Internal Auditing
Textbook Exam Questions
Course Introduction
Internal Auditing explores the principles, practices, and professional standards essential to evaluating and improving the effectiveness of risk management, control, and governance processes within organizations. The course covers the internal auditors role, including planning and conducting audits, assessing organizational policies and procedures, reporting findings, and recommending improvements to enhance operational efficiency and compliance. Students will engage with case studies and real-world scenarios to develop skills in audit techniques, ethical decision-making, and communication, preparing them to add value through independent, objective assurance and consulting activities.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 10th Edition by William F Messier Jr
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Q1) Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
A) It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor.
B) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
C) The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
D) It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business.
Answer: C
Q2) Conflicts of interest often occur between absentee owners and managers. A)True
B)False
Answer: True
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Chapter 2: The Financial Statement Auditing Environment
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Q1) The auditor must be independent of the auditee unless
A) The lack of independence does not influence his or her professional judgment.
B) Both parties agree that the independence issue is not a problem.
C) The lack of independence is insignificant.
D) None of the above-the auditor cannot lack independence.
Answer: D
Q2) The audit committee generally includes senior executives of the organization.
A)True
B)False
Answer: False
Q3) External auditors are referred to as "external" because
A) They report to users outside of the audited entity.
B) They are paid by parties outside of the audited entity.
C) They are not employees of the entity being audited.
D) Their offices are not at the entity's place of business.
Answer: C
Q4) A financial statement audit must be conducted based on GAAP.
A)True
B)False
Answer: False
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Q1) Materiality is based only on a quantitative analysis of the financial statements.
A)True
B)False
Answer: False
Q2) When a CPA is approached to perform an audit for the first time,the CPA should make inquiries of the predecessor auditor.This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining
A) Whether the predecessor's work should be utilized.
B) Whether, in the predecessor's opinion, the financial statements are materially correct.
C) Whether, in the predecessor's opinion, the company's internal controls have been satisfactory.
D) Whether the engagement should be accepted.
Answer: D
Q3) There are five general types of audit tests.
A)True
B)False
Answer: False
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Chapter 4: Risk Assessment
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Q1) Inherent risk includes sampling risk and detection risk.
A)True
B)False
Q2) When assessing the risk of material misstatement,auditors evaluate the reasonableness of an entity's accounting estimates.An auditor normally would be concerned about assumptions that are
A) Susceptible to bias.
B) Consistent with prior periods.
C) Insensitive to variations.
D) Similar to industry guidelines.
Q3) In general,material frauds perpetrated by which of the following are most difficult to detect?
A) Internal audit function.
B) Keypunch operator.
C) Cashier.
D) Controller.
Q4) Inherent risk is the susceptibility of an assertion to material misstatement,assuming no related controls.
A)True
B)False
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) The audit testing hierarchy is considered to be more effective and more efficient.Why?
Q2) Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships.The results of these procedures most likely would indicate that
A) Fraud exists within the relevant accounts.
B) Internal control activities are not operating effectively.
C) Additional tests of details are required.
D) The communication with the audit committee should be revised.
Q3) An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by
A) Availability of data aggregated at a high level.
B) Relative effectiveness and efficiency of the tests.
C) Timing of tests performed after the balance sheet date.
D) Auditor's familiarity with industry trends.
Q4) When using analytical procedures,the auditor first needs to develop an expectation with which to compare recorded results.What is meant by "precision of the expectation," and what factors affect the precision of analytical procedures?
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Chapter 6: Internal Control in a Financial Statement Audit
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Q1) After obtaining an understanding of internal controls and assessing control risk of an entity,an auditor decided not to perform tests of controls for purposes of the audit.The auditor most likely decided that
A) The available evidential matter obtained through tests of controls would not support an increased level of control risk.
B) A reduction in the assessed level of control risk is justified for certain financial statement assertions.
C) It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.
D) The assessed level of inherent risk exceeded the assessed level of control risk.
Q2) It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the
A) Cost/benefit relationship of the system of internal control.
B) Achievement of the objectives of the system of internal control.
C) Comparison of recorded accountability with assets.
D) Timing of the tests to be performed.
Q3) Why might an auditor decide to test controls at an interim date?
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Q1) Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control?
A) Multiple locations and business units.
B) Service organizations.
C) The role of the auditor in internal control.
D) Safeguarding assets.
Q2) A modification of the standard report is required for all of the following conditions except:
A) There is a restriction on the scope of the engagement.
B) There is other information contained in management's report on internal control.
C) Management has concluded that internal controls are not effective.
D) A significant subsequent event has occurred since the date being reported on.
Q3) ACL is an example of
A) An EDI software package.
B) An IT software package.
C) Software that allows auditors to retrieve and evaluate data from entity systems.
D) A type of networking.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Q1) A Type II error is the risk of incorrect acceptance.
A)True
B)False
Q2) An auditor is testing internal control procedures that are evidenced on an entity's vouchers.To select the vouchers for testing,the auditor obtains random numbers between the first and last voucher number in the period.If a random number matches the number of avoided voucher,that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
A) constitutes a deviation.
