Principles of Auditing Test Questions
Course Introduction
Principles of Auditing introduces students to the foundational concepts, objectives, and procedures of auditing within the context of financial statements and assurance services. The course covers the ethical responsibilities of auditors, the regulatory environment, audit planning and evidence collection, risk assessment, internal control evaluation, and the formulation of audit opinions. Students will gain an understanding of the audit process from engagement to reporting, as well as exposure to contemporary developments and professional standards that influence the practice of auditing in public accounting and organizational settings.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant?
Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. To provide relevant information, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information. In addition, accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost. The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period. Because U.S. or international accounting standards provide the criteria for evaluating whether financial information is properly recorded, auditors must thoroughly understand those accounting standards. In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants. Determining the proper audit procedures, deciding the number and types of items to test, and evaluating the results are unique to the auditor.
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Page 3
Chapter 2: The CPA Profession
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Sample Questions
Q1) Which of the following does not describe a size category for a CPA firm?
A) Big Four national firms
B) Big Four international firms
C) local firms
D) national and regional firms
Answer: A
Q2) In 2017, the American Institute of CPAs joined with which of the following to form the Association of International Certified Public Accountants?
A) the Chartered Institute of Management Accountants
B) the Securities and Exchange Commission
C) the Public Accounting Oversight Board
D) the Japanese Institute of Certified Public Accountants
Answer: A
Q3) Many small, local accounting firms perform audits as their primary service to their clients.
A)True
B)False
Answer: False
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Chapter 3: Audit Reports
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Sample Questions
Q1) The unqualified opinion audit report for public entities includes which of the following sections and/or paragraphs?
A) report title, address, and opinion
B) basis for opinion and discussion of critical audit areas
C) auditor information and date
D) All of the above are included.
Answer: D
Q2) A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is
A) included in the scope paragraph.
B) included in the opinion paragraph.
C) included in a separate paragraph in the report.
D) included in the introductory paragraph.
Answer: C
Q3) In the case of a disclaimer due to lack of independence, the entire scope paragraph is excluded from the report.
A)True
B)False
Answer: True
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Chapter 4: Professional Ethics
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Sample Questions
Q1) A member actively endorses an attest client's products or services. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?
A) management participation
B) self-interest
C) advocacy
D) undue influence
Q2) In which of the following circumstances would a CPA be ethically bound to refrain from disclosing any confidential client information?
A) The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information.
B) A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
C) The confidential client information is made available as part of a quality review of the CPA's practice by a peer review team authorized by the AICPA.
D) An inquiry by a disciplinary body of a state CPA society requests confidential client information.
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Chapter 5: Legal Liability
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Sample Questions
Q1) Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?
A) Private Securities Litigation Reform Act
B) Public Securities Damages and Settlements Act
C) Racketeer Influenced and Corrupt Organization Act
D) U.S. Securities Claims Reform Act
Q2) Discuss at least three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.
Q3) Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units.
A)True
B)False
Q4) A CPA is subject to criminal liability if the CPA
A) refuses to turn over requested audit documentation to a client.
B) performs an audit in a negligent manner.
C) is knowingly involved with false financial statements.
D) willfully breaches a contract with a client.
Q5) Distinguish between constructive fraud and fraud.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) Under the cycle approach to segmenting an audit, transactions recorded in different journals should never be combined with the general ledger balances that result from those transactions.
A)True
B)False
Q2) In order to mitigate overconfidence, the auditor should challenge the opinions of experts and the underlying evidence.
A)True
B)False
Q3) The Sarbanes-Oxley Act provides for criminal penalties. A)True
B)False
Q4) If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct, A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically practical.
Q5) List the four phases of a financial statement audit.
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Chapter 7: Audit Evidence
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Sample Questions
Q1) The SEC requires the auditors of public companies to retain e-mail correspondence related to the audit.
A)True
B)False
Q2) Confirmations are ordinarily used to verify account balances, but may be used to verify transactions.
A)True
B)False
Q3) Auditors may download all transactions from the general ledger into the working trial balance file for subsequent audit testing and analysis.
A)True
B)False
Q4) Analytical procedures performed during the planning phase of the audit
A) are used as a substantive test in support of account balances.
