Internal Auditing Question Bank
Course Introduction
Internal Auditing is a comprehensive course that explores the principles, procedures, and practices involved in assessing and improving an organizations risk management, control, and governance processes. Students will learn about the internal auditors role, responsibilities, and ethical considerations, as well as techniques for planning and conducting audits, gathering and evaluating evidence, and preparing audit reports. The course emphasizes the application of auditing standards, the use of risk-based audit approaches, and the development of critical thinking and analytical skills necessary for effective internal audit engagements across diverse organizational settings.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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26 Chapters
3526 Verified Questions
3526 Flashcards
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Page 2
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) CPA firms are often called and thought of by outsiders as external auditors, independent auditors, or internal auditors.
A)True
B)False
Answer: False
Q2) The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and some established criteria is defined as
A) accounting.
B) financial reporting.
C) tax reporting.
D) auditing.
Answer: D
Q3) Which of the following is not a cause of information risk?
A) Society, today, is not as complex as it used to be.
B) Remoteness of information.
C) The volume and the complexity of data and exchange transactions.
D) The biases and the motives of the information provider.
Answer: A
Page 3
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Chapter 2: The CPA Profession
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100 Verified Questions
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Sample Questions
Q1) Professional skepticism must be maintained only if the auditor suspects fraud.
A)True
B)False
Answer: False
Q2) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.
A)True
B)False
Answer: True
Q3) The International Standards on Auditing (ISA)
A) are issued by the AICPA.
B) override a country's regulations governing the audit of a company.
C) has many of the same standards as the Auditing Standards Board (ASB).
D) must be followed by companies whose stock is traded in the U.S.
Answer: C
Q4) Membership in the AICPA is mandatory for all licensed practicing CPAs.
A)True
B)False
Answer: False
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Chapter 3: Audit Reports
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170 Flashcards
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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 phrase "accounting principles generally accepted in the United States of America" can be found in the auditor's opinion paragraph of a standard unmodified opinion report.
A)True
B)False Answer: True
Q3) A pervasive exception is one that affects different parts of the financial statements.
A)True
B)False Answer: True
Q4) Client imposed restrictions on the audit always require a disclaimer of opinion. A)True
B)False Answer: False
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Chapter 4: Professional Ethics
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Sample Questions
Q1) The AICPA Code of Conduct includes a conceptual framework approach for the member to evaluate threats to compliance with the Code. List the three steps necessary to evaluate the threats.
Q2) The Conceptual Framework for AICPA Independence Standards can be used when making decisions on ethical matters not explicitly addressed in the Code.
A)True
B)False
Q3) Under the interpretations to the AICPA Code, independence is considered to be impaired if fees remain unpaid for professional services provided more than six months before the date of the current year's report.
A)True
B)False
Q4) Which of the following statements is true with respect to audit committees?
A) Audit committee members should consist of members of the company's management.
B) All members of the audit committee must be financial experts.
C) The audit committee of a public company is responsible for hiring the auditor.
D) Audit committees must have a minimum of ten members.
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Chapter 5: Legal Liability
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Sample Questions
Q1) A CPA is subject to criminal liability if the CPA
A) refuses to turn over requested audit documentation to a client.
B) performs an audit in a negligent manner.
C) is knowingly involved with false financial statements.
D) willfully breaches a contract with a client.
Q2) In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions extends to the firm's assets.
A)True
B)False
Q3) Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include
A) employees of the CPA firm.
B) employees of the audit client.
C) other CPA firms engaged to do part of the audit work.
D) specialists employed by the CPA firm to provide technical advice on the audit.
Q4) Discuss some of the steps practicing auditors can take to minimize their legal liability.
Q5) Distinguish between constructive fraud and fraud.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct,
A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically practical.
Q2) Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism. List and briefly describe each of these characteristics.
Q3) When examining the relationships of the five cycles and general cash, the cycles have no beginning or end except at the origin or final disposition of the company.
A)True
B)False
Q4) Management is not responsible for which of the following?
A) adopting sound accounting policies
B) issuing their own opinion on the fairness of the financial statements
C) maintaining an effective system of internal controls
D) making fair representations in the financial statements
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8
Chapter 7: Audit Evidence
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164 Flashcards
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Sample Questions
Q1) The permanent audit file would usually include the
A) client's working trial balance.