B) has been properly voided.
C) cannot be located.
D) represents an immaterial dollar amount.
Q3) An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
A) afford greater assurance than a nonstatistical sample of equal size.
B) provide an objective basis for quantitatively evaluating sample risks.
C) can more easily convert the sample into a dual-purpose test useful for substantive testing.
D) eliminate the need to use judgment in determining appropriate sample sizes.
Page 10
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) Which of the following sampling methods would be used to estimate a numerical measurement of population,such as the dollar value of an account?
A) Attributes sampling.
B) Stop-or-go sampling.
C) Classical variables sampling.
D) Random-number sampling.
Q2) Expected misstatement is directly related to sample size.
A)True
B)False
Q3) In statistical or nonstatistical sampling methods used in substantive testing,an auditor most likely would stratify a population into meaningful groups if
A) monetary-unit sampling (MUS) is used.
B) the population contains both very high and very low recorded amounts.
C) the auditor's estimated tolerable misstatement is extremely small.
D) the standard deviation of recorded amounts is relatively small.
Q4) Monetary-unit sampling is based on attribute sampling concepts.
A)True
B)False
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Q5) What is one advantage and one disadvantage of classical variables sampling?
Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) According to the Association of Certified Fraud Examiners,there are eight common methods for committing financial statement fraud.List 4 of the 8 methods.
Q2) During a review of a small business entity's internal control system,the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash.Which of the following controls would be most effective in offsetting this weakness?
A) The owner reviews errors in billings to customers and postings to the subsidiary ledger.
B) A controller receives the monthly bank statement directly and reconciles the checking accounts.
C) The owner reviews credit memos before they are recorded.
D) The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger.
Q3) An aged trial balance of accounts receivable is normally used by the auditor to A) verify the existence of recorded receivables.
B) ensure that all accounts are promptly credited.
C) evaluate the results of tests of controls.
D) evaluate the provision for bad debts.
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Chapter 11: Auditing the Purchasing Process
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Q1) The key inherent risk factors an auditor must consider when auditing the purchasing process are industry factors.Which two are most important and why?
Q2) When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents,the auditor is gathering evidence primarily in support of the assertion that A) recorded obligations were paid.
B) incurred obligations were recorded in the correct period.
C) recorded obligations were valid.
D) cash disbursements were recorded as incurred obligations.
Q3) The occurrence assertion for accounts payable includes
A) determining whether all accounts payable are recorded.
B) determining whether all accounts payable actually are liabilities.
C) determining whether all accounts payable are recorded in the proper period.
D) determining whether all accounts payable are properly classified in the financial statements.
Q4) Which type of confirmation is used more frequently by auditors accounts receivable confirmations or accounts payable confirmations? Why?
Q5) Describe three categories of expenses outlined in FASB Concept Statement No.5.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) An auditor would consider internal control over an entity's payroll procedures to be ineffective if the payroll department supervisor is responsible for A) hiring subordinate payroll department employees.
B) having custody over unclaimed paychecks.
C) updating employee earnings records.
D) applying pay rates to time tickets.
Q2) An auditor most likely would assess control risk at high if the payroll department supervisor is responsible for
A) examining authorization forms for new employees.
B) comparing payroll registers with original batch transmittal data.
C) authorizing payroll rate changes for all employees.
D) hiring all subordinate payroll department employees.
AICPA: BB Industry
AICPA: FN Risk Analysis
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Q3) If the results of the control tests do not support the planned level of control risk,the detection risk will have to be set higher.
A)True
B)False
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Chapter 13: Auditing the Inventory Management Process
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Q1) The auditor's observation of inventory is a generally accepted auditing procedure.
A)True
B)False
Q2) An entity maintains perpetual inventory records in both quantities and dollars.If the assessed level of control risk is high,an auditor would probably
A) increase the extent of tests of controls for the inventory cycle.
B) request that the entity schedule the physical inventory count at the end of the year.
C) insist that the entity perform physical counts of inventory items several times during the year.
D) apply gross profit tests to ascertain the reasonableness of the physical counts.
Q3) Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities?
A) Inventory cutoff errors.
B) Misapplication of LIFO.
C) Unreported scrap or spoilage.
D) Theft.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Which of the following is the most important control activity over acquisitions of property,plant,and equipment?
A) Establishing a written company policy distinguishing between capital and revenue expenditures.
B) Using a budget to forecast and control acquisitions and retirements.
C) Analyzing monthly variances between authorized expenditures and actual costs.
D) Requiring acquisitions to be made by user departments.
Q2) Reviewing capital budgets and comparing the amounts spent with amounts budgeted is an example of a substantive analytical procedure for auditing prepaid accounts.
A)True
B)False
Q3) In auditing intangible assets,an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of
A) valuation and allocation.
B) existence.
C) completeness.
D) rights and obligations.
Page 16
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Q1) An audit of stockholders' equity ordinarily should include
A) tracing individual dividend payments to the capital stock records.
