Internal Auditing
Textbook Exam Questions
Course Introduction
Internal Auditing is a course that explores the systematic process of evaluating and improving the effectiveness of risk management, control, and governance processes within an organization. Students learn about the standards, procedures, and ethical requirements of internal audit functions, as well as techniques for planning, conducting, and reporting audit activities. The course covers key topics such as internal control frameworks, audit evidence, sampling methods, fraud detection, and the role of auditors in supporting organizational objectives. Practical case studies and real-world scenarios are used to develop analytical and communication skills essential for a career in internal auditing.
Recommended Textbook
Auditing and Assurance Services 6th Edition by Timothy J. Louwers
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2
Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) If an auditor is performing procedures related to the information that is contained in the client's pension footnote,he/she is most likely obtain evidence concerning management's assertion about
A) rights and obligations.
B) existence.
C) valuation.
D) presentation and disclosure.
Answer: D
Q2) Which of the following is not included in The American Accounting Association (AAA)definition of auditing?
A) Potential conflict of interest
B) Systematic process
C) Assertions about economic actions
D) Established criteria
Answer: A
Q3) What is information risk? What is business risk?
Answer: Information risk is the risk that financial statements will be materially false or misleading.Business risk is the risk an entity will fail to meet its objectives.
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3
Chapter 2: Professional Standards
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Sample Questions
Q1) For each of the statements below,indicate through the appropriate letter whether it relates to the PCAOB,Auditing Standards Board,both the PCAOB and Auditing Standards Board,or neither the PCAOB nor Auditing Standards Board.
A. PCAOB
B. Auditing Standards Board
C. Both PCAOB and Auditing Standards Board
D. Neither PCAOB nor Auditing Standards Board
___ 1. Conducts inspections of firms that audit public entities.
___ 2. Pronouncements may be used in the audit of nonpublic entities.
___ 3. Pronouncements may be used in the audit of public entities.
___ 4. Was created by the Sarbanes Oxley Act of 2002.
___ 5. Involved with the certification and licensure of public accountants.
___ 6. Issues Statements on Auditing Standards.
___ 7. Conducts peer reviews of firms that audit nonpublic entities.
___ 8. Sanctions individual auditors for violations of generally accepted auditing standards.
Answer: 1.A,2.B,3.C,4.A,5.D,6.B,7.D,8.D
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Page 4
Chapter 3: Engagement Planning
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Sample Questions
Q1) Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs)to determine whether comparable information is in agreement.Examples of such comparisons would not include
A) payroll details with personnel records.
B) current and prior inventory to details of purchases and sales.
C) paid vouchers to disbursements.
D) observation of inventory accounts.
Answer: D
Q2) Which of the following is not a way in which auditors use the concept of overall materiality?
A) As a guide to planning the audit plan
B) As a guide to the evaluation of evidence
C) As a guide for making decisions about the audit report
D) As a guide for assessing control risk
Answer: D
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Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240)is on
A) employee misappropriation of assets.
B) management fraud.
C) client fraud on customers.
D) employee embezzlement.
Q2) What assurance does the auditor provide that errors,frauds,and direct effect noncompliance that are material to the financial statements will be detected?
A) Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited
B) Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable
C) Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited
D) Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable
Q3) When fraud risk is significant,and management cooperation is unsatisfactory,the auditors will most likely
A) perform extended audit procedures.
B) consult with fraud examiners.
C) report directly to the Securities and Exchange Commission within one day.
D) withdraw from the engagement.
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) When an auditor plans to rely on controls that have changed since they were last tested,which of the following courses of action would be most appropriate?
A) Test the operating effectiveness of such controls in the current audit.
B) Document that reliance and proceed with the original audit strategy.
C) Inquire of management as to the effectiveness of the controls.
D) Report the reliance in the report on internal controls.
Q2) If a control total were to be computed on each of the following data items,which would best be identified as a hash total for a payroll IT application?
A) Hours worked
B) Total debits and total credits
C) Net pay
D) Department numbers
Q3) In testing control activities,an auditor ordinarily selects from a variety of techniques,including
A) inquiry and analytical procedures.
B) reperformance and observation.
C) comparison and confirmation.
D) inspection and verification.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) Narbona,CPA is reviewing controls over cash received through a bank night depository.Which controls would she find most important?
A) Responsibilities are rotated for processing night depository receipts among employees of the various departments.
B) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.
C) Vacations are required for all employees engaged in night depository activities.
D) All deposit tickets related to night deposits are numbered.
Q2) When you examine canceled checks returned in the bank statement by a client's bank,how could you tell whether the amount on the check had been skillfully raised (increased,say,from $75.00 to $7,500 in the amount box,and altered in the written line from "Seventy-five dollars" to "Seventy-five hundred dollars")after the check was cleared by the bank? (An employee might do this to "support" a $7,500 cash disbursement journal entry.)
Q3) After checks are signed for vendor invoices,why should vouchers be marked "paid" or otherwise mutilated?
