Introduction to Auditing Question Bank
Course Introduction
Introduction to Auditing provides students with a foundational understanding of the principles, practices, and procedures of auditing in contemporary organizations. The course covers the objectives and types of audits, the ethical and legal environment, internal controls, risk assessment, audit evidence, sampling techniques, and audit reporting. Students will explore the role of auditors, both internal and external, and gain insight into the audit process from planning to completion. Through real-world examples and case studies, students will develop analytical skills and an appreciation for the importance of audit quality, professional skepticism, and the evolving challenges in the auditing profession.
Recommended Textbook
Auditing and Assurance Services 6th Edition by Timothy J. Louwers
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20 Chapters
1618 Verified Questions
1618 Flashcards
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2
Chapter 1: Auditing and Assurance Services
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62 Verified Questions
62 Flashcards
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Sample Questions
Q1) The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations.When looking at the ending balance for the fixed asset account the auditor examined all work orders,purchased materials,labor cost reports,and applied overhead that were capitalized as part of the equipment costs.Which of the following is the ASB balance assertion most closely related to the auditor's testing?
A) Existence
B) Completeness
C) Rights and obligations
D) Valuation
Answer: D
Q2) Which of the following best describes assurance services?
A) Independent professional services that report on the client's financial statements
B) Independent professional services that improve the quality of information for decision makers
C) Independent professional services that report on specific written management assertions
D) Independent professional services that improve the operations of the client
Answer: B
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3
Chapter 2: Professional Standards
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Sample Questions
Q1) Which of the following courses of action is most appropriate if an auditor concludes that there is a high risk of material misstatement?
A) Use smaller, rather than larger, sample sizes.
B) Perform substantive tests as of an interim date.
C) Select more effective substantive tests.
D) Increase tests of controls.
Answer: C
Q2) Which of the following is most closely associated with the responsibilities principle?
A) Due care
B) Planning
C) Qualified audit opinion
D) Risk of material misstatement
Answer: A
Q3) Auditors try to achieve independence in appearance in order to
A) maintain public confidence in the profession.
B) become independent in fact.
C) comply with the responsibilities principle.
D) maintain an unbiased mental attitude.
Answer: A
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Page 4
Chapter 3: Engagement Planning
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Sample Questions
Q1) Which of the following is not a category of audit documentation?
A) Temporary files
B) Permanent files
C) Audit administrative files
D) Current documentation files
Answer: A
Q2) The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of
A) planning.
B) supervision.
C) information evaluation.
D) quality assurance.
Answer: A
Q3) Explain the bottom-up approach and the top-down approach to quantifying overall materiality.
Answer: In the bottom-up approach to judging materiality,amounts in each account are judged separately and then combined to determine the overall effect.In the top-down approach to judging materiality,an overall material amount is determined for the financial statements and then allocated to each particular account.
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Page 5
Chapter 4: Management Fraud and Audit Risk
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71 Verified Questions
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Sample Questions
Q1) In the planning stage,analytical procedures are used to A) identify potential problem areas.
B) provide direct evidence about the balances in accounts.
C) determine the mathematical correctness of the financial statements.
D) all of these.
Q2) The purpose of an audit strategy is
A) to provide a defense against litigation.
B) to gain an understanding of the client.
C) to comply with securities law.
D) to set the scope, timing, and direction for auditing each relevant assertion.
Q3) Based on audit evidence gathered and evaluated,an auditor decides to increase the assessed level of control risk from that originally planned.To achieve an overall audit risk level that is substantially the same as the planned audit risk level,the auditor would A) decrease substantive testing.
B) decrease detection risk.
C) increase inherent risk.
D) increase materiality levels.
Q4) What are the independent auditor's responsibilities to detect and report errors and frauds?
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) Proper separation of duties reduces the opportunities to allow persons to be in positions to both
A) journalize entries and prepare financial statements.
B) record cash receipts and cash disbursements.
C) establish internal controls and authorize transactions.
