Introduction to Auditing Test Questions
Course Introduction
Introduction to Auditing provides students with a comprehensive overview of the fundamental concepts, principles, and procedures of auditing. The course covers the role of the auditor, the types of audits, and the regulatory environment surrounding audit practice. Students will explore the audit process including planning, evidence gathering, assessment of internal controls, analytical procedures, and the formulation of audit opinions. Emphasis is placed on ethical considerations, professional standards, and the importance of independence in the auditing profession. Through practical examples and case studies, students will develop a foundational understanding of how auditing contributes to organizational accountability and financial integrity.
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Auditing Assurance Services and Ethics in Australia 10th Edition by Alvin Arens
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Chapter 1: Demand for audit and assurance services
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Q1) Business performance measurement services involve:
A) the board of directors and managers using a balanced scorecard to define an entity's financial objectives and goals.
B) assurance about whether nonfinancial information being reported from the entity's performance measurement system is reliable.
C) assurance about whether financial and nonfinancial information being reported from the entity's performance measurement system is reliable.
D) none of the above
Answer: C
Q2) Which of the following is NOT a category of auditing standards?
A) audit conclusions and reporting
B) risk assessment and response to assessed risks
C) ethical requirements
D) general principles and responsibilities
Answer: C
Q3) Results of compliance audits are typically reported to the Auditor-General.
A)True
B)False
Answer: False
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Chapter 2: Auditors legal environment
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Q1) That which constitutes reasonable care, skill, and caution in an audit depends on the:
A) particular circumstances of each case.
B) level of audit risk involved.
C) integrity of management.
D) auditing standards existing at the time.
Answer: A
Q2) Tort actions against public accounting firms are more common than breach of contract actions because:
A) the burden of proof is on the auditor rather than on the person suing.
B) the person suing need prove only negligence.
C) there are more torts than contracts.
D) the amounts recoverable are normally larger.
Answer: D
Q3) In the Caparo case, it was stated that the purpose of the audit report is to:
A) only provide information to the company and its shareholders.
B) provide information to third parties.
C) report on the accuracy of the financial statements.
D) all of the above
Answer: C
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Chapter 3: Audit quality and ethics
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Q1) The Code of Ethics for Professional Accountants adopts a conceptual framework that involves:
A) a system of safeguards that reduce threats to an acceptable level.
B) a framework for identifying, evaluating, and resolving threats to the fundamental principles.
C) a principles approach because it is impossible to anticipate every situation that might generate an ethical problem for a professional accountant.
D) all of the above
Answer: D
Q2) Which one of the following policies and procedures is NOT required by ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information?
A) leadership responsibilities for quality on audits
B) remunerating the auditor fairly and responsibly
C) ethical requirements (including independence)
D) acceptance and continuance of client relationships and specific engagements
Answer: B
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Chapter 4: Audit responsibilities and objectives
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Q1) The reason auditors accumulate evidence is to:
A) satisfy the requirements of the Corporations Act.
B) justify the conclusions they have otherwise reached.
C) defend themselves in the event of a lawsuit.
D) enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.
Q2) Which of the following is NOT one of the four phases in the audit process?
A) Complete the audit and issue the report.
B) Plan and design an audit approach.
C) Test controls and transactions.
D) Inform the client of any adjustments or corrections to be made to the financial statements.
Q3) The cycle approach to segmenting an audit:
A) requires different audit teams to ensure objectivity.
B) keeps closely related types of transactions and account balances in the same segment.
C) divides the different operation areas of the client's business operations.
D) all of the above
Q4) Discuss the differences between errors, fraud, and illegal acts.Give an example of each.
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Chapter 5: Audit evidence
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Q1) Which one of the following forms of evidence would be LEAST persuasive in forming the auditor's opinion?
A) the auditor's count of marketable securities
B) responses to auditor's questions by the president and controller regarding the investments account
C) minutes of the board of directors authorising the purchase of shares as an investment
D) correspondence with a stockbroker regarding the quantity of the client's investments held by the broker
Q2) ASA 500 requires auditors to accumulate sufficient appropriate evidence to support the opinion issued.Because of the nature of audit evidence, it is:
A) likely the auditor will be completely convinced that the opinion is correct.
B) unlikely the auditor will arrive at a conclusion.
C) unlikely the auditor will be completely convinced that the opinion is correct.
D) likely that the auditor would change his or her mind about the opinion if he or she took the time to gather additional evidence.
Q3) What are the benefits to auditors of using computer software?
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Chapter 6: Audit planning and documentation
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Q1) Discuss the purposes of audit working papers.
Q2) Which one of the following is an inherent risk that is common to all clients in certain industries?
A) brand loyalty in the cosmetics industry
B) sales between a parent company and subsidiary company
C) dependence on a small number of customers
D) accounts receivable collection in the consumer loan industry
Q3) An extensive understanding of the client's business and industry as well as knowledge of the company's operations are essential because:
A) there is a risk the business may impact the environment.