B) summary of the risk assessment procedures performed.
C) organizational chart of the company's employees.
D) summary of the auditor's test of controls for the current years audit.
Q2) An ________ is the detailed instruction that explains the audit evidence to be obtained during the audit.
A) audit objective
B) audit procedure
C) audit assertion
D) audit program
Q3) Which of the following statements is not correct?
A) It is possible to vary the sample size from one unit to 100% of the items in the population.
B) Cost is an adequate justification for not gathering an adequate sample size.
C) The decision of how many items to test must be made by the auditor for each audit procedure.
D) The sample size for any given procedure is likely to vary from audit to audit.
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9
Chapter 8: Audit Planning and Materiality
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Sample Questions
Q1) AICPA auditing standards require the auditor to determine whether the financial statement framework to be used by management to prepare the financial statements is appropriate under the circumstances.
A)True
B)False
Q2) A predecessor auditor who has been contacted by a successor auditor for information about the client does not have to obtain permission from the former client before providing any confidential information to the successor auditor because the confidentiality requirement does not extend to former clients.
A)True
B)False
Q3) If the client will not permit the predecessor auditor to communicate with the successor auditor, or the predecessor does not provide a comprehensive response to the successor auditor, the successor auditor must not accept the audit engagement.
A)True
B)False
Q4) Discuss four of the matters that should be specified in an engagement letter.
Q5) Discuss the required communications between predecessor and successor auditors.
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Chapter 9: Assessing the Risk of Material Misstatement
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Sample Questions
Q1) PCAOB auditing standards require the auditor to make inquiries of the audit committee about the risks of material misstatement.
A)True B)False
Q2) Performance materiality does not affect any of the four risks to planned audit evidence.
A)True B)False
Q3) Which of the following statements is not true?
A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.
B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required.
C) Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls.
D) Inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit.
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11
Chapter 10: Fraud Auditing
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139 Verified Questions
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Sample Questions
Q1) The Securities and Exchange Commissions will set up the Office of the Whistleblower sometime in the near future in an effort to combat fraud and offer monetary rewards for being a whistleblower.
A)True
B)False
Q2) Which of the following is not a risk factor that the auditor should take into account when considering the possibility of fraudulent financial reporting at an audit client?
A) Significant accounting estimates are not difficult for the auditor to verify and justify.
B) Board members' personal net worth is threatened if the entity's financial performance does not meet market expectations.
C) Increasing business complexity occurs as a result of numerous recent acquisitions.
D) Information technology personnel are found to be not keeping up with the latest trends in internal controls and data security.
Q3) Auditors should rely on original, rather than duplicate, copies of documents.
A)True
B)False
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Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?
A) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
B) a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
C) a statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
D) a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control
Q2) Controls that relate to a specific use of the IT system, such as the processing of sales or cash receipts, are called application controls.
A)True
B)False
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13
Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) The level of understanding of a client's internal controls required is less than what is required for an audit of only the financial statements.
A)True
B)False
Q2) Discuss the advantages and benefits of using generalized audit software.
Q3) For integrated audits of large, publicly traded companies, the level of understanding of internal controls and the extent of testing of those controls need to be sufficient for the auditor to issue an opinion on the effectiveness of internal controls over financial reporting.
A)True
B)False
Q4) The objective of the test data approach is to determine whether the client's computer programs can correctly process valid and invalid transactions.
A)True
B)False
Q5) Describe three computer auditing techniques available to the auditor.
Q6) A proper narrative of an accounting system and the related controls should include which four characteristics?
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) The document that details the specific audit procedures for each type of test is the
A) audit strategy.
B) audit program.
C) audit procedure.
D) audit risk model.
Q2) The auditor has determined that a key control in the audit of the sales and collection cycle is that recorded sales are supported by authorized shipping documents and approved customer orders. What typical test of controls should be used in this situation?
A) Examine a sample of duplicate sales invoices to determine that each one is supported by an authorized shipping document and approved customer order.
B) Observe whether shipping documents are forwarded daily to billing and observe when they are billed.
C) Examine a sample of sales invoices and agree prices to the authorized computer price list.
D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and general ledgers.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) A bill of lading is a written contract between the seller and the buyer.