B) are used to assist in determining the nature, extent, and timing of audit procedures. C) are used to detect fraud.
D) are mandatory only for public companies.
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9
Chapter 8: Audit Planning and Materiality
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Sample Questions
Q1) In what order should the following steps occur?
A. Set preliminary judgment of materiality and performance materiality.
B. Understand the client's business and industry.
C. Perform preliminary analytical procedures.
D. Accept the client and perform initial audit planning.
A) D, B, C, A
B) B, A, C, D
C) B, D, A, C
D) D, C, B, A
Q2) Auditors are ________ to document the known and likely misstatements in the financial statements under audit.
A) permitted
B) required
C) not allowed
D) strongly encouraged
Q3) ________ materiality is materiality for segments of the audit.
A) Segment
B) Individual
C) Financial statement
D) Performance
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Chapter 9: Assessing the Risk of Material Misstatement
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Sample Questions
Q1) Overall assessment of acceptable audit risk is highly subjective.
A)True
B)False
Q2) In assessing management integrity for potential new audit clients, the auditor should examine the prospective client's standing in the business community, financial stability, and relations with its previous CPA firm, among other procedures.
A)True
B)False
Q3) When taken together, the concepts of risk and materiality in auditing
A) measure the uncertainty of amounts of a given magnitude.
B) measure uncertainty only.
C) measure magnitude only.
D) measure inherent risk.
Q4) As management is responsible for the financial statements, failure to assess the risk of material misstatement is not detrimental to the auditor.
A)True B)False
Q5) Why do auditors use the audit risk model when planning an audit?
Q6) Describe the audit risk model and each of its components.
11
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) If the fraud perpetrated by senior management is a material weakness, the auditor's report on internal control over financial reporting will contain a qualified opinion.
A)True
B)False
Q2) Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt repayment requirements
C) management's practice of making overly aggressive forecasts
D) high turnover of accounting, internal audit, and information technology staff
Q3) Auditing standards require that the auditor presume that there is a risk of fraud in revenue recognition.
A)True
B)False
Q4) Most frauds are detected by
A) a confession by the fraudster.
B) IT controls.
C) law enforcement.
D) a tip.
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Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) List the four underlying principles of risk assessment per the COSO framework.
Q2) Companies using e-commerce systems to transact business electronically do not need to be concerned about how their e-commerce partners manage IT systems risks.
A)True B)False
Q3) Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.
Q4) When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that A) multiple users can access and update data files.
B) the accounting information is only in one place.
C) the database administrator may lack appropriate accounting knowledge.
D) multiple users could all access the data simultaneously causing a system shutdown.
Q5) Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.
Q6) Identify the six categories of general controls and give one example of each.
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Page 13
Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) The assessment of control risk is the measure of the auditor's expectation that internal controls will prevent material misstatements from occurring or detect and correct them if they have occurred.
A)True
B)False
Q2) In evaluating the operational effectiveness of internal controls, the auditor is likely to use four types of audit procedures. List the procedures below.
Q3) The procedures to obtain an understanding of internal control are only applied when the assessed control risk is high.
A)True
B)False
Q4) An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed?
A) inquiry
B) observation
C) reperformance
D) examination
Q5) Describe three computer auditing techniques available to the auditor.
Page 14
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) A medium-sized, nonpublic company has few effective controls and significant inherent risks. The auditor in this situation should emphasize tests of details and balances and substantive tests of transactions; no substantive analytical procedures should be performed in this situation by the auditor.
A)True
B)False
Q2) Management implements internal controls to ensure that all required footnote disclosures are accurate. Auditors tests those controls to provide evidence supporting the ________ presentation.
A) completeness and valuation
B) completeness and accuracy
C) rights and obligations and existence
D) occurrence and accuracy
Q3) For automated controls, the auditor's procedures to determine whether the automated control has been implemented cannot also serve as the test of that control.
A)True
B)False
Q4) List each of the five types of audit tests.
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Page 15
Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room?
A) The cashier prepares the daily deposit.
B) The cashier makes the daily deposit at a local bank.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the checks.
Q2) It is normal practice for the auditor to trace from prenumbered remittance advices or prelists of cash receipts to the cash receipts journal and the accounts receivable subsidiary records.
