Internal Auditing Practice Questions
Course Introduction
Internal Auditing is a comprehensive course that explores the principles, standards, and practices of internal auditing within organizations. Students will learn about the role of internal auditors, risk assessment, internal control systems, audit planning, and execution of audit fieldwork. The course emphasizes ethical responsibilities, compliance with professional frameworks such as the Institute of Internal Auditors (IIA) standards, reporting processes, and the contribution of internal auditing to governance and organizational improvement. Through case studies and practical examples, learners will develop skills in evaluating internal control effectiveness, detecting fraud, and recommending improvements to policies and procedures.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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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) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting.
A)True
B)False
Answer: True
Q2) External users of the financial statements
A) value the auditor's report because of the auditor's independence from the client.
B) look to the auditor's report as an indication of the statements' reliability.
C) use the audited information on the assumption that it is reasonably complete, accurate, and unbiased.
D) all of the above.
Answer: D
Q3) Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The CPA Profession
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Which one of the following is not true regarding the American Institute of Certified Public Accountants peer review requirement?
A) A CPA firm must develop and adhere to quality control standards.
B) Peer reviews are mandatory.
C) A CPA firm will lose AICPA eligibility if a peer review is not performed.
D) Firms required to be registered with and inspected by the PCAOB are exempt.
Answer: D
Q2) An auditor need not abide by a particular auditing standard if the auditor believes that
A) the issue in question is immaterial in amount.
B) more expertise is needed to fulfill the requirement.
C) the requirement of the standard has not been addressed by the PCAOB.
D) fraud is involved.
Answer: A
Q3) International Standards on Auditing are issued by the International Auditing and Assurance Standards Board (IAASB).
A)True
B)False
Answer: True
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Page 4
Chapter 3: Audit Reports
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170 Verified Questions
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Sample Questions
Q1) If the auditor concludes there are no critical audit matters, the auditor is not required to disclose this fact in the audit report.
A)True
B)False
Answer: False
Q2) The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date.
A)True
B)False
Answer: True
Q3) As misstatements become more pervasive, the likelihood of issuing a disclaimer rather than a qualified opinion increases.
A)True
B)False
Answer: False
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Chapter 4: Professional Ethics
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Sample Questions
Q1) Professionals are expected to conduct themselves at a higher level than most other members of society.
A)True
B)False
Q2) The AICPA's Code of Professional Conduct states that a CPA should maintain integrity and objectivity. The term "objectivity" in the Code refers to a CPA's ability to A) choose independently between alternate accounting principles and auditing standards.
B) distinguish between accounting practices that are acceptable and those that are not.
C) be unyielding in all matters dealing with auditing procedures.
D) maintain an impartial attitude on matters that come under the CPA's review.
Q3) 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
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Chapter 5: Legal Liability
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147 Verified Questions
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Sample Questions
Q1) The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called
A) separate and proportionate liability.
B) joint and several liability.
C) shared liability.
D) unitary liability.
Q2) Which of the following is an illustration of liability to clients under common law?
A) A client sues the auditor for not discovering a theft of assets by an employee.
B) A bank sues the auditor for not discovering that the borrower's financial statements are misstated.
C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements.
D) The federal government prosecutes the auditor for knowingly issuing an incorrect audit report.
Q3) Distinguish between "joint and several liability" and "separate and proportionate liability."
Q4) Distinguish between constructive fraud and fraud.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) The presentation and disclosure-related audit objectives are identical to the management assertions for presentation and disclosure.
A)True
B)False
Q2) The classification balance-related audit objective
A) involves determining if items included on a client's listing are included in the correct general ledger accounts.
B) is the counterpart to the management assertion of completeness.
C) involves determining if items included on a client's listing are disclosed properly in the financial statements.
D) involves tying in the account balances to the general ledger.
Q3) The objective of an audit of the financial statements is an expression of an opinion on
A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements.
C) the accuracy of the annual report.
D) the accuracy of the balance sheet and income statement.
Q4) Discuss the differences between errors, frauds, and illegal acts. Give an example of each.
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Chapter 7: Audit Evidence
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Sample Questions
Q1) Audit documentation of the evidence gathered by the auditor should meet which of the following criteria?
