Introduction to Auditing Pre-Test Questions
Course Introduction
Introduction to Auditing provides an overview of the fundamental principles and practices involved in the auditing process. The course explores the role and responsibilities of auditors, the regulatory framework governing audits, and the ethical standards required in the profession. Topics include types of audits, audit planning, evidence collection, risk assessment, internal control evaluation, and the preparation of audit reports. Students will also be introduced to current issues in auditing, the use of technology in the audit process, and the impact of auditing on corporate governance and financial reporting.
Recommended Textbook
Auditing Assurance Services A Systematic Approach 11th 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 is not a concept that is included in the scope paragraph of the auditor's report?
A)The conformance of the financial statements with generally accepted accounting principles.
B)The audit was conducted in accordance with applicable auditing standards.
C)The audit was planned and performed to obtain reasonable, rather than absolute, assurance.
D)An audit involves examining items on a test (i.e., sampling)basis.
Answer: A
Q2) The auditor's report is generally addressed to the:
A)chief operating officer.
B)securities and exchange commission.
C)stockholders of the company.
D)chief financial officer.
Answer: C
Q3) Auditing is a type of attest service.
A)True
B)False
Answer: True
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Chapter 2: The Financial Statement Auditing Environment
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Q1) The Reporting section of the "Principles Underlying an Audit" is concerned with:
A)proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence.
B)the auditor expressing an audit opinion in accordance with the auditor's findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework.
C)whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence.
D)complying with ethical requirements, appropriate competence and maintaining professional skepticism.
Answer: B
Q2) 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
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Q1) Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
A)Analysis of balance sheet accounts.
B)Analysis of income statement accounts.
C)All matters of continuing accounting significance.
D)Facts that might bear on management integrity.
Answer: D
Q2) In assessing the competence of the internal audit function, an independent CPA most likely would obtain information about the:
A)quality of the work of the internal audit function.
B)organization's commitment to integrity and ethical values.
C)influence of management on the scope of the internal audit function duties.
D)organizational levels to which the internal audit function reports.
Answer: A
Q3) Define the engagement letter and discuss its importance.
Answer: An engagement letter formalizes the arrangement reached between the auditor and the client. This letter serves as a contract, outlining the responsibilities of both parties and preventing misunderstandings between the two parties.
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Chapter 4: Risk Assessment
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Q1) When an entity moves into a significant new line of business, all of the following increase except:
A)client risk.
B)acceptable audit risk.
C)risk of material misstatement.
D)entity business risk.
Q2) Increased fraud risk could result in all of the following except:
A)lower detection risk.
B)higher inherent risk.
C)lower control risk.
D)higher client risk.
Q3) Stacey, the partner in charge of the audit of GHER Corporation, calculates that detection risk to be 5.7% for the audit of accounts payable. GHER Corporation and RIF Enterprises are in the same industry, close to the same size, and have similar balances in accounts payable. What do the different detection risks tell you about the planned audit evidence that will be gathered for the GHER Corporation audit?
Q4) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Q1) Name two management assertions pertaining to the inventory account balance and explain why they are considered in an audit.
Q2) Which of the following is not a typical analytical procedure?
A)Study of relationships of the financial information with relevant nonfinancial information.
B)Comparison of the financial information with similar information regarding the industry in which the entity operates.
C)Comparison of recorded amounts of major disbursements with appropriate invoices.
D)Comparison of the financial information with budgeted amounts.
Q3) Audit procedures are designed to test management assertions. A)True
B)False
Q4) Stan is auditing First Financial Services and would like to use financial ratios to test the ability of First Financial Services to meet its current obligations. Identify two ratios that would help Stan in this task. Indicate how each ratio is calculated and what a high ratio would signify to Stan.
Q5) For an auditor, how are management assertions useful?
Q6) According to the text, what are the three functions of working papers?
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Chapter 6: Internal Control in a Financial Statement Audit
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Q1) The extent of an entity's use of IT can affect internal control.
A)True
B)False
Q2) While performing an audit on the internal controls over financial reporting for AirWaves Corporation, your audit team finds what it considers to be a significant deficiency. AirWaves is a large, private company. What steps would you take to communicate this finding?
Q3) If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end:
A)additional tests are seldom conducted for the remaining period.
B)additional control tests are required in the remaining period.
C)the entity's controls likely are ineffective.
D)additional tests likely will be performed in the remaining period.
Q4) To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including:
A)Inquiry.
B)Analytical procedures.
C)Calculation.
D)Confirmation.
Q5) 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) Examples of entity-level controls include:
A)management's risk assessment process.
B)controls to monitor results of operations.