A)True
B)False
Q3) A proof of cash receipts may be useful when the auditor concludes internal controls in the cash recording function are deficient.
A)True
B)False
Q4) Credit should be approved before goods are shipped to a customer. A)True
B)False
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) In using audit sampling for exception rates
A) the auditor wants to know the most the exception rate is likely to be.
B) sampling error is the likelihood that the auditor will miss a monetary misstatement.
C) the upper limit of the interval estimate is known as the sampling risk.
D) the computed upper exception rate (CUER) cannot be considered in the context of specific audit objectives.
Q2) Which of the following statements regarding block sampling is least likely to be true?
A) Block sampling is the selection of several items in sequence.
B) It is acceptable to use block sampling for tests of transactions only if a reasonable number of blocks is used.
C) Only one block should be selected to increase the probability of a representative sample.
D) Once the first item in the block is selected, the remainder of the block is chosen automatically.
Q3) When using nonstatistical sampling, the sample must be a probabilistic one.
A)True
B)False
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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Sample Questions
Q1) If material, all of the following are required to be separately disclosed in the financial statements except for
A) accounts receivable from officers.
B) accounts receivable from affiliates.
C) sales and assets for different business segments.
D) sales for the last ten days of the fiscal year.
Q2) Auditors perform both planning and substantive analytical procedures for the entire sales and collection cycle, not just accounts receivable.
A)True
B)False
Q3) U.S. auditing standards indicate that auditors should use external confirmations for accounts receivable. However, there are certain circumstances where confirmation may not be appropriate. List these three situations.
Q4) The auditor must have a thorough understanding of the accounting standards, including presentation and disclosure requirements, for accounts receivable when performing the audit of accounts receivable.
A)True
B)False
18
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?
A) a decrease in the tolerable misstatement
B) small expected misstatements
C) an increase in the tolerable misstatement
D) an increase in the acceptable risk of incorrect acceptance
Q2) If a population is not considered acceptable, and the analysis indicates an individual error is unique or most of the misstatements are of a specific type, it may be appropriate to restrict the additional audit effort to the problem area.
A)True
B)False
Q3) Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but it is most commonly used with A) ratio estimation.
B) discovery sampling.
C) difference estimation.
D) mean-per-unit estimation.
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19
Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
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Q1) Which of the following is not a key control in the acquisition and payment cycle?
A) authorization of purchases
B) authorization of credit
C) timely recording and independent review of transactions
D) authorization of payments
Q2) Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?
A) Examine documents in voucher package for occurrence.
B) Examine supporting documents for indication of approval.
C) Account for sequence of vouchers.
D) Attempt to input transactions with valid and invalid vendors.
Q3) A substantive test of transactions for acquisitions that would be used to provide evidence regarding the occurrence assertion would be to
A) compare the classification with the chart of accounts by referring to vendors' invoices.
B) recompute the clerical accuracy on the vendors' invoices.
C) review the acquisitions journal for large or unusual amounts.
D) trace from a file of receiving reports to the acquisition journal.
Page 20
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Chapter 19: Completing the Tests in the Acquisition and Payment
Cycle: Verification of Selected Accounts
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Q1) Equipment on hand which is no longer used in operations but which the auditor has physically verified as being in existence does not need to be evaluated for potential impairment.
A)True
B)False
Q2) Property, plant, and equipment are assets that have expected lives of less than one year, are used in the business, and are not acquired for resale.
A)True
B)False
Q3) The intent to use property, plant, and equipment as part of the operations of a client's business is a significant characteristic that differentiates these assets from other assets like inventory and prepaid expenses.
A)True
B)False
Q4) Other accrued expenses are normally considered to be associated with the acquisition and payment cycle.
A)True
B)False
21
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) It is usually very easy for an auditor to determine if an employee has overstated their hours worked.
A)True
B)False
Q2) Hiring personnel initiates the payroll and personnel cycle.
A)True
B)False
Q3) An imprest payroll account that has a significant balance may indicate the presence of
A) employees not cashing their payroll checks.
B) fraudulent transfer of funds by the company.
C) lack of controls over payroll distribution.
D) the company overpaying its employees.