D) perpetrate a fraud and then conceal it in the books.
Q2) The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with A) knowledge necessary for audit planning.
B) evidential matter to use in assessing inherent risk.
C) a basis for modifying tests of controls.
D) an evaluation of the consistency of application of management's policies.
Q3) The internal control in small business is highly dependent on the A) separation of functional responsibilities.
B) complexity of the client's internal controls.
C) owner-manager's competence, as well as his/her ethics and integrity.
D) bonding of employees.
Q4) List and explain briefly the phases of an internal control evaluation.
Q5) List several elements of a company's control environment.
Q6) What is the difference between a significant deficiency and a material weakness?
Page 7
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) A proof of cash
A) is required by GAAS.
B) can be used to test the transactions process.
C) is most helpful when control risk for cash is low.
D) always detects lapping.
Q2) Which of the following should be performed by the persons opening the mail and recording payments?
A) Restrictive endorsement on all checks
B) Entering of payment information into customer accounts
C) The preparation of the deposit slip and the delivery of the checks to the bank
D) The segregation of all payments made on accounts listed as past due
Q3) Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets?
A) A large number of bearer bonds on hand
B) A large number of inventory items with low sales prices
C) A large number of transactions processed in a short period of time
D) A large number of fixed assets with easily identifiable serial numbers
Q4) List,and briefly describe,the three factors that increase the probability of fraud.
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Page 8
Chapter 7: Revenue and Collection Cycle
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112 Flashcards
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Sample Questions
Q1) Internal control assessment is important because it governs the ________________________________,____________________________
_____ and _________________________________ of substantive procedures.
Question also found in study guide
Q2) Confirmations of accounts receivable provide the most evidence for which of the following assertions?
A) Existence.
B) Valuation or allocation.
C) Rights and obligations.
D) Completeness.
Q3) Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
A) Review the cash receipts journal for the month prior to the year-end.
B) Intensify the study of the internal control structure concerning the revenue cycle.
C) Increase the assessed level of detection risk for the existence assertion.
D) Inspect the shipping records documenting the merchandise sold to the debtors.
Q4) What is dual direction testing?
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9
Chapter 8: Acquisition and Expenditure Cycle
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130 Flashcards
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Sample Questions
Q1) Which of the following would not overstate current-period net income?
A) Capitalizing an expenditure that should be expensed.
B) Failing to record a liability for an expenditure.
C) Failing to record a check paying an item in vouchers payable.
D) All of the above would overstate net income.
Q2) Tracing a sample of time clock cards to payroll registers (journals)is a procedure designed to obtain evidence about the transaction assertion(s)of A) occurrence only.
B) occurrence and accuracy only.
C) completeness only.
D) accuracy only.
Q3) An audit plan for accounts payable would not include which of the following procedures?
A) Obtaining a trial balance of recorded accounts payable.
B) Sending confirmation to accounts with zero balances.
C) Reviewing cash receipts for the period after year-end.
D) Obtaining written client representations about related-party payables and pledges of assets as collateral for liabilities.
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Chapter 9: Production Cycle
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Sample Questions
Q1) An auditor selected a product maintained in the finished goods warehouse.The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account.Which ASB balance assertion is the auditor most likely testing?
A) Existence
B) Completeness
C) Rights and obligations
D) Valuation
Q2) The audit procedures used in an observation of the client's physical inventory taking are designed primarily to
A) test and observe the client's physical count of inventory.
B) verify independently the physical counts obtained by the client.
C) assist the client in taking test counts of year-end inventory.
D) determine whether inventory contains obsolete goods.
Q3) Generally accepted accounting principles (GAAP)require that inventory be recorded at
A) the lower of cost or fair market value.
B) the lower of cost or net realizable value.
C) the higher of cost or net realizable value less a normal profit (floor).
D) none of the above.
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Chapter 10: Finance and Investment Cycle
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116 Flashcards
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Sample Questions
Q1) The focus of substantive tests in the finance and investment cycle is on
A) reconciliation of detailed listings with general ledger amounts.