B) reviewing minutes of board meetings to determine the number of shares outstanding.
C) confirming shares outstanding with state officials.
D) determining that dividend declarations comply with debt agreements.
Q2) You have been assigned the duty of auditing long-term debt and retained earnings for Keys,Inc.Describe the tests you would use to support management's assertions regarding disclosure for these accounts.
Q3) Notes receivable is a common type of long-term financing.
A)True
B)False
Q4) Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity?
A) Determining whether restrictions have been imposed on retained earnings.
B) Counting treasury stock certificates.
C) Inspecting minutes of the board of directors to verify that cash dividends were declared.
D) Establishing that treasury stock is valued at cost.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) When an entity uses a trust company as custodian of its marketable securities,the possibility of concealing fraud most likely would be reduced if the A) trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
B) securities are registered in the name of the trust company, rather than the entity itself. C) interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.
D) trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
Q2) The least crucial element of internal control over cash is A) separation of cash record-keeping from custody of cash. B) preparation of the monthly bank reconciliation. C) batch processing of checks.
D) separation of cash receipts from cash disbursements.
Q3) Explain how cash plays a role in all business processes.
Q4) Identify 3 of the 6 tests an auditor uses on the bank reconciliation. (Only 3 are required for the student's answer)
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Chapter 17: Completing the Audit Engagement
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Q1) State the two primary purposes of the management representation letter.
Q2) Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?
A) Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date.
B) Culmination of events affecting the realization of inventories owned as of the balance sheet date.
C) Material changes in the settlement of liabilities that were estimated as of the balance sheet date.
D) Material changes in the quoted market prices of listed investment securities since the balance sheet date.
Q3) Which of the following auditing procedures is ordinarily performed last?
A) Confirming accounts payable.
B) Testing the purchasing function.
C) Reading the minutes of directors' meetings.
D) Obtaining a management representation letter.
Q4) Every contingent liability must be recorded.
A)True
B)False
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Chapter 18: Reports on Audited Financial Statements
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Q1) What are the four key audit report enhancements for all entities,which are effective for financial periods ending after December 15,2016?
Q2) Identify the special purpose framework used in each of the following situations.
1.A real estate company reports to its partners on the basis used to complete the income tax return.
2.A company has its financial statements prepared on a price-level adjusted basis as required by its lender.
3.An insurance company reports in compliance with the rules of a state insurance commission.
4.A partnership reports on revenues received and expenses paid. What modifications must be made to the standard auditor's report for these situations?
Q3) Discuss the new IAASB reporting standards for "listed" (public)entities which are effective for financial periods ending after December 15,2016.
Q4) A basic assumption that underlies financial reporting is that an entity will continue as a going concern.
A)True
B)False
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Chapter 19: Professsional Conduct,Independence,and Quality Control
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Q1) With respect to ethics,the rights-based approach
A) suggests that auditors should always verify ownership of a client's material tangible assets.
B) is primarily concerned with equity and impartiality.
C) suggests that an individual's actions should not violate the rights of any individual.
D) recognizes that decisions involve trade-offs between costs and benefits.
Q2) The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.
A)True
B)False
Q3) The SEC's rules with respect to services provided by auditors are predicated on three basic principles of auditor objectivity and independence.What are the three basic principles?
Q4) The quality control standards are concerned primarily with A) actions of individual auditors.
B) a firm's monitoring of its practice.
C) disciplinary actions against individual auditors.
D) preventing legal action.
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Q5) When can a CPA disclose confidential information without the client's consent?
Chapter 20: Legal Liability
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Q1) To recover against an auditor in a negligence case,the client must prove that the client sustained an actual loss or damage.
A)True
B)False
Q2) To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement,the plaintiff must prove A) the plaintiff's reliance on the registration statement and the defendant's intent to deceive.
B) neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive.
C) the plaintiff's reliance on the registration statement but not the defendant's intent to deceive.
D) the defendant's intent to deceive but not the plaintiff's reliance on the registration statement.
Q3) Suits are often brought against auditors that allege that the auditors did not detect some type of fraud or defalcation.List the six defenses that the auditors could mount against client negligence claims.
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Chapter 21: Assurance,Attestation,amd Internal Auditing
Services-professional Judgement Module
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Q1) A practitioner is allowed to perform either of two types of attestation engagements for reporting on internal control: (1)examination or (2)review.
A)True
B)False
Q2) To bridge the gap between a changing business environment and the guidance that was then available,the IIA developed a Professional Practices Framework.This framework consists of two broad categories of guidance.List these categories of guidance and what they include.
Q3) Which of the following would an accountant not need to know when conducting a compilation?
A) The accounting principles and practices of the industry in which the entity operates.
B) A general understanding of the nature of the entity's business transactions and the form of its accounting records.
C) The accounting basis on which the financial statements are to be presented.
D) The accountant would need to know all of the other items listed when conducting a compilation.
Q4) Explain each of the three PrimePlus Services typically offered by practitioners.
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