C)the period-end financial reporting process.
D)All of these are examples of entity-level controls.
Q2) Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation?
A)Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually.
B)Flynt Corporation's CFO was arrested last year for embezzling money from the entity.
C)For the current year, the auditor found a material misstatement in Flynt's sales recognition that was undetected by the internal controls.
D)Flynt's audit committee is deemed to be ineffective.
Q3) All companies must follow the Sarbanes-Oxley Act requirements.
A)True
B)False
Q4) Discuss entity-level controls and provide examples of these types of controls.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Q1) For an attributes sampling plan, the tolerable deviation rate is 4.5%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the desired confidence level is 95%. What is the allowance for sampling risk included in the computed upper deviation rate?
A)1)5%.
B)3%.
C)4%.
D)5%.
Q2) In attributes sampling, population size has little or no effect on sample size once the population exceeds approximately:
A)1,000.
B)5,000.
C)100,000.
D)1,000,000.
Q3) Audit sampling is commonly used to gather confirmation audit evidence.
A)True
B)False
Q4) Define sampling risk and nonsampling risk.
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Q5) Why must an auditor use sampling? What tradeoffs occur when an auditor uses sampling?
Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) In applying classical variables sampling, an auditor attempts to:
A)estimate a qualitative characteristic of interest.
B)determine various rates of occurrence for specified attributes.
C)discover at least one instance of a critical deviation.
D)predict a monetary population value within a range of precision.
Q2) Which of the following would be an improper technique when using monetary-unit statistical sampling in an audit of accounts receivable?
A)Combining negative and positive dollar misstatements in the appraisal of a sample.
B)Using a sampling technique in which the same account balance could be selected more than once.
C)Selecting a random starting point and then sampling every n dollar.
D)Defining the sampling unit in the population as an individual dollar and not as an individual account balance.
Q3) In monetary-unit sampling, population size is:
A)the dollar balance in an account.
B)the number of items in an account.
C)unrelated to sample size.
D)included in the denominator of the formula to determine sample size.
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Chapter 10: Auditing the Revenue Process
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Q1) Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
A)Scan the sales journal for sequential and unusual entries.
B)Examine shipping documents for matching sales invoices.
C)Compare the accounts receivable ledger to daily sales summaries.
D)Inspect unused sales invoices for consecutive prenumbering.
Q2) Which of the following misstatements is not related to the completeness assertion for revenue?
A)Goods are shipped, but revenue is not recorded.
B)This year's revenue is recorded next year.
C)Next year's revenue is recorded this year.
D)Revenue is not recognized for services that have been performed.
Q3) A negative confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.
A)True
B)False
Q4) Describe the two types of confirmations and indicate which one is more reliable and why.
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Chapter 11: Auditing the Purchasing Process
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Q1) The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:
A)accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions.
B)accrued liability balances are less material than accounts payable balances.
C)evidence supporting accrued liabilities is nonexistent, while evidence supporting accounts payable is readily available.
D)accrued liabilities at year-end will become accounts payable during the following year.
Q2) When searching for unrecorded liabilities at year-end, the population identified for sampling would be:
A)cash receipts from related parties recorded before year-end.
B)creditors whose accounts appear on a subsidiary trial balance of accounts payable.
C)cash disbursements recorded in the period subsequent to year-end.
D)invoices dated a few days before and after year-end.
Q3) 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) When an auditor sets control risk low, sufficient evidence can be obtained for most payroll accounts through an understanding of internal controls, substantive analytical procedures, and tests of details of transactions. However, there are several accounts in the payroll cycle that may require more attention. Name the accounts and explain why the additional testing is necessary.
Q2) Listed below are descriptions of various types of documents used in the payroll process. Identify the document being described for each of the following:
1)The document used to record hours worked by an employee.
2)The document that summarizes all payroll payments issued to employees.
3)The document that contains information on an employee's work history.
4)The form used to authorize deductions from an employee's pay.
5)The computer file that contains all the entity's records related to payroll.
Q3) Proper segregation of duties is critical for the human resource management process.
A)True
B)False
Q4) Payroll-related expenses normally are not a material cost to the organization.
A)True
B)False
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Chapter 13: Auditing the Inventory Management Process
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Q1) In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:
A)review the entity's description of inventory policies and procedures.
B)perform test counts of inventory during the entity's physical count.
C)analyze inventory turnover statistics to identify slow-moving and obsolete items.
D)analyze monthly production reports to identify variances and unusual transactions.
Q2) The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.
A)True
B)False
Q3) An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of:
A)valuation.
B)rights and obligations.
C)existence.
