Internal Auditing Review Questions
Course Introduction
Internal Auditing is a course designed to introduce students to the principles, practices, and procedures involved in evaluating and improving the effectiveness of risk management, control, and governance processes within organizations. The course covers the internal audit process, including audit planning, evidence collection and evaluation, reporting, and communication with stakeholders. Emphasis is placed on professional standards, ethical considerations, internal controls, and the use of technology in auditing. Through case studies and practical exercises, students will gain hands-on experience in identifying organizational risks, conducting audits, and making recommendations for improvement to support organizational objectives and compliance requirements.
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Auditing The Art and Science of Assurance Engagements 13th Canadian Edition by
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Alvin A. Arens
Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) The reasoning behind the requirements of the Sarbanes Oxley Act's section 404 (attestation on internal control over financial reporting) is that
A) effective controls result in greater profits to organizations, reducing business failures.
B) effective controls reduce the likelihood of future misstatements in the financial statements.
C) better internal controls can be implemented at lower cost, improving product quality.
D) automated controls improve customer service, resulting in higher product sales.
Answer: B
Q2) Because an external auditor is paid a fee by a client company, he or she
A) is absolutely independent and may conduct an audit.
B) may be sufficiently independent to conduct an audit.
C) is never considered to be independent.
D) must receive approval from the relevant provincial securities commission before conducting an audit.
Answer: B
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Page 3
Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in the creation of the PCAOB to oversee listed companies' auditors and develop audit standards. The impact of this requirement in Canada was
A) the creation of new auditing standards to ensure better quality control for audits.
B) revision to the rules of professional conduct for CPAs.
C) additional training requirements for becoming an auditor.
D) the creation of the CPAB to oversee Canadian audit professionals.
Answer: D
Q2) During which phases of the financial statement audit does the auditor "conduct quality control" when using a risk assessment approach?
A) the risk assessments
B) the risk responses
C) the reporting process
D) risk assessment, risk response, and reporting phases
Answer: D
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Chapter 3: Legal Liability
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Sample Questions
Q1) The King Surety Company wrote a general fidelity bond covering defalcations by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17 200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson's auditors, Lynch & Merritt, public accountants. Which of the following would be Lynch & Merritt's best defence?
A) King is not in privity of contract.
B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards.
C) Lynch & Merritt were not guilty either of negligence or fraud.
D) Lynch & Merritt were not aware of the King-Wilson surety relationship.
Answer: B
Q2) Laws that have been passed through federal or provincial governments are
A) statutory law.
B) judicial law.
C) criminal law.
D) common law.
Answer: A
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Page 5
Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) How do quality control processes for the financial statement audit process incorporate consideration of legislation that affects the client?
A) they require second partner review of all working partners that relate to legislative matters
B) they provide auditors with copies of legislation that affects their client
C) they require the training of all auditors in legislation details that could affect all clients
D) they include in audit checklists questions that address relevant new legislation
Q2) What is the difference between auditors and lawyers with respect to privileged information?
Q3) When public accountants are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence in A) fact.
B) appearance.
C) conduct.
D) total.
Q4) What are the qualities of professional skepticism?
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) Pet Shop Ltd. is a large retail outlet with ten full-time employees in addition to the owner. You dropped by on your way home one day to organize the audit planning process for the coming year and noticed brand new terminals at the cashier's desk. One of the employees was having fun zapping inventory items. The owner teased him about the new laser scanning devices and told him to get to work to see which items needed to be ordered. It turns out that Pet Shop Ltd. has implemented a new point-of-sale computer system that is integrated with inventory. The last time you were there to buy dog food (about three months ago), the store had old computer terminals that were no longer functional and staff were recording sales transactions manually in the sales journal.
Required:
List the three sections of the audit. For each section, explain how these new computer systems might affect the audit process.
Q2) Management assertions are
A) directly related to auditing standards.
B) directly related to accounting standards.
C) indirectly related to auditing standards.
D) indirectly related to accounting standards.
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Page 7
Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) 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 calculating key ratios for the client's business and comparing them with industry averages?
A) to understand the client's industry and business
B) to assess going concern
C) to indicate possible misstatements
D) to reduce detailed tests
Q2) Three conditions for fraud are referred to as the "fraud triangle." One of the sides of this triangle is incentives or pressures. The other two sides are
A) opportunities and a desire to meet debt repayment obligations.
B) opportunities and attitudes or rationalizations.
C) attitudes or rationalizations and the need to maintain stock prices.
D) the need to maintain stock prices and the need to meet debt repayment obligations.
Q3) What are the three main factors that influence the organizational structure of all public accounting firms?
Q4) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
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8
Chapter 7: Materiality and Risk
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Sample Questions
Q1) A PA firm can experience high levels of business risk if the audit firm
A) does a poor job preparing client risk profiles.
B) pays its employees wages that are not in line with the market.
C) experiences significant litigation or has clients that do not pay their bills.
