Introduction to Auditing Test Bank
Course Introduction
Introduction to Auditing provides students with a foundational understanding of the principles, objectives, and processes involved in auditing financial statements. The course explores the regulatory environment of auditing, the ethical and legal responsibilities of auditors, and the importance of internal controls in organizations. Through the study of audit planning, evidence gathering, risk assessment, and reporting, students gain practical knowledge of assurance services and the role auditors play in promoting transparency, accountability, and confidence in financial information. Case studies and real-world examples are used to illustrate key auditing concepts and techniques.
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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Sample Questions
Q1) You are a new employee at the accounting firm Murray & Murray, CPAs. Before you are assigned to your first audit, your supervisor tests your knowledge and asks you to explain the term "scope" in the context of a financial statement audit.
Required:
A. Provide a definition of scope.
B. Describe what influences an auditor's determination of scope.
Answer: A.
The scope of an audit is the type and amount of audit work to be performed.
B.
The auditor's assessments of risk and materiality influence the scope of the audit. For instance, if an auditor sets a lower materiality amount or would like to substantially reduce audit risk, the scope of the audit would be increased. In establishing the scope of an audit, the auditor must make decisions about the nature, extent, and timing of evidence to be gathered in order to evaluate management's assertions.
Q2) Information asymmetry seldom occurs.
A)True
B)False
Answer: False
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of:
A)the stock exchange officials.
B)the independent auditor.
C)the company's management.
D)the securities and exchange commission.
Answer: C
Q2) One of the five basic business processes is the warehousing cycle.
A)True
B)False
Answer: False
Q3) Which of the following best describes the role of corporate governance?
A)Management decides which accounting principles are the most appropriate.
B)Shareholders vote to decide who should be members of the board of directors.
C)Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.
D)Management often is compensated based on the company's profitability.
Answer: C
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) The engagement partner is typically responsible for doing the detailed audit testing.
A)True
B)False
Answer: False
Q2) Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements?
A)An illegal payment to a foreign official that was not recorded.
B)A piece of obsolete office equipment that was not retired.
C)A petty cash fund disbursement that was not properly authorized.
D)An uncollectible account receivable that was not written off.
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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Sample Questions
Q1) When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the:
A)extent of tests of controls.
B)level of detection risk.
C)extent of substantive tests.
D)level of inherent risk.
Q2) Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.
A)True
B)False
Q3) The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as:
A)sampling risk.
B)detection risk.
C)nonsampling risk.
D)inherent risk.
Q4) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Analytical procedures used in planning an audit should focus on identifying:
A)material weaknesses in internal control.
B)the predictability of financial data from individual transactions.
C)the various assertions that are embodied in the financial statements.
D)areas that may represent specific risks relevant to the audit.
Q2) Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
A)Existence or occurrence.
B)Completeness.
C)Rights and obligations.
D)Observation.
Q3) Audit documentation prepared on audits of public entities is the property of the: A)Shareholders.
B)Auditor.
C)Management of the entity being audited.
D)SEC.
Q4) 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) Describe the limitations of internal control. Why do limitations on internal control exist?
Q2) A high detection risk strategy includes all of the following except:
A)interim testing.
B)reduced testing of transactions.
C)heavy reliance on analytical procedures as substantive procedures.
D)audit work only completed at year-end.
Q3) The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as:
A)Reasonable assurance.
B)Management responsibility.
C)Limited liability.
D)Management by exception.
Q4) Internal control consists of six components.
A)True
B)False
Q5) Once a level of control risk has been established, it cannot be changed. A)True B)False
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) Most public companies must follow Sarbanes-Oxley requirements.
A)True
B)False
Q2) An "integrated audit":
A)will, in most cases, lead to a substantive audit strategy.
B)denies the auditor access to information about the entity's controls.
C)may be performed by two separate audit firms.
D)is comprised of audits of internal control over financial reporting and of financial statements.
Q3) The advantages of generalized audit software include all of the following except:
A)it involves auditing while the data are being processed (real-time).