D)completeness.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining Tennessee's financial statements would most likely learn of this error by:
A)discussing Tennessee's capitalization policies with its controller.
B)reviewing the titles and descriptions for all construction work orders issued during the year.
C)observing during the physical inventory observation that the warehouse has been painted.
D)examining in detail a sample of construction work orders.
Q2) In verifying the amount of goodwill recorded by an entity, the most convincing evidence that an auditor can obtain is by comparing the recorded value of assets acquired with the:
A)assessed value as evidenced by tax bills.
B)seller's book value as evidenced by financial statements.
C)insured value as evidenced by insurance policies.
D)appraised value as evidenced by independent appraisals.
Q3) An example of a prepaid account is prepaid interest.
A)True
B)False
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders' Equity, and Income
Statement Accounts
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Q1) Examining cancelled stock certificates addresses the assertion of: A)occurrence.
B)disclosures.
C)valuation.
D)completeness.
Q2) Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of: A)occurrence.
B)completeness.
C)cutoff.
D)accuracy.
Q3) 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.
Q4) Give an example of how the audit of income statement accounts could be affected by results of audit work done in other areas of the audit.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) An imprest cash account is used for specific purposes and contains a stipulated amount of money.
A)True
B)False
Q2) Explain how cash plays a role in all business processes.
Q3) A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconciliation.
A)True
B)False
Q4) An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether:
A)the cash receipts journal was held open for a few days after the year-end.
B)the last checks recorded before the year-end were actually mailed by the year-end.
C)cash balances were overstated because of kiting.
D)any unusual payments to or receipts from related parties occurred.
Q5) The cash account is affected by all of the entity's business processes.
A)True
B)False
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Chapter 17: Completing the Audit Engagement
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Q1) Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A)Inspecting title documents to verify whether any assets are pledged as collateral.
B)Confirming with third parties the details of arrangements to maintain financial support.
C)Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation.
D)Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.
Q2) When obtaining evidence regarding litigation against an entity, the CPA would be least interested in determining:
A)an estimate of when the matter will be resolved.
B)the period in which the underlying cause of the litigation occurred.
C)the probability of an unfavorable outcome.
D)an estimate of the potential loss.
Q3) What is the difference between a contingent liability and a commitment?
Q4) State the two primary purposes of the management representation letter.
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Chapter 18: Reports on Audited Financial Statements
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Q1) Auditing standards define special purpose financial statements as including those prepared under the following basis(es):
A)regulatory basis.
B)tax basis.
C)contractual basis.
D)regulatory basis, tax basis, and contractual basis.
Q2) An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:
A)is considered an "except for" qualification of the opinion.
B)violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C)necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D)is appropriate and would not negate the unqualified opinion.
Q3) Discuss three circumstances that prohibit the auditor from issuing an unqualified/unmodified opinion and the types of reports that the auditor may issue for a financial statement audit because of these circumstances.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Q1) In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the:
A)auditor's acquiescence in use of this defense.
B)common law.
C)AICPA Code of Professional Conduct.
D)state law.
Q2) In determining estimates of fees, an auditor may take into account each of the following, except the:
A)value of the service to the client.
B)degree of responsibility assumed by undertaking the engagement.
C)skills required to perform the service.
D)attainment of specific findings.
Q3) Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations?
A)10 days.
B)30 days.
C)50 days.
D)90 days.
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Chapter 20: Legal Liability
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Q1) Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that:
A)there was fraudulent activity by Worth.
B)there was a material misstatement in the financial statements.
C)Quincy relied on Worth's opinion.
D)Quincy was in privity with Worth.
Q2) A tort is a breach of contract for which civil action may be taken.
A)True
B)False
Q3) The Securities Exchange Act of 1934:
A)established a voluntary disclosure mechanism for issuers of publicly traded securities.
B)primarily relates to initial sales of securities to the public.
C)regulates all sales of securities.
D)regulates trading of securities subsequent to issuance.
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Q1) Absolute assurance is provided in:
A)an audit engagement.
B)a compilation engagement.
C)a review engagement.
D)none of the items listed.
Q2) The purpose of an attestation engagement is to provide users of information with an opinion, conclusion, or findings regarding the reliability of subject matter or an assertion about the subject matter, as measured against suitable and available criteria.
A)True
B)False
Q3) Which of the following are prospective financial statements upon which an accountant may appropriately report for general use?
A)Pro forma financial statements.
B)Financial projections.
C)Partial presentations.
D)Financial forecasts.
Q4) How has the advancement in technology led to the creation of the Trust Services?
Q5) In your own words, describe how the Institute of Internal Auditors (IIA)defines internal auditing.
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