A) Workpapers are prepared in sufficient detail so that they can be given to the client for future reference.
B) The content is sufficient to provide support for the auditor's opinion, including the auditor's representation as to compliance with auditing standards.
C) Audit evidence is principally gathered to determine if the client's financial statements, as prepared by management, can be relied upon to make managerial decisions about the firm.
D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing firm in the case of a lawsuit by investors.
Q2) Which of the following is not a weakness of using industry averages for auditing?
A) The industry data are broad averages.
B) Different companies follow different accounting methods.
C) They can be helpful in identifying potential misstatements.
D) All of the above are weaknesses.
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Chapter 8: Audit Planning and Materiality
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Sample Questions
Q1) Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files.
A) permit
B) do not allow
C) require
D) strongly encourage
Q2) CPA firms can establish policy guidelines to help their auditors determine materiality.
A)True
B)False
Q3) Auditors should understand client objectives related to A) reliability of financial reporting.
B) effectiveness and efficiency of operations.
C) compliance with laws and regulations.
D) all of the above.
Q4) Determining materiality requires professional judgment.
A)True
B)False
Q5) Discuss four of the matters that should be specified in an engagement letter.
Page 10
Q6) Discuss the essential activities involved in the initial planning of an audit.
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Chapter 9: Assessing the Risk of Material Misstatement
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Sample Questions
Q1) When assessing risk, it is important to remember that A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients.
B) inherent risk can be changed by the auditor.
C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined.
D) control risk is determined by company management since they are responsible for internal control.
Q2) For a private company client, auditors are required to test any internal controls they believe have not been operating effectively during the period under audit.
A)True
B)False
Q3) One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.
A)True
B)False
Q4) Describe the audit risk model and each of its components.
Q5) Why do auditors use the audit risk model when planning an audit?
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) Auditors are required to perform certain procedures in every audit to address the risk of management override of internal controls. What are these procedures?
Q2) Most auditors will encounter a material fraud during their auditing careers.
A)True
B)False
Q3) When dealing with revenue frauds,
A) the most egregious form of revenue fraud involves premature revenue recognition.
B) premature revenue recognition involves recognizing the revenue after the accounting standards requirements have been met.
C) premature revenue recognition is the same as cutoff errors.
D) side agreements can modify the terms of the sales transaction and should be analyzed carefully.
Q4) Auditors may expand other substantive procedures to address the heightened risks of fraud.
A)True B)False
Q5) Describe the five sources of information gathered to assess fraud risks.
Q6) Discuss the need for maintaining professional skepticism during an audit.
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Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) List the four underlying principles of risk assessment per the COSO framework.
Q2) ________ protect(s) the security of electronic communication when information is transmitted and when it is stored.
A) Firewalls
B) Digital signatures
C) Encryption
D) A database
Q3) Other countries around the world have passed similar legislation to the Sarbanes-Oxley Act regarding mandating management and auditor reporting on internal controls over financial reporting.
A)True
B)False
Q4) Parallel testing is used when old and new systems are operated simultaneously in all locations.
A)True
B)False
Q5) Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.
Q6) Identify the six categories of general controls and give one example of each.
Page 13
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) The auditor obtains a sufficient understanding of internal control to assess the risk of material misstatement at the overall financial statement level and at the relevant assertion level.
A)True
B)False
Q2) Which of the following is most correct for audits of non-public companies?
A) An audit of internal control is required.
B) An audit of internal control is not required.
C) An audit of the design of internal controls is required.
D) An audit of the operational effectiveness of internal controls is required.
Q3) Tests of controls
A) are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk.
B) are used to support the ending balances in the balance sheet and income statement accounts.
C) are performed at the end of the audit.
D) are designed to detect fraud.
Q4) Flowcharts are harder to read and update than narratives.
A)True
B)False
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) At what point in the audit process are tests of details most appropriately designed?
A) plan and design audit approach
B) perform audit tests of controls and substantive tests of transactions
C) perform substantive analytical procedures and tests of details of balances
D) complete the audit and issue the audit report
Q2) In the context of an audit of financial statements, substantive tests are audit procedures that
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) are designed to test for dollar misstatements.