B) the increased importance of human resources has increased accounting complexity.
C) the increased importance of intangible assets has increased accounting complexity.
D) all of the above
Q4) As inherent risk decreases, audit expertise should normally increase.
A)True
B)False
Q5) Discuss the purpose of an audit engagement letter.
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Chapter7: Materiality and risk
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Q1) The auditor assesses control risk and inherent risk.On a typical engagement, the auditor would be LEAST likely to assess these for:
A) each audit objective.
B) each cycle.
C) the overall audit.
D) each account.
Q2) Unlike control risk and inherent risk, planned detection risk and required audit evidence will vary from cycle to cycle.
A)True
B)False
Q3) Many account balances require estimates and/or a great deal of management judgement.One area that does NOT require such judgement would be:
A) obsolete inventory.
B) liability for warranty payments.
C) interest expense.
D) allowance for uncollectible accounts.
Q4) Describe the audit risk model and each of its components.
Q5) Identify the three strategies that auditors can use during the audit to respond to risk.
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Chapter 8: Internal control and control risk
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Q1) Management's integrity and ethical values include:
A) management's actions to reduce incentives for dishonest acts.
B) communication of entity values and behavioural standards to personnel through policy statements.
C) codes of conduct.
D) all of the above
Q2) Management of public listed entities have to issue a report on the effectiveness of their organisation's internal control system in:
A) the United States.
B) Australia.
C) both Australia and the United States.
D) none of the above
Q3) Each key control that the auditor intends to rely on must be supported by sufficient:
A) tests of transactions.
B) tests of controls.
C) reperformance procedures.
D) analytical review procedures.
Q4) Discuss 'monitoring activities' and give an example.
Q5) Describe three inherent limitations of internal control.
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Chapter 9: Fraud auditing
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Q1) What are the three main types of revenue manipulations fraud perpetrated by organisations or their employees?
Q2) Premature revenue recognition is the recognition of revenue before accounting standard requirements for recording revenue have been met.An example of this is:
A) a 'bill-and-hold' sale.
B) creating fictitious customers.
C) adjusting sales returns.
D) lapping.
Q3) Auditors AACSB used in using inquiry, evaluate verbal and nonverbal cues as they listen to the interviewee.Verbal cues include interviewee's reluctance to end an interview.
A)True
B)False
Q4) The primary responsibility to oversee the organisation's financial reporting and internal control processes lies with:
A) ASIC.
B) the audit committee.
C) external auditors.
D) internal auditors.
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Chapter 10: The impact of information technology on the audit process
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Q1) When might an auditor decide NOT to reduce assessed control risk even if internal controls are adequate?
A) The cost of the study and tests of controls will exceed the savings from reduced substantive procedures.
B) A qualified opinion will be issued.
C) The auditor plans to rely on the controls and reduce substantive testing.
D) all of the above
Q2) Oversight of the IT function to ensure that all activities are carried out consistently with the IT strategic plan is the responsibility of the:
A) chief information officer.
B) data control group.
C) librarian.
D) computer operators.
Q3) An advantage of generalised audit software (GAS)is the ability to access and test client data independently.
A)True
B)False
Q4) Discuss what is meant by the term 'auditing through the computer'.
Q5) Identify the six categories of general controls and give one example of each.
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Chapter 11: Overall audit plan and audit program
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Q1) The timing of phase III audit procedures are typically:
A) before the balance sheet date.
B) on or after the balance sheet date.
C) anytime.
D) at the end of fieldwork.
Q2) Tests of controls and substantive tests of transactions are often conducted simultaneously on the same transactions.
A)True
B)False
Q3) ASA 520 states that analytical procedures can be used as:
A) compliance tests.
B) tests of controls.
C) substantive tests.
D) helpful procedures not possessing the validity of other tests available to the auditor.
Q4) Analytical procedures are relatively inexpensive, so many auditors perform them on all audits.
A)True
B)False
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Chapter 12: Audit of the sales and collection cycle: Tests of controls
and substantive tests of transactions
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Q1) Explain the audit procedure 'proof of cash receipts'.
Q2) A common test is to account for a sequence of various types of documents, such as duplicate sales invoices selected from the sales journal, watching for omitted and duplicate numbers or invoices outside the normal sequence.This test provides evidence of:
A) completeness.
B) existence.
C) both of the above
D) none of the above
Q3) Which of the following business functions is mainly related to the bad debts expense account?
A) allowing for bad and doubtful debts
B) granting credit
C) billing customers
D) all of the above
Q4) Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales.
A)True
B)False
Q5) Discuss what is meant by 'proof of cash receipts' and explain its purpose.
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Chapter 13: Completing tests in the sales and collection cycle:
Accounts receivable
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Q1) A high acceptable audit risk will permit a higher planned detection risk than if acceptable audit risk were low.
A)True
B)False
Q2) Which one of the following circumstances would indicate that negative confirmations should NOT be used on an engagement?
A) A significant portion of the total accounts receivable is represented by a small number of accounts with large balances.