A)True
B)False
Q2) Proper accounting requires an adjustment to the allowance for uncollectible accounts after a customer with an unpaid balance to the company has declared bankruptcy or after the account has been turned over to a collection agency.
A)True
B)False
Q3) Common tests of internal controls related to financial statement presentation and footnote disclosures include observing or examining an indication of management's review and approval of information presented and disclosed in the financial statements. A)True
B)False
Q4) You are part of the audit team that is auditing Hillsburg Hardware Co. and you have been assigned to the sales and collection cycle. You are testing whether the cash receipts are deposited and recorded at the amounts received (accuracy objective). List two tests of controls and one test of transactions that you would do to satisfy yourself regarding the accuracy objective.
Page 16
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) Whenever auditors use sampling, they risk making incorrect conclusions about the population. The risk that the auditor concludes that controls are more effective than they actually are is known as the
A) risk of overreliance.
B) risk of underreliance.
C) risk that the sample is not representative of the population.
D) risk that the sample conclusions cannot be useful because of nonprobability sampling.
Q2) When the estimated population exception rate exceeds the sample exception rate, the auditor can conclude that the sample results do not support the preliminary assessed control risk.
A)True
B)False
Q3) Which of the following must be set prior to testing a sample?
A) sample exception rate
B) achieved upper precision limit
C) computed exception rate
D) tolerable exception rate
Q4) List the two ways auditors can control sampling risk.
Q5) Discuss what is meant by "sampling risk" and "nonsampling 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
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Sample Questions
Q1) As a test of the occurrence transaction-related audit objective for sales and the accuracy balance-related audit objective for accounts receivable, auditors can use audit data analytics to match, for example, cash receipts to invoiced sales amounts.
A)True B)False
Q2) Both U.S. and international auditing standards require the use of confirmations for accounts receivable.
A)True B)False
Q3) It is common for clients to unintentionally or fraudulently misstate the allowance for doubtful accounts due to the difficulty in estimating the correct balance in this account. A)True
B)False
Q4) The two primary classes of transactions in the sales and collection cycle are A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) To calculate the sample size in monetary unit sampling,
A) the confidence factor is multiplied by the tolerable misstatement as a percentage of the population value.
B) the confidence factor is divided by the tolerable misstatement as a percentage of the population value.
C) the tolerable misstatement is divided by the population recorded value.
D) the tolerable misstatement is multiplied by the population recorded value.
Q2) The larger the sample size, the more confident the auditor can be that the point estimate is close to the true population value.
A)True
B)False
Q3) If no exceptions were found in the substantive tests of transactions,
A) ARIA would stay the same.
B) the sample size would stay the same.
C) ARIA would increase.
D) the sample size would increase.
Q4) How might auditors include negative balances when using monetary unit sampling to evaluate a population?
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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) Failure to record the acquisition of goods is a violation of which audit objective?
A) accuracy
B) occurrence
C) authorization
D) completeness
Q2) In the processing and recording of cash disbursements,
A) after a check includes the signature of an authorized person, it is a liability.
B) when a check cashed by the vendor has cleared the bank, it is called an outstanding check.
C) in many cases, the company submits payment to the vendor electronically through an electronic funds transfer (EFT) between the company's bank and the vendor's bank.
D) the accounts payable master file is a computer-generated file that includes all cash disbursement transaction processed by the accounting system for a period.
Q3) Describe purchase requisitions and purchase orders. What is a key difference between the two documents?
Q4) What are the three most important controls over cash disbursements?
Page 20
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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) When auditing acquisitions of property, plant, and equipment, the auditor's review of lease and rental agreements most closely relate to the cutoff objective.
A)True
B)False
Q2) When performing the test of details of balances, the balance-related audit objective of classifications is closely related to the objective of A) accuracy.
B) detail tie-in.
C) existence.
D) completeness.
Q3) Typically, analytical procedures are the primary means of verifying income statement accounts resulting from allocations.
A)True
B)False
Q4) What are several substantive analytical procedures used in the audit of prepaid insurance and insurance expense?
Q5) Discuss the key internal controls related to the disposal of property, plant, and equipment.
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) Hiring personnel initiates the payroll and personnel cycle.
A)True
B)False
Q2) Examining payroll records for an indication of authorization is part of the timing transaction-related audit objective.
A)True
B)False
Q3) Most monetary misstatements of payroll are corrected by internal verification controls or by the PCAOB.