D) has a generous vacation policy for its staff.
Q2) A PA is working on the audit of a publicly held corporation. At what level will the auditor likely set audit risk?
A) low
B) medium
C) high
D) very high
Q3) Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for
A) identified misstatements.
B) likely misstatements.
C) unanticipated misstatements.
D) further possible misstatements.
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) An essential characteristic of the persons performing internal check procedures is
A) independence from the original data preparer.
B) a thorough knowledge of accounting.
C) an analytical and inquisitive mind.
D) competence in data entry skills.
Q2) When planning the audit, the auditor's decision on the appropriate assessed level of control risk to use is
A) an economic issue, trading off the costs of testing controls against the cost of testing balances.
B) calculated by using the audit risk model.
C) calculated by using a standard formula.
D) determined by using actuarial tables.
Q3) A system of internal control consists of policies and procedures designed to provide management with
A) reasonable assurance that the company achieves its objectives.
B) assurance that fraud will be prevented.
C) reasonable assurance that fraud will be detected.
D) assurance that the firm's resources will be used in the optimal way.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Identify and explain the three determinants of the persuasiveness of evidence.
Q2) Following are examples of evidence that could be collected during an audit of financial statements.
1. Duplicate copies of sales invoices
2. Inspection of new $100 000 cutting machine
3. Bank confirmation
4. Remittance advices
5. Vendors' invoices
6. Standard letter from lawyer to auditor
7. Auditor inventory count sheets
8. Shipping documents
9. Payroll cheques
10. Long-term debt agreements review notes
11. Auditor interest expense calculation worksheet
12. Observation by auditor of computer error message (invalid supplier number)
13. Gross margin calculation
14. Interview notes from interview with credit manager
Required:
Classify each type of evidence as to its reliability (1 - high, 2 - moderate, 3 - low). Justify your classification.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Which of the following is an example of a substantive test that could be used for the audit of the accuracy of sales prices?
A) inspect sales price master authorization forms for the presence of an approval signature
B) observe that the point-of-sale system automatically pulls sales prices from the master file
C) inquire about the process that is used to update sales prices in the sales price master file
D) calculate the gross margin for each product that is sold by the company
Q2) Audit risk is assessed at which level of the audit?
A) account
B) cycle
C) transaction-related audit objective
D) overall audit
Q3) A standard audit program can dramatically increase
A) audit efficiency.
B) quality of audit evidence.
C) communication among the audit team.
D) the amount of work that can be delegated to more junior staff members.
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Page 12
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) Which of the following best describes what the auditor means by the exception rate in the attribute sampling plan? The
A) number of errors that can reasonably be expected to be found in a population.
B) frequency with which a certain characteristic occurs within a population.
C) degree of confidence that the sample is representative of the population.
D) dollar range within which the true population total can be expected to fall.
Q3) The exception rate the auditor will permit in the population and still be willing to use the assessed level of control risk is called the
A) tolerable exception rate.
B) estimated population exception rate.
C) acceptable risk of overreliance.
D) sample exception rate.
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Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider
A) access controls as being poor.
B) program change controls as poor.
C) program change controls as excellent.
D) access controls as being excellent.
Q2) The auditor would like to conduct dual purpose tests verifying that the programs performing the totaling and aging of accounts receivable are functioning correctly as well as quantifying any errors. Which of the following is a dual purpose test that the auditor could use?
A) use analytical review and compare amounts from current to prior
B) inquire how the calculations are performed
C) use test data and observe how the invoice(s) in the test are aged
D) use generalized audit software to reperform the calculations
Q3) A) State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective.
B) Discuss what is meant by proof of cash receipts and explain its purpose.
Q4) Outline the key areas that the auditor would review as part of general controls.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.
Q2) State six specific balance-related audit objectives for accounts payable and for each objective describe one common test of details of balances.
Q3) The purchase order, usually in writing, is a legal document that is A) a non-binding agreement between client and vendor.
B) an offer to buy.
C) not enforceable if it is not in writing.
D) an acceptance of a vendor's catalogue offer to sell.
Q4) Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as
A) accounts payable.
B) accrued liabilities.
C) miscellaneous assets.
D) unearned revenues.
Q5) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
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15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) Dishware Distribution Limited uses average costing to cost its inventory. It keeps a perpetual inventory file that is linked to its sales systems. It orders inventory in for specific customers as needed, and traditionally has a slow time just before its year-end. Accordingly, inventory at the year-end is about $2000, while materiality is about $30 000. How should the auditor approach the audit of physical inventory?
A) Exclude testing of physical inventory from the audit program.
B) Use attribute sampling to select a sample of items to count.
C) Use dollar-unit sampling to select a sample of items to count.
D) Count only those items that have a dollar value in excess of $100.
Q2) From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?
