occur following the audit report release date?
A)Interim testing.
B)Roll-forward work.
C)Subsequent events.
D)Subsequently discovered facts.
Q3) To whom should written representations be addressed?
A)Auditors.
B)Board of directors.
C)Client.
D)Stockholders.
Q4) 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) In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?
A)The Auditor's Responsibility section.
B)The opinion paragraph.
C)An emphasis-of-matter paragraph following the opinion paragraph.
D)An emphasis-of-matter paragraph before the opinion paragraph.
Q2) When reporting on financial statements that include only summarized totals of account balances,the auditors' conclusion should state whether the information in the summary financial statements
A)Is complete with respect to disclosures required by the SEC.
B)Is fairly stated,in all material respects,in accordance with generally accepted accounting principles.
C)Is consistent,in all material respects,with the prior years' summary financial statements.
D)Is fairly stated,in all material respects,in relation to the complete financial statements.
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14
Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) Extensible Business Reporting Language (XBRL)provides a computer readable identifying tag for each individual item of data.The advantages of XBRL include all of the following except
A)increases the speed of handling of financial data.
B)reduces the chance of error.
C)improves the full disclosure of financial information.
D)permits automatic checking of information.
Q2) Which of the following steps is NOT required in performing a compliance attestation engagement?
A)Assess planning materiality
B)Assess inherent risk
C)Confirm restrictions with applicable third-parties
D)Consider subsequent events
Q3) A report on sustainability,as defined by the AICPA,might include all of the following except
A)economic viability.
B)social responsibility.
C)environmental responsibility.
D)internal control over financial reporting.
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Page 15
Chapter 14: Professional Ethics
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Sample Questions
Q1) To which group can a CPA provide audit documentation without being subpoenaed and without the client's consent?
A)The IRS.
B)The FASB.
C)Another CPA firm performing a peer review.
D)Another CPA firm considering the purchase of the auditing firm.
Q2) Which of the following is NOT a restriction placed on audit partners by Sarbanes-Oxley?
A)Limits engagement partners to a five-year term as the engagement partner.
B)Limits other partners associated with the engagement to a seven-year term
C)Engagement partners must review nonaudit work to insure that independence has not been compromised.
D)Partners that engage in selling services,other than audit,review,and attestation services,to an audit client are not independent with respect to that client.
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) Auditors should not be liable to any party if they perform services that met the standards of:
A)Ordinary negligence.
B)Regulatory providence.
C)Due care.
D)Good faith.
Q2) Kerry CPA is the auditor for Sammy Corp.During the audit,Kerry discovers a material misstatement in Sammy's financial statements.Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement,Sammy Corp.will likely have to declare bankruptcy and thousands of employees will lose their jobs.Which of the following statements is true if the misstatement is not corrected and Kerry issues an unqualified opinion on Sammy's financial statements?
A)Kerry is liable only to third parties in privity of contract.
B)Kerry is liable only to known users of the financial statements.
C)Kerry is likely liable to any person who suffered a loss as a result of the fraud.
D)Kerry is likely liable to third parties even if the third parties were aware of the fraud and did not rely on the opinion.
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Page 17
Chapter 16: Internal Audits, Governmental Audits, and Fraud Examinations
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Sample Questions
Q1) Which of the following would be considered an independence issue for an internal auditor?
A)The company decreased every department's budget,including internal audit,by 5%.
B)The auditors participated in the employee stock plan and,therefore,owned stock in the company.
C)The CAE reports directly to the audit committee.
D)The controller had authority to change the audit schedule before being sent to management and the audit committee.
Q2) Internal auditors perform audits and consulting engagements.
A)True
B)False
Q3) Few fraud auditors believe in the concept of an "immaterial fraud" because ________________________ and ________________________________________.
Question also found in study guide
Q4) Once a fraud is discovered,the focus of the audit changes to an investigation with the primary objective of
Question also found in study guide
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) Which of the following statements is true about haphazard selection?
A)Under haphazard selection,bias in selecting items (either conscious or unconscious)often exists.
B)Haphazard selection can be described in sufficient detail to allow sample selection to be replicated by others.
C)Under haphazard selection,the items are selected in an unstructured and careless manner.
D)Haphazard selection allows individuals to measure the probability of selecting sample items.
Q2) When examining the client's internal control,what is the relationship of each of the following with sample size? \[\begin{array} { c c c } & \text { Brpected refe of deviation } & \text { Rist of } \\
&&\text { averrehiavee } \\
\text { A. } & \text { Direct } & \text { Direct } \\
\text { B. } & \text { Direct } & \text { Inverse } \\
\text { C. } & \text { Inverse } & \text { Inverse } \\
\text { D. } & \text { Invere } & \text { Direat } \end{array}\]
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Page 19
Chapter 18: Attributes Sampling
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Sample
Questions
Q1) Assume that the audit team wishes to determine the extent to which a particular control policy was functioning as intended.Identifying applications of the control throughout the period under audit would be most closely related to which of the following steps in sampling?
A)Determining the objective of sampling.
B)Defining the characteristic of interest.
C)Defining the population.
D)Determining the sample size.
Q2) Which of the following sampling risks is associated with the use of attributes sampling?
A)Risk of underreliance: Yes; Risk of incorrect rejection: Yes
B)Risk of underreliance: Yes; Risk of incorrect rejection: No
C)Risk of underreliance: No; Risk of incorrect rejection: Yes
D)Risk of underreliance: No; Risk of incorrect rejection: No
Q3) The upper limit rate of deviation in attributes sampling is:
A)The actual deviation rate in the population.
B)Always less than the tolerable rate of deviation.
C)Always greater than the tolerable rate of deviation.
D)A statistical calculation that considers sampling risk.
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Page 20
Chapter 19: Variables Sampling
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Sample Questions
Q1) How does the auditor typically determine the appropriate level of the risk of incorrect rejection when using classical variables sampling?
A)Based on prior assessments of audit risk,risk of material misstatement,and analytical procedures risk.
B)Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals.
C)Based on the findings in prior audits or based on a small sample taken during the current year.
D)Based on the anticipated cost of conducting additional substantive procedures.
Q2) Which component of the expanded audit risk model is most closely associated with the risk of incorrect acceptance?
A)Analytical procedures risk.
B)Risk of material misstatement.
C)Nonsampling risk.
D)Test of details risk.
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Chapter 20: Auditing and Information Technology
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Sample Questions
Q1) Which of the following statements best describes the impact on an audit when a client uses computerized processing of transactions?
A)The objective of the audit examination focuses on detection of fraud and theft through the computer.
B)The type of substantive procedures performed by the audit team change because of the use of computerized processing.
C)The effectiveness of computer controls implemented by the client over its computerized processing may need to be evaluated by audit teams.
D)Different independence standards are introduced for audit teams when clients utilize computerized processing.
Q2) Each of the following automated application controls are designed to ensure that the input of individual transactions and data is accurate except for
A)Check digits.
B)Valid sign tests.
C)Sequence tests.
D)Limit and reasonableness tests.
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