A)True
B)False
Q4) A key internal control which the auditor should determine if the client has procedures designed to identify key provisions in employment contracts, compensation, and bonus plans which may require financial statement disclosure.
A)True
B)False
Q5) Paying employees for their services ends the payroll and personnel cycle. A)True
B)False
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) When verifying the transfer of inventory from one location to another, the audit objectives with which the auditor is primarily concerned are occurrence of recorded transfers, completeness of recorded transfers, and accuracy of recorded transfers.
A)True
B)False
Q2) Internal controls over cost accounting records are very similar among companies.
A)True B)False
Q3) The receipt of raw materials is a part of the acquisition and payment cycle.
A)True
B)False
Q4) The audit of cost accounting begins with the internal transfer of assets from raw materials to work-in-process to A) manufacturing overhead.
B) finished goods inventory.
C) the perpetual inventory master files.
D) retail sales.
Q5) What are two factors affecting the complexity of the audit of inventory?
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) When conducting the audit of stockholders' equity, it is normal practice to verify all capital stock transactions
A) only when the client is small.
B) that are in excess of a material amount.
C) if there aren't very many during the year.
D) regardless of the controls in existence, because of their materiality and permanence in the records.
Q2) Discuss the four key controls over notes payable.
Q3) Assessed control risk and results of substantive tests of transactions are normally unimportant for designing tests of details of balances for which of the following accounts?
A) accounts receivable
B) inventory
C) accounts payable
D) notes payable
Q4) If loans require significant restrictions on the activities of the company, they must be disclosed in the footnotes.
A)True
B)False
24
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) The standard bank confirmation form has been agreed upon by the A) SEC and FASB.
B) AICPA and the SEC.
C) SEC and the American Bankers' Association.
D) AICPA and the American Bankers' Association.
Q2) In addition to confirming bank balances of your audit client, a bank confirmation would normally contain
A) the client's bank loans with due date, interest rate, and collateral requested.
B) the client's credit history as regards to paying back loans.
C) the client's managements bank account information.
D) the client's business prospects.
Q3) A growing number of organizations, especially larger organizations, use pre-approved V-cards to make miscellaneous purchases instead of maintaining a petty cash fund.
A)True
B)False
Q4) A proof of cash includes four reconciliation tasks. List below two of those tasks.
Q5) Explain kiting, and discuss how it is performed.
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Chapter 24: Completing the Audit
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Q1) The standard letter sent by the auditor to the attorney requests the attorney communicate about contingencies up to approximately the date of the auditor's report.
A)True
B)False
Q2) List the three reasons why an experienced member of the audit firm must thoroughly review audit documentation at the completion of the audit.
Q3) If an auditor discovers that previously issued financial statements are misleading, the most desirable approach to follow is to request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision.
A)True
B)False
Q4) The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner.
A)True B)False
Q5) 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) Professional standards prohibit which one of the following types of engagements for prospective financial statements from being undertaken?
A) a compilation
B) a review
C) an examination
D) an agreed-upon procedures engagement
Q2) A primary concern in reporting on a comprehensive basis is to make sure that the statements clearly indicate that they are prepared on a basis other than GAAP.
A)True
B)False
Q3) SOC 3 reports are prepared using the Trust Services Criteria.
A)True
B)False
Q4) A review results in a conclusion that represents ________ assurance.
A) limited assurance
B) negative
C) positive
D) unequivocal
Q5) Briefly describe each of the five Trust Services Categories.
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Chapter 26: Internal and Governmental Financial Auditing and Operational Auditing
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Sample Questions
Q1) Which of the following is most correct with regard to the comparison of the financial auditing standards of the Yellow Book with the principles of the AICPA auditing standards?
A) the same as B) quite different from C) incompatible with D) consistent with
Q2) Which of the following is not a difference between operational auditing and financial auditing?
A) Both must be performed by a CPA.
B) Operational audit reports are usually of a restricted distribution while financial audit reports are widely distributed.
C) Operational audits often cover nonfinancial issues while financial audits do not.
D) None of the above is a difference.
Q3) Internal auditing standards are included in the Blue Book.
A)True B)False
Q4) Name three expectations of today's internal auditors.
Q5) Discuss three major differences between operational and financial auditing.
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