A) observation of physical inventory counts
B) written inventory representations from management
C) confirmation of inventories in a public warehouse
D) auditor's recomputation of inventory extensions
Q3) The audit of the inventory and distribution cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) Which of the following tests of controls would pertain to whether existing payroll transactions are recorded?
A) Compare cancelled cheques with payroll journal details.
B) Compare cancelled cheques with payroll records.
C) Foot the payroll journal and trace details to the general ledger.
D) Conduct gap testing for a sequence of payroll cheques.
Q2) Otto decided to outsource the payroll function to Magna Plus. The controller of Otto should still
A) recalculate the payroll and its remittance to ensure accuracy.
B) review and authorize each individual payment to employees.
C) review the payroll journal and compare the total hours worked with the payroll time records.
D) inquire with the manager of Magna Plus if they suspect any unusual transactions.
Q3) Master file data is the semi-permanent data in an employee's file. Changes to the master file
A) should be adequately supported.
B) should be checked by the originator.
C) would be entered only once per month.
D) would be implemented on an annual basis.
Page 17
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Recalculation of an approximate interest expense using the basis of average interests rates and overall monthly notes payable could detect what type of possible misstatement?
A) misstatement of interest expense or accrued interest, or omission of a note payable
B) omission or misstatement of a note payable
C) misclassification of a note payable as long-term rather than current
D) misclassification of notes payable, interest expense, or accrued interest
Q2) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q3) Comparison of individual notes payable outstanding with the prior year could detect what type of possible misstatement?
A) misstatement of interest expense or accrued interest, or omission of a note payable
B) omission or misstatement of a note payable
C) misclassification of a note payable as long-term rather than current D) misstatement of notes payable, interest expense, or accrued interest
Q4) Discuss the internal controls related to owners' equity that are of concern to the auditor.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to
A) verify the cash balance reported on the bank confirmation inquiry form.
B) verify reconciling items on the client's bank reconciliation.
C) detect lapping.
D) detect kiting.
Q2) The auditor has determined exchange rates used by the client to present cash in foreign currencies and has recalculated the amounts. Which audit assertion is associated with this audit procedure?
A) existence
B) valuation
C) allocation
D) classification
Q3) The most important internal control for petty cash is
A) the use of an imprest fund that is the responsibility of one individual.
B) keeping it in a safe or locked drawer.
C) keeping the amount of cash to a minimum.
D) accessibility so that cheques won't have to be written for small amounts.
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19
Chapter 18: Completing the Audit
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Sample Questions
Q1) A) Discuss the purposes of performing analytical procedures during the audit completion phase.
B) State the two purposes of the client representation letter.
Q2) Which of the following is a required condition for a contingent liability to exist?
A) There is a potential liability to an employee of the client.
B) The amount of the future payment is known.
C) The liability resulted from known events.
D) The outcome has been resolved by a current event.
Q3) The auditor's responsibility with regards to contingent liabilities is to
A) identify the appropriate accounting treatment.
B) decide on the appropriate accounting treatment.
C) prepare note disclosure.
D) evaluate the accounting treatment of known contingent liabilities.
Q4) What audit approach is used to search for unknown commitments?
A) include as part of the search for subsequent events
B) conduct with substantive tests associated with the cutoff assertion
C) perform as part of the audit of each cycle or audit area
D) include with the legal letter sent to lawyers
Q5) State the three conditions required for a contingent liability to exist.
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Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) The primary auditor who relies on a secondary auditor
A) is responsible for any deficiencies in the secondary auditor's work.
B) will mention the name of the secondary auditor if he or she decides that an unqualified opinion is appropriate.
C) will never mention the name of the secondary auditor in his or her report even if the report is qualified.
D) has no responsibility for checking the work of the secondary auditor.
Q2) If the balance sheet of a company is dated December 31, 2015, the audit report is dated March 6, 2016, and both are released to the public on March 15, 2016, this indicates that the auditor has searched for material unrecorded transactions and events that occurred up to
A) December 31, 2015.
B) March 6, 2016.
C) March 15, 2016.
D) December 31, 2016.
Q3) There are two conditions requiring a departure from an unqualified audit report. Discuss each of these conditions and state the appropriate audit report for each condition.
Q4) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) Prior to accepting an engagement to examine a financial forecast or projection included in a prospectus or other public offering document, the public accountant should
A) obtain an understanding of the controls over preparation of internal forecasts such as budgets.
B) increase the risk profile of the client with respect to management integrity.
C) ensure that management will provide sufficient evidence to conduct the engagement.
D) inform the client that the engagement may not detect errors in the client's forecasts.
Q2) With respect to working on an engagement to examine a financial forecast or projection included in a prospectus or other public offering document, the public accountant and the client should agree upon
A) allocation of the responsibility of creating the assumptions to the public accountant.
B) the period of time to be covered.
C) delegation of forecast preparation to the public accountant.
D) the fact that the forecast may not be prepared in accordance with standards.
Q3) Define "assurance engagements."
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