B) proper cut-off.
C) search for unrecorded items.
D) gaining an understanding and verifying amounts and calculations.
Q2) Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30.Having completed an examination of the investment securities,which of the following is the best method of verifying the accuracy of recorded dividend income?
A) Tracing recorded dividend income to cash receipts records and validated deposit slips.
B) Performing analytical procedures and statistical sampling.
C) Comparing recorded dividends with amounts appearing on federal information Form 1099.
D) Comparing recorded dividends with a standard financial reporting service's record of dividends.
Q3) _________________________________ transactions are obligations and commitments that are not required to be recorded.
Question also found in study guide
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Page 12
Chapter 11: Completing the Audit
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61 Flashcards
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Sample Questions
Q1) Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements?
A) Settlement of long outstanding litigation
B) Collection of a past due accounts receivable
C) Loss of inventory as a result of a flood
D) An additional tax assessment on prior income
Q2) Near the end of an audit,the application of analytical procedures is
A) recommended by auditing standards.
B) not mentioned by auditing standards.
C) not useful, since detailed substantive procedures have already been performed.
D) required by auditing standards.
Q3) Which of the following reporting options is available if the client refuses to provide auditors with written representations?
A) Unmodified or qualified opinion
B) Qualified or adverse opinion
C) Qualified opinion or disclaimer of opinion
D) Disclaimer of opinion or adverse opinion
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13
Chapter 12: Reports on Audited Financial Statements
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Sample Questions
Q1) Below are two independent situations.
A.Grinner and Greeter,CPAs,were engaged to perform an audit of the financial statements of Happy Inc.Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable.All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered.However,Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.
B.Tick and Tie,CPAs,were performing their annual audit of Johnson Manufacturing Company.Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer.Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000.Johnson's management has included information in the footnotes about the lawsuit.However,they have not recorded any loss or liability in the income statement or balance sheet.
Required:
For each of the independent situations presented above,state what type of opinion should be issued on the company's financial statements.Briefly explain your rationale.Finally,state which paragraphs,if any,of the standard report would be modified.
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Page 14
Chapter 13: Other Public Accounting Services
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57 Flashcards
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Sample Questions
Q1) An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that
A) justifies the reasons for departing from generally accepted principles.
B) states whether the financial statements are fairly presented in conformity with a special purpose framework.
C) refers to the note to the financial statements that describes the special purpose framework.
D) explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.
Q2) Extensible Business Reporting Language (XBRL)provides a computer readable identifying tag for each individual item of data.The advantages of XBRL include all of the following except
A) increases the speed of handling of financial data.
B) reduces the chance of error.
C) improves the full disclosure of financial information.
D) permits automatic checking of information.
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15
Chapter 14: Professional Ethics
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Sample Questions
Q1) Red and Green,CPAs are the external auditors for Blue Corporation,a publicly-held company.Blue Corporation has outsourced its internal audit function to Red and Green.Which of the following statements is true?
A) Doing internal audit work does not impair the independence of Red and Green.
B) The independence of Red and Green is impaired only if employees of Red and Green act in a management capacity or make management decisions.
C) The independence of Red and Green is impaired only if a member of Red and Green's engagement team is hired to manage an accounting function in Blue Corporation.
D) Public accounting firms cannot be both the internal and external auditors for publicly-held companies and maintain independence.
Q2) Which of the following forms of organization would NOT be allowed under Rule 505 of the Professional Code of Conduct?
A) Limited liability partnership; all partners are CPAs
B) Limited liability partnership; 70% of partners are CPAs
C) Limited liability corporation; all shareholders are CPAs
D) Partnership; 40% of partners are CPAs
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Chapter 15: Legal Liability
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Sample Questions
Q1) Which of the following statements is true concerning auditors' responsibilities during the audit?
A) Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances.
B) Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements.
C) Auditors are strictly liable for failures to discover client fraud.
D) Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards.
Q2) Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?