B)it is easy to use.
C)the time to develop the application is usually short.
D)an entire population can be examined in some instances.
Q4) All companies must follow the Sarbanes-Oxley Act requirements.
A)True
B)False
Q5) Discuss entity-level controls and provide examples of these types of controls.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) In determining the sample size for a test of controls, an auditor should consider the expected population deviation rate, desired confidence level, and the:
A)tolerable deviation rate.
B)risk of incorrect acceptance.
C)nature and cause of deviations.
D)population size.
Q2) In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample?
A)Population size.
B)Tolerable deviation rate.
C)Expected population deviation rate.
D)Desired Confidence Interval.
Q3) For a particular audit, the sample size for testing controls over the revenue cycle is relatively large. What can you infer about the desired confidence level, the tolerable deviation rate, and the expected population deviation rate?
Q4) A Type II error is the risk of incorrect acceptance.
A)True
B)False
Page 10
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) The formula for nonstatistical sampling sample sizes provided by the AICPA:
A)must be used for nonstatistical sampling.
B)includes a provision for the risk of incorrect acceptance.
C)includes a measure for the expected misstatement in the population.
D)is largely based on the variation of items in the account.
Q2) When auditing accounts payable using classical variables sampling, Sue finds evidence indicating that the account may be materially misstated. What are Sue's options?
Q3) MUS misstatement
A)an individual dollar
B)the total of the projected misstatement plus the allowance for sampling risk
C)the difference between monetary amounts in the entity's records and amounts supported by audit evidence
D)the account or transaction that contains the selected dollar
Q4) Monetary-unit sampling is based on attribute sampling concepts.
A)True
B)False
Q5) Describe two advantages and two disadvantages of monetary-unit sampling (MUS).
Q6) What is one advantage and one disadvantage of classical variables sampling? Page 11
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Chapter 10: Auditing the Revenue Process
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Q1) Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables':
A)valuation.
B)classification.
C)existence.
D)completeness.
Q2) Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an:
A)understatement of revenues, receivables, and inventory.
B)overstatement of revenues and receivables and an understatement of inventory.
C)understatement of revenues and receivables and an overstatement of inventory.
D)overstatement of revenues, receivables, and inventory.
Q3) What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?
Q4) A remittance advice is used to track purchases.
A)True
B)False
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Chapter 11: Auditing the Purchasing Process
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Q1) Which of the following procedures would an auditor least likely perform before the balance sheet date?
A)Assessment of inherent risk.
B)Observation of merchandise inventory count.
C)Assessment of control risk.
D)Identification of related parties.
Q2) To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:
A)supported by a vendor's invoice.
B)stamped "paid" by the check signer.
C)prenumbered and accounted for.
D)approved for authorized purchases.
Q3) Product costs should be matched directly with specific transactions and are recognized upon recognition of revenue.
A)True
B)False
Q4) There are several important disclosure items to consider when auditing the purchasing process. Discuss what they are and why they are important.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and:
A)observe the segregation of duties concerning human resource responsibilities and payroll disbursement.
B)inspect evidence that all prenumbered payroll checks are accounted for.
C)recompute the payroll deductions for employee fringe benefits.
D)verify the preparation of the monthly payroll account bank reconciliation.
Q2) Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
A)There are significant unexplained variances between standard and actual labor cost.
B)Payroll checks are disbursed by the same employee each payday.
C)Employee time sheets are approved by individual departmental supervisors.
D)A separate payroll bank account is maintained on an imprest basis.
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) An auditor will usually trace the details of the test counts made during the observation of the physical inventory count to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are:
A)owned by the entity.
B)not obsolete.
C)physically present at the time of the preparation of the final inventory schedule.
D)included in the final inventory schedule.
Q2) You are auditing SBT, which has a December 31 year-end. On December 24 , the person responsible for processing receiving reports and recording the receipt of inventory became very ill and was out of the office for a week. Due to the company's small staff and the holiday season, a number of the receiving reports were not processed on a timely basis. As an auditor, on which assertion would you place a high importance for this entity and how would you test for it?