D) will increase proportionately with the auditor's reliance on internal control.
Q3) If the auditor's test of controls supports the control risk assessment, planned detection risk in the audit risk model is decreased, and planned substantive tests should therefore be reduced.
A)True
B)False
Q4) List each of the five types of audit tests.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement. sales included in the journals for which there was no shipment sale recorded more than once shipments made to nonexistent customers and recorded as sales
Q2) Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to
A) prenumber and account for all credit memorandums.
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
C) have independent sales and accounts receivable departments.
D) mail monthly statements to customers.
Q3) Which accounts are involved in the sales class of transactions?
A) accounts receivable and sales returns and allowances
B) cash and allowance for uncollectible accounts
C) sales allowances and accounts receivable
D) accounts receivable and sales
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
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Sample Questions
Q1) Describe each of the four types of sample selection methods commonly associated with statistical audit sampling.
Q2) When generating random numbers, the random numbers must be obtained with replacement.
A)True
B)False
Q3) Auditors can increase the likelihood of a sample being representative by using professional care in the design of the sampling process, in the selection of the sample, and in the evaluation of the sample results.
A)True
B)False
Q4) The sample exception rate equals
A) the number of exceptions in the population divided by the sample size.
B) the number of items in the population multiplied by the number of exceptions in the sample.
C) the number of exceptions in the sample divided by the sample size.
D) the number of exceptions in the population divided by the population size.
Q5) Discuss what is meant by "sampling risk" and "nonsampling risk."
Q6) List the two ways auditors can control sampling risk.
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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130 Verified Questions
130 Flashcards
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Sample Questions
Q1) Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally
A) reduce the extent of tests of details of balances.
B) reduce the extent of tests of controls.
C) reduce the tests of transactions.
D) reduce all of the other tests.
Q2) The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.
A)True
B)False
Q3) Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.
A)True
B)False
Q4) Stratification of accounts receivable is desirable when using confirmations.
A)True
B)False
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Q5) Describe how the auditor tests the accuracy objective for accounts receivable.
Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) In estimating the population misstatement, the first step in projecting from the sample to the population is to
A) make a point estimate.
B) revise the upper error bound.
C) calculate the precision interval.
D) determine the population mean.
Q2) Explain why monetary unit sampling, or probability proportional to size sampling, is not useful for detecting understatements.
Q3) ARIA measures the auditor's desired assurance for an account balance.
A)True
B)False
Q4) When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?
A) a decrease in the tolerable misstatement
B) small expected misstatements
C) an increase in the tolerable misstatement
D) an increase in the acceptable risk of incorrect acceptance
Q5) Discuss the advantages and disadvantages of monetary unit sampling over other sampling methods.
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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) Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case, which audit procedure should be used to detect any unrecorded liabilities?
A) Examine cash disbursements for several weeks after the balance sheet date.
B) Reconcile purchase orders to requisition orders.
C) Reconcile purchase orders to receiving reports.
D) Reconcile purchase orders to vendor invoices.
Q2) By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for
A) theft of merchandise by employees.
B) unrecorded obligations.
C) lapping.
D) kiting.
Q3) A liability is properly accounted for as an account payable if
A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D) the amount is estimated and owed within 90 days of the balance sheet date.
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Chapter 19: Completing the Tests in the Acquisition and Payment
Cycle: Verification of Selected Accounts
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Sample Questions
Q1) The audit procedure that requires an auditor to "foot the acquisition schedule" relates to which balance-related audit objective?
A) classification
B) detail tie-in
C) existence
D) cut-off
Q2) If management hires a specialist to estimate the fair value of a long-lived asset, the auditor should take appropriate steps as required by auditing standards in evaluating the work of the specialist
A)True
B)False
Q3) The auditor's tests for proper cutoff of current year acquisitions of property, plant, and equipment are usually done as part of accounts payable cutoff tests.
A)True
B)False
Q4) State four of the seven specific balance-related audit objectives which the auditor should use as a frame of reference for tests of property, plant, and equipment acquisitions.
21
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) Separation of duties in the payroll and personnel cycle will prevent overpayments, but not payments to nonexistent employees.