B) The auditor is unaware of disputed or inaccurate accounts.
C) The internal control over receivables is good.
D) The recipients are mostly businesses rather than individuals.
Q3) Negative confirmations are less expensive and less reliable than positive confirmations.
A)True
B)False
Q4) In the audit of accounts receivable, list the factors that affect the planned detection risk for tests of details of balances.
Q5) Describe how the auditor tests the rights objective for accounts receivable.
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Chapter 14: Audit sampling
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Q1) The relationship between sample size and the acceptable risk of incorrect acceptance is:
A) indeterminate.
B) variable; that is, larger acceptable risk = sometimes larger sample size and sometimes not.
C) direct; that is, larger acceptable risk = larger sample size.
D) inverse; that is, larger acceptable risk = smaller sample size.
Q2) Acceptable risk of incorrect acceptance is of greater concern to the auditor than acceptable risk of incorrect rejection.
A)True
B)False
Q3) When errors are found, a common assumption in practice is to assume:
A) a 100% assumption for all errors.
B) that the population errors are smaller than the sample errors.
C) that the population errors are larger than the sample errors.
D) that misstatements in the unaudited population are proportional to the misstatements in the sample.
Q4) When does allowable risk of incorrect rejection (ARIR)affect the auditor?
Q5) Discuss two ways in which the auditor can control sampling risk.
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Chapter 15: Audit of transaction cycles and financial statement balances I
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Q1) The audit procedure 'examine paid cheque for authorised signature, proper endorsement, and cancellation by the bank' is used to test the existence objective for cash payments.
A)True
B)False
Q2) Once the auditor has determined the company's policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to:
A) compare the recorded accrued wages with the amount approved in the minutes of the board.
B) confirm the amount with employees.
C) compare the ledger balance with the journal and the tax form.
D) recalculate the client's accruals.
Q3) State each of the eight specific balance-related audit objectives for accounts payable, and, for each objective, describe one common test of details of balances.
Q4) Identify three analytical procedures commonly used when auditing accounts in the inventory and warehousing cycle.
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Chapter 16: Audit of transaction cycles and financial statement balances II
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Q1) To prevent the improper or incorrect issue of share certificates, it is common practice for publicly listed companies to engage:
A) a share register.
B) an independent share registrar.
C) an independent internal audit department.
D) an imprest dividend account.
Q2) The starting point for verifying current year disposals of property, plant, and equipment is the client's schedule of recorded disposals.Discuss the types of information that should be included in this schedule.
Q3) Depreciation expense is normally verified using tests of controls and substantive tests of transactions.
A)True
B)False
Q4) The primary documents used to test the existence of current year acquisitions of property, plant, and equipment are vendors' invoices and receiving reports.
A)True
B)False
Q5) Discuss what is meant by kiting, and discuss how it is performed.
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Chapter 17: Completing the audit
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Q1) Subsequent events which require adjustment to the financial statements provide additional information about significant conditions or events which did not exist at the balance sheet date.
A)True
B)False
Q2) No disclosure in the financial statement is necessary if the contingent liability: A) is remote. B) is probable. C) is reasonably possible. D) has occurred.
Q3) An engagement checklist is prepared to assist the auditor in drawing final conclusions about the adequacy of the audit evidence.
A)True
B)False
Q4) Distinguish between a 'management representation letter' and a 'management letter', and state the primary purpose of each.
Q5) State the three conditions required for a contingent liability to exist.
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Chapter 18: Audit reporting
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Q1) Which one of the following is NOT a condition requiring departure from an unmodified opinion?
A) a materially misstated financial report
B) inability to obtain sufficient appropriate audit evidence
C) both A and B
D) none of the above
Q2) The appropriate date for the report is the one on which the auditor completes the most important auditing procedures in the field.
A)True
B)False
Q3) What are the nine distinct parts of a standard audit report?
Q4) The audit report date indicates the:
A) last day of the financial period.
B) date on which the financial report was filed with ASIC.
C) last date on which users may institute a lawsuit against either the client or the auditor.
D) last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial report.
Q5) What are the two main causes of scope limitations?
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Chapter 19: Other auditing and assurance engagements
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Q1) The Institute of Internal Auditors Professional Practice Standards require that internal auditors should be independent of:
A) their employer.
B) the controller's function within their organisation.
C) the line function within their organisation.
D) the activities they audit.
Q2) Which one of the following statements is NOT correct? Under ASA 800, the audit report for special purpose financial reports would:
A) contain an opinion section.
B) report the auditor's view of the appropriateness of the financial reporting framework used.
C) identify the financial reporting framework.
D) indicate that the financial report is a special purpose financial report.
Q3) Performance auditing is the review of an organisation for efficiency and effectiveness.Discuss what is meant by the terms (1)'effectiveness' and (2)'efficiency'.
Q4) Describe how the amount of evidence collected varies between an examination, a review, and agreed-upon procedures.
Q5) Discuss each of the three phases of a performance audit.
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