Q4) The computer file used for recording payroll transactions for each employee and maintaining total wages paid for the year to date is the
A) payroll transaction file.
B) payroll master file.
C) payroll bank account reconciliation.
D) payroll tax returns.
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory?
A) The company recorded nonexistent inventory.
B) The auditor did not perform any audit tests of the inventory.
C) The auditor and company colluded to overstate inventory balances.
D) The company counted inventory three months prior to year-end.
Q2) To test for proper sales cutoff, an auditor would obtain the number of the last bill of lading issued during the period under audit and verify that the item shipped had been excluded from the inventory listing.
A)True
B)False
Q3) ________ is normally characterized as a difficult and complex account to audit.
A) Property, plant and equipment
B) Cash
C) Inventory
D) Prepaid insurance
Q4) In job cost systems, costs are accumulated by individual jobs.
A)True
B)False
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Independent registrars commonly disburse cash dividends to shareholders. A)True
B)False
Q2) The audit procedure "Review the notes to determine whether any are related party notes or accounts payable" is performed when verifying the classification objective for notes payable.
A)True
B)False
Q3) Because the accounts in the capital acquisition and repayment cycle contain few transactions, control risk and the results of substantive transactions are normally more important for designing tests of details of balances in these accounts.
A)True
B)False
Q4) List the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q5) You are employing tests of details of balances for notes payable and interest expense. Describe below specific audit procedures you would perform for the balance-related audit objectives of detail tie-in and existence. List at least two for each objective.
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Chapter 23: Audit of Cash and Financial Instruments
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Q1) The test of details of balances procedure that requires the auditor to foot the outstanding check and electronic payment list and deposits in transit is an attempt to satisfy which audit objective?
A) cutoff
B) presentation and disclosure
C) detail tie-in
D) completeness
Q2) Many of the auditor's audit procedures in the audit of cash center around the client's bank confirmations.
A)True
B)False
Q3) Tracing outstanding checks to subsequent period bank statements tests the cutoff audit objective.
A)True
B)False
Q4) Branch bank accounts are useful for building banking relations in local communities.
A)True
B)False
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Page 25
Chapter 24: Completing the Audit
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Q1) In a standard inquiry to the client's attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date.
A)True
B)False
Q2) If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, current professional standards require that the auditor consider the refusal as a scope limitation.
A)True
B)False
Q3) Distinguish between contingent liabilities and commitments.
Q4) An example of a presentation and disclosure-related objective is determining that current and noncurrent receivables are classified, separately, and any factoring or discounting of notes receivable is disclosed.
A)True
B)False
Q5) Auditing standards require the auditor's assessment of going concern issues.
A)True
B)False
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Chapter 25: Other Assurance Services
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Q1) The amount of evidence and assurance needed for each engagement is defined by the profession, reducing the need for the accountant to make judgments for these engagements.
A)True
B)False
Q2) Who developed the WebTrust service?
Briefly explain this service.
Q3) An accountant has accepted an engagement in which the audit procedures of inquiry and analytical procedures will be employed. These procedures will form the basis for issuance of
A) a compilation report.
B) an audit report on supplemental information issued by the client.
C) a management advisory report requested by the audit committee.
D) a review report on financial statements for a nonpublic company.
Q4) In a Type 2 engagement, the service auditor performs tests of the operating effectiveness of the controls, but does not have to perform any of the procedures performed in a Type 1 engagement.
A)True
B)False
Q5) Define forecast and projection.
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Chapter 26: Internal and Governmental Financial Auditing and Operational Auditing
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Q1) Discuss each of the three broad categories (types) of operational audits.
Q2) What distinguishes internal control evaluation and testing for financial and operational auditing?
A) purpose of the work
B) scope of the work
C) both A and B
D) neither A nor B
Q3) Discuss three major differences between operational and financial auditing.
Q4) The objectives of internal auditors are considerably broader than the objectives of external auditors.
A)True
B)False
Q5) Internal auditors and government auditors perform a significant amount of financial auditing, similar to that done by external CPA firms.
A)True
B)False
Q6) Discuss each of the three phases of an operational audit.
Q7) Name three expectations of today's internal auditors.
Q8) What are three similarities between internal and external auditors? Page 28
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