A)True
B)False
Q2) The primary purpose of a surprise payroll payoff is to detect employees who have reported more time than was actually worked (fraudulent hours).
A)True
B)False
Q3) An auditor traces a sample of electronic time cards before and after the bi-weekly payroll report and then traces to the payroll master file to determine that payroll transactions are reported in the correct period. The auditor is gathering evidence for which audit objective?
A) completeness
B) existence
C) cut-off
D) accuracy
Q4) Imprest accounts usually carry a significant balance.
A)True
B)False
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) Internal controls over cost accounting records are very similar among companies.
A)True
B)False
Q2) Management may decide to allocate manufacturing overhead based upon machine hours. In this situation, the auditor must test and verify the reasonableness of the use of machine hours to allocate overhead.
A)True
B)False
Q3) The design of tests of details of balances for inventory is affected by audit results from multiple cycles. Identify the cycles, other than the inventory and warehousing cycle that affect the audit of inventory.
Q4) As part of the risk assessment process, the auditor will consider whether any of the identified risks of material misstatement found during the audit of the inventory and warehousing cycle are considered a significant risk.
A)True
B)False
Q5) Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned.
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) The auditor's independent estimate of interest expense from notes payable uses average interest rates and
A) average notes payable outstanding.
B) year-end notes payable outstanding.
C) only notes payable above the level of materiality.
D) only notes payable to major lenders.
Q2) To determine if notes payable is included in the proper period, the auditor should
A) trace the cash received from the issuance to the accounting records.
B) examine duplicate copies of notes to determine whether the notes were dated on or before the balance sheet date.
C) examine duplicate copies of notes for principal and interest rates.
D) trace the individual notes payable to the master file.
Q3) Auditors can test whether dividend payments have been made to shareholders by selecting a sample of recorded dividend payments and agreeing payee information on the cancelled check to the dividend records.
A)True
B)False
Q4) Discuss the four key controls over notes payable.
Page 24
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) The bank reconciliation
A) must be done on a daily basis if the client uses electronic banking.
B) should be performed by someone independent of the handling or recording of cash receipts.
C) should be performed by someone who handles cash disbursements.
D) ensures that no cash has been embezzled.
Q2) When an audit client uses a service organization to manage their investment activity,
A) the auditor can always rely on the internal controls of the service organization.
B) the auditor must state in their audit opinion that the client uses a service organization.
C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control.
D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates.
Q3) Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank statement in the audit of cash.
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Chapter 24: Completing the Audit
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Sample Questions
Q1) Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to
A) determine the range of probable loss for asserted claims.
B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.
C) obtain an outside opinion of the probability of losses in determining accruals for contingencies.
D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.
Q2) With what types of contingencies might an auditor be concerned?
Q3) In a standard inquiry to the client's attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date.
A)True
B)False
Q4) State the three purposes of the management representation letter.
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) You are preparing to issue a report on the compilation of financial statements for a nonpublic company. Prior to issuing the report you should
A) read the financial statements to determine if they are free from obvious material errors.
B) perform analytical procedures to determine if they are free from material misstatements.
C) perform tests of balances on selected accounts to determine if they are free from material misstatements.
D) perform limited control tests to determine if there are any material misstatements.
Q2) Practitioners who perform preparation, compilation, or review engagements are referred to in the Statements on Standards for Accounting and Review Services (SSARS) standards as
A) bookkeepers.
B) accountants.
C) auditors.
D) CPAs.
Q3) Define forecast and projection.
Q4) 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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Sample Questions
Q1) Professional guidelines for performing internal audits for companies are not as well-defined as for external audits.
A)True
B)False
Q2) Operational auditing is the review of an organization for efficiency and effectiveness. Discuss what is meant by the terms "effectiveness" and "efficiency."
Q3) For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management.
A)True
B)False
Q4) What is the Institute of Internal Auditors Professional Practices Framework definition of internal auditing?
Q5) Benchmarking is one source of evaluation criteria for completing an operational audit.
A)True
B)False
Q6) Discuss three major differences between operational and financial auditing.
Q7) List the three purposes of a program audit.
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