Q4) Describe how a lockbox works and indicate the advantages of such a system.
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Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) Alpha Brewery Corporation recorded sales through January 4,2005,dating them December 31,2004.This situation is an example of a violation of which of the following assertions?
A) Existence or occurrence.
B) Completeness.
C) Classification.
D) Accuracy.
Q2) The document that generates recording of a sale is the A) customer order.
B) shipping order.
C) invoice.
D) purchase order.
Q3) A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses. Question also found in study guide
A)True
B)False
Q4) Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.
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Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) A CPA learns that his client has paid a vendor twice for the same shipment; once based upon the original invoice and once based upon the monthly statement sent from the vendor.A control procedure that should have prevented this duplicate payment is
A) prenumbering of disbursement vouchers.
B) attachment of the receiving report to the disbursement report.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
Q2) Auditors should inspect the "unmatched receiving report" file to determine whether the liability for the receipt of goods has been recorded.
A)True
B)False
Q3) A list of all purchases might exist only in a ____________________________________ file rather than a
Question also found in study guide
Q4) The payroll department approves payroll hours prior to processing the payroll.
A)True
B)False
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10
Chapter 9: Production Cycle
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Sample Questions
Q1) Which of the following is the assertion with the highest inherent risk in auditing inventory?
A) Completeness.
B) Rights.
C) Existence.
D) Properly classification on the balance sheet.
Q2) The cost accounting department at Blue Manufacturing Company receives various types of information at the end of each week.The production floor reports time and production work data directly to the cost accounting department.Also,the payroll department sends labor cost data to the cost accounting department.What is the cost accounting department likely to do with this information? Why?
Q3) Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
A) Scanning perpetual inventory, production, and purchasing records.
B) Examining paid vendor invoices.
C) Tracing inventory items from the tag listing back to the physical inventory quantities.
D) Performing cutoff procedures for shipping and receiving.
Q4) Prepare an audit plan for inventory pricing and compilation.
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Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) The most significant inherent risk in the fiancé and investment cycle is the proper presentation of items on the balance sheet.
A)True
B)False
Q2) When circumstances call for extended procedures,information on outstanding stock may be ________________________________________________.
Question also found in study guide
Q3) When the client holds a large amount of negotiable securities,auditors need to plan to guard against
A) unauthorized negotiation of the securities before they are counted.
B) unrecorded sales of securities after they are counted.
C) substitution of securities already counted for other securities that should be on hand but are not.
D) substitution of authentic securities with counterfeit securities.
Q4) _______________________________ is responsible for making estimates and should have a _____________________________ and _____________________________ designed to reduce the likelihood of material misstatements in them.
Question also found in study guide
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Chapter 11: Completing the Audit
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Sample Questions
Q1) Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
A) Confirming a sample of material accounts receivable established after year-end
B) Comparing the financial statements being reported on with those of the prior period
C) Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements
D) Inquiring as to whether any unusual adjustments were made just before year-end
Q2) If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date),this is known as a(n)
A) omitted procedure.
B) prior period adjustment.
C) subsequent event.
D) subsequently discovered fact.
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Chapter 12: Reports on Audited Financial Statements
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Sample Questions
Q1) Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph
A) preceding the Auditor's Responsibility section.
B) preceding the opinion paragraph.
C) following the opinion paragraph.
D) within the footnotes to the financial statements.
Q2) Management determined it was probable that a pending litigation claim would result in a material loss.The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement.If the auditors believe an accrual should be made,what type of report should be issued?
A) Standard (unmodified) report
B) Unmodified opinion with an emphasis-of-matter paragraph
C) Qualified opinion based on a circumstance-imposed scope limitation
D) Qualified or adverse opinion based on a departure from GAAP
Q3) Define a scope limitation and distinguish between client-imposed and circumstance-imposed scope limitations.What reporting options are available to auditors when scope limitations are encountered during the engagement?
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Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) In reporting on a nonpublic entity's internal control over financial reporting,an accountant should include a paragraph that describes the A) documentary evidence regarding the control environment factors. B) changes in the entity's internal control since the prior report.
C) potential benefits from the accountant's suggested improvements. D) inherent limitations of internal control.
Q2) George Wilson is on the board of directors of a small manufacturing company,Smith Plastics Inc.George holds a CPA certificate and is a member of the AICPA.The president of the company,John Smith,has asked George to prepare financial statements for the company to be submitted to Sixth First Bank as part of a loan request.Mr.Smith tells George that the bank would like a review or an audit,but would settle for a compilation from a CPA.He would like George to do the compilation.
Required:
Under what conditions,if any,George Wilson would be allowed to prepare a compilation of the financial statements of Smith Plastics Inc.?
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Chapter 14: Professional Ethics
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Sample Questions
Q1) The SEC requires companies to disclose fees paid to independent public accounting firms for audit and consulting services in the belief that
A) such disclosures will end the practice of auditors performing nonaudit services for audit clients.
B) financial analysts will attribute far less credibility to financial statements audited by public accounting firms that earn substantial nonaudit fees from audit clients.