A) The loss was caused by factors other than the materially misstated financial statements
B) Lack of proper standing (relationship) to bring suit in that jurisdiction
C) Lack of a privity relationship with auditors
D) Third parties did not rely upon the financial statements
Q3) What are the legal liabilities of auditors under common law?
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Chapter 16: Internal Audits governmental Audits and Fraud
Examinations
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Sample Questions
Q1) Internal auditors should be independent when obtaining evidence in the sense of being free financial relationships such as owning stock.
A)True
B)False
Q2) The purpose of the internal audit's evaluation of the effectiveness of existing risk management processes is to determine that
A) management has planned and designed operations to provide reasonable assurance of achieving objectives and goals.
B) management's policies and procedures will achieve objectives and goals.
C) the organization's objectives and goals are established within risk limits established by the internal audit organization.
D) the organization's objectives and goals will be achieved in an accurate and timely manner and with minimal use of resources.
Q3) Internal audit reports are usually considered "____________________" until a _________________________ is performed.
Question also found in study guide
Q4) What are the different types of government audits?
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
A) eliminate the risk of nonsampling error.
B) reduce the level of audit risk and overall materiality to a relatively low level.
C) measure the sufficiency of the evidence gathered.
D) minimize the failure to detect misstatements and irregularities.
Q2) All of the following are correct regarding variables sampling,except A) variables sampling is used to examine a population when auditors want to estimate the amount (or value) of some characteristic of that population.
B) the risk of incorrect rejection is of more concern to auditors than the risk of incorrect acceptance.
C) auditors can use either statistical or nonstatistical sampling approaches to variables sampling.
D) to determine if an account balance is fairly stated, auditors compare the adjusted sample estimate of the misstatement to the tolerable misstatement.
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Chapter 18: Attributes Sampling
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Sample Questions
Q1) As a result of tests of controls,an auditor assessed control risk too low and decreased the effectiveness of her substantive procedures.This assessment occurred because the true deviation rate in the population was
A) less than the risk of overreliance, based on the auditor's sample.
B) less than the deviation rate in the auditor's sample.
C) greater than the risk of overreliance, based on the auditor's sample.
D) greater than the deviation rate in the auditor's sample.
Q2) The risk of underreliance is the risk that the sample selected to test controls
A) does not support the auditor's planned level of control risk when the true operating effectiveness of the control justifies such an assessment.
B) contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes.
C) contains proportionally fewer monetary errors or deviations from prescribed control procedures than exist in the balance or class as a whole.
D) does not support the tolerable misstatement for some or all of management's assertions.
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Chapter 19: Variables Sampling
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Sample Questions
Q1) Which of the following represents a major difference in the use of monetary unit sampling (MUS)and classical variables sampling?
A) MUS is more effective in controlling the auditors' exposure to sampling risk than classical variables sampling.
B) MUS considers both the expected misstatement and tolerable misstatement in the determination of sample size, while classical variables sampling only considers the expected misstatement.
C) MUS defines the sampling unit as a dollar of an account balance while classical variables sampling defines the sampling unit as a component of an account balance.
D) MUS is a nonstatistical sampling method while classical variables sampling is a statistical sampling method.
Q2) You are planning to use monetary unit sampling to evaluate accounts receivable for
Q3) What is the projected misstatement?
A) $5,000
B) $10,000
C) $15,000
D) $30,000
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21
Chapter 20: Auditing and Information Technology
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Sample Questions
Q1) The reprocessing of actual data using programs developed by the audit team to evaluate program controls is called
A) test data.
B) test deck.
C) generalized audit software.
D) parallel simulation.
Q2) Which of the following categories of general controls includes retention and recovery techniques for data and related programs?
A) Access to programs and data
B) Computer operations
C) Data file controls
D) Program change controls
Q3) Which of the following organizational positions would evaluate the existing system and design new computerized processing systems and documentation?
A) Programmer
B) Systems analyst
C) Computer operator
D) Data conversion operator
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