Q3) State the six functions that make up the inventory management process. For each function, identify the related documents and/or records that would be used by a manufacturing company.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) The property, plant, and equipment records function should be segregated from the custodial function.
A)True
B)False
Q2) Substantive analytical procedures should not be used in the audit of property, plant, and equipment.
A)True
B)False
Q3) What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?
Q4) To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes:
A)continuous analysis of the repairs and maintenance account.
B)periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
C)a level of authorization above the department initiating the retirement.
D)periodic inspection of insurance policies by the internal auditors.
Page 17
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders' Equity, and Income
Statement Accounts
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Q1) A substantive strategy is typically used to audit stockholders' equity because:
A)the number of transactions is small.
B)controls over stockholders' equity transactions typically are weak.
C)a reliance strategy is most efficient.
D)a substantive strategy likely was used in prior years.
Q2) Long-term borrowing should be properly authorized.
A)True
B)False
Q3) The auditor can best verify an entity's bond sinking fund transactions and year-end balance by:
A)recomputation of interest expense, interest payable, and amortization of bond discount or premium.
B)confirmation with individual holders of retired bonds.
C)confirmation with the bond trustee.
D)examination and count of the bonds retired during the year.
Q4) When auditing capital-stock accounts, the cutoff assertion is the most important to consider.
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A)True
B)False
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.
A)True
B)False
Q2) Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?
A)Authorization.
B)Completeness.
C)Cutoff.
D)Accuracy.
Q3) Which of the following procedures would be important in the audit of an investment valued at fair value?
A)Compare the balance in the investment account to the prior year.
B)Read the footnote disclosure related to the investment.
C)Inquire of management's regarding the accuracy and reliability of the underlying data.
D)Develop an independent estimate of the fair value measurement.
Q4) Explain how cash plays a role in all business processes.
Page 19
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Chapter 17: Completing the Audit Engagement
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Q1) An example of a Type I event or condition is the settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year-end financial statements.
A)True
B)False
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) 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) An auditor must disclaim an opinion when the auditor lacks independence.
A)True
B)False
Q2) In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?
A)The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B)The financial statements fail to disclose information that is required by generally accepted accounting principles.
C)The auditor's opinion is based in part on the report of another auditor.
D)Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
Q3) Changes that affect comparability but that do not involve a change in accounting principle or the correction of a misstatement are normally disclosed in the footnotes but do not require an explanatory paragraph in the audit report.
A)True
B)False
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Q1) PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.
A)True
B)False
Q2) A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by:
A)adhering to generally accepted accounting principles.
B)implementing an appropriate system of quality control.
C)joining professional societies that enforce ethical conduct.
D)maintaining an attitude of independence in its engagements.
Q3) Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8?
A)Monitoring.
B)Independence.
C)Human resources.
D)Relevant ethical requirements.
Q4) When can a CPA disclose confidential information without the client's consent?
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Chapter 20: Legal Liability
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Q1) An auditor can be sued by a third party under statutory law for willful violation of federal statutes.
A)True
B)False
Q2) While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933?
A)The purchaser must prove that Larson was negligent in conducting the audit.
B)The purchaser must prove that Larson knew of the material misstatements.
C)Larson will not be liable if it had reasonable grounds, based on work performed, to believe the financial statements were accurate.
D)Larson will be liable unless the purchaser did not rely on the financial statements.
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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) Which of the following statements is not true concerning assurance services?
A)The growth in assurance services has been driven by users' demands for those services.
B)Assurance services focus on improving the quality of information or its context, for decision makers.
C)Unlike audit and attestation engagements, an engagement to perform assurance services does not require the CPA to consider information reliability.
D)Auditing and attestation services can be viewed as subsets of assurance services since there is overlap in their objectives.
Q3) Auditing standards do not allow private companies to have an audit of internal control over financial reporting integrated with the audit of their financial statements.
A)True
B)False
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