C) audit firm consulting on client's accounting information processing systems essentially impairs audit independence.
D) client directors and financial statement users should consider all aspects related to auditors' independence, and information about fees is important.
Q2) What agency has the ultimate authority in defining independence for public companies?
A) AICPA
B) SEC
C) Department of Justice
D) Congress
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Chapter 15: Legal Liability
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Sample Questions
Q1) While conducting an audit of a public entity,Wallace failed to identify material misstatements in its client's financial statements.Investors then sued Wallace in connection with this audit.Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace?
A) Wallace was in privity with the shareholders.
B) The shareholders relied upon the materially misstated financial statements.
C) Wallace acted with gross negligence in his audit.
D) The reliance on the materially misstated financial statements caused the shareholders' losses.
Q2) Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?
A) Contributory negligence on the part of the client
B) A disclaimer contained in the engagement letter
C) Lack of privity
D) Lack of scienter
Q3) Briefly explain the concept of proportionate liability.Why is the adoption of proportionate liability important to the accounting profession?
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Chapter 16: Internal Audits governmental Audits and Fraud
Examinations
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Sample Questions
Q1) Auditors are concerned about internal control strengths and weaknesses; fraud investigators are mostly concerned about fraud weaknesses. Question also found in study guide
A)True
B)False
Q2) In a single audit of federal financial assistance programs,which of the following does the auditor not need to determine and report for each organization?
A) An expanded scope audit of economy, efficiency, and program results.
B) That the financial statements are presented fairly in accordance with GAAP.
C) That an adequate internal control system is in place.
D) That the laws and regulations have been complied with.
Q3) To ensure an internal auditor's independence it is preferable for the internal auditor to report directly to the audit committee.
A)True
B)False
Q4) Fraud examination requires the individual to have expertise in ____________________ and ______________________________.
Question also found in study guide
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) Which of the following sampling activities is not performed during the planning stage of the audit?
A) Define the population.
B) Determine the sample size.
C) Determine the objective of sampling.
D) Define the characteristic of interest.
Q2) In the study of internal control,the auditor uses sampling to compare the ______________ to the ______________.
A) adjusted estimate of misstatement; overall materiality
B) sampling risk; precision
C) adjusted estimate of the deviation rate; tolerable rate of deviation
D) precision interval; upper limit on misstatement
Q3) If the upper limit rate of deviation exceeds the tolerable rate of deviation,the auditor would most likely
A) accept the account balance as fairly stated.
B) reject the account balance as fairly stated.
C) increase the planned effectiveness of substantive procedures.
D) not increase the planned effectiveness of substantive procedures.
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Chapter 18: Attributes Sampling
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Sample Questions
Q1) If an auditor calculated an upper limit rate of deviation of 5% when the tolerable rate of deviation was 4%,the auditor would conclude that
A) the population deviation rate is low enough to rely on internal control as planned.
B) the population deviation rate may be higher than that necessary to rely on internal control as planned.
C) the control risk can be assessed at planned levels.
D) the control risk should be assessed at lower levels.
Q2) Mary Todd is auditing White House Furniture.In selecting a sample of purchases,she finds that a purchase order is missing.She should
A) select another purchase to test.
B) have the client recreate the purchase order.
C) consider the sample item a deviation.
D) ask the client if the purchase was authorized.
Q3) Which of the following does not have a direct relationship with sample size?
A) Expected population deviation rate
B) Population size
C) Risk of overreliance
D) All of these have a direct relationship with sample size
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Page 20
Chapter 19: Variables Sampling
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Sample
Questions
Q1) Roberts,CPA,decided to use monetary unit sampling in the audit of a client's accounts receivable balance.The recorded amount of the accounts receivable control account totaled $2,000,000 and consisted of approximately 5,000 accounts.Roberts established a tolerable misstatement of $100,000,a risk of incorrect acceptance of 5%,and an expected misstatement of $10,000.
a.Calculate the sample size.
b.Calculate the sampling interval.
Q2) Cruz,CPA decided to use nonstatistical sampling to examine the accounts payable balances of Maverick Inc.,Based on his professional judgment,Cruz judgmentally selected sample invoices from a file,but did so without any intentional bias.The selection method used by Cruz was
A) haphazard selection.
B) block selection.
C) systematic selection.
D) random selection.
Q3) You are planning to use monetary unit sampling to evaluate accounts receivable for
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Chapter 20: Auditing and Information Technology
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Sample Questions
Q1) When a real-time computerized processing system is in use,the computer controls can be strengthened by
A) providing for the separation of duties between data input and error listing operations.
B) using a systems development life cycle for authorization, user involvement, and testing of program modifications.
C) preparing batch totals to provide assurance that file updates are made for the entire group of transactions.
D) performing a validity check of an identification number before a user can obtain access to the computer files.
Q2) Computer controls that are pervasive and apply to all applications of a computerized processing system are referred to as
A) computer controls.
B) environment controls.
C) automated application controls.
D) general controls.
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