Professional Ethics in Auditing Exam Materials
Course Introduction
Professional Ethics in Auditing explores the fundamental ethical principles and codes of conduct that govern the auditing profession. The course examines the importance of integrity, objectivity, confidentiality, professional competence, and due care for auditors in both internal and external auditing contexts. Through analysis of real-world cases, regulatory frameworks, and professional standards such as those provided by the International Federation of Accountants (IFAC) and other national bodies, students will develop skills to identify and address ethical dilemmas, recognize conflicts of interest, and understand the implications of ethical breaches on public trust and the credibility of the audit process. The course also highlights contemporary challenges facing auditors and underscores the role of ethics in maintaining the quality and reliability of financial reporting.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 8th Edition by William F. Messier
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Page 2
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Q1) Assurance services may improve all of the following except A) Relevance.
B) Credibility.
C) Periodicity.
D) Reliability.
Answer: C
Q2) Auditors are most likely to use the most rigorous audit procedures to examine A) Routine transactions.
B) Management assertions that are deemed to be of low risk.
C) Only the rights and obligations assertion.
D) Management assertions that are deemed to be of high risk.
Answer: D
Q3) Before accepting an engagement to audit a new client,an auditor is required to A) Make inquiries of the predecessor auditor.
B) Tell the client whether or not the auditor is willing to issue a "clean" opinion.
C) Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D) Become a member of the client's board of directors.
Answer: A
3
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Chapter 2: The Financial Statement Auditing Environment
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Q1) The fourth PCAOB reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.The objective of the fourth standard is to prevent
A) An auditor from reporting on one basic financial statement and not the others.
B) An auditor from expressing different opinions on each of the basic financial statements.
C) Management from reducing its final responsibility for the basic financial statements. D) Misinterpretations regarding the degree of responsibility the auditor is assuming.
Answer: D
Q2) The audit committee generally includes senior executives of the organization. A)True
B)False
Answer: False
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Chapter 3: Audit Planning,Types of Audit Tests,and Materiality
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Q1) Evaluating a prospective client requires the following step(s):
A) Communicate with the predecessor auditor.
B) Preplan the audit.
C) Establish the terms of the engagement.
D) None of the above.
Answer: A
Q2) When the prospective client has previously been audited,auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.
A)True
B)False
Answer: True
Q3) All of the following refer to an internal auditor's competence except:
A) The party in the entity to which the internal auditor reports.
B) The quality of internal audit documents and reports.
C) Professional certification.
D) Supervision and review of internal audit activities.
Answer: A
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Chapter 4: Risk Assessment
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Sample Questions
Q1) The combination of inherent risk and control risk is referred to as client risk.
A)True
B)False
Q2) An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion.The auditor should probably
A) Disclose the fraud to the appropriate level of the client's management.
B) Disclose the fraud to appropriate authorities external to the client.
C) Discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud.
D) Modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements.
Q3) The achieved (actual)level of audit risk
A) Can always be accurately assessed by the auditor.
B) Should be greater than or equal to acceptable audit risk.
C) Can never be known with certainty.
D) Is the same for all audit clients.
Q4) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Q1) For each of the following categories of analytical procedures,indicate (a)whether an auditor is required to use the procedure and (b)the purpose(s)of the procedure.
Preliminary analytical procedures
Substantive analytical procedures
Final analytical procedures
Q2) Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships.The results of these procedures most likely would indicate that
A) Fraud exists within the relevant accounts.
B) Internal control activities are not operating effectively.
C) Additional tests of details are required.
D) The communication with the audit committee should be revised.
Q3) Analytical procedures are
A) Never required.
B) Required for planning, substantive testing, and overall review of the financial statements.
C) Required for planning and overall review of the financial statements.
D) Required during planning only.
Q4) According to the text,what are the two functions of working papers?
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) Internal control includes monitoring of controls.
A)True
B)False
Q2) While substantive procedures may support the accuracy of underlying records,these tests frequently provide no affirmative evidence of segregation of duties because
A) Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested.
B) The records may be accurate even though they are maintained by persons having incompatible functions.
C) Substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the client's premises.
D) Many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.
Q3) What are two potential benefits and two potential risks of using IT for an entity's internal control?
Q4) Why might an auditor decide to test controls at an interim date?
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Q1) In determining the extent to which the auditor may use the work of others in the audit of ICFR,the auditor should do all of the following except:
A) Test some of the work performed by others to evaluate the quality and effectiveness of their work.
B) Evaluate the nature of the controls subjected to the work of others.
C) Evaluate the competence and objectivity of the individuals who performed the work.
D) All of the above are required.
Q2) In a public company,management must assess and report on internal control over financial reporting.
A)True
B)False
Q3) Which of the following is not a primary objective of internal control as established by COSO?
A) Efficiency and effectiveness of operations.
B) Effective purchasing systems.
C) Compliance with laws and regulations.
D) Reliable financial reporting.
Q4) 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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Q1) An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
A) Afford greater assurance than a nonstatistical sample of equal size.
B) Provide an objective basis for quantitatively evaluating sample risks.
C) Can more easily convert the sample into a dual-purpose test useful for substantive testing.
D) Eliminate the need to use judgment in determining appropriate sample sizes.
Q2) Which of the following statements is correct concerning statistical sampling in compliance testing?
A) The population size has little or no effect on determining sample size except for very small populations.
B) The expected population deviation rate has little or no effect on determining sample size except for very small populations.
C) As the population size doubles, the sample size also should double.
D) For a given tolerable deviation rate, a larger sample size should be selected as the expected population deviation rate decreases.
Q3) Define Type I and Type II errors.
Q4) Define sampling risk and nonsampling risk.
Page 10
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) In statistical sampling,setting the appropriate confidence level and desired sample precision are decisions made by the auditor that will affect sample size for a substantive procedure.Which of the following should not be a factor in the choice of desired precision?
A) The sampling risk.
B) The size of an account balance misstatement considered material.
C) The audit resources available for execution of the sampling plan.
D) The objectives of the audit test being conducted.
Q2) The objective of monetary-unit sampling is to test the assertion that no material misstatements exist in an account balance or class of transactions.
A)True
B)False
Q3) For monetary-unit sampling,a sampling interval of 400 means that
A) Every 400<sup>th</sup> item in the account will be selected in the sample.
B) The average size of items in the account is 400.
C) Every 400<sup>th</sup> dollar in the account will be included in the sample.
D) The average misstatement in sample items is $400.
Q4) Describe two advantages and two disadvantages of monetary-use sampling (MUS).
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Q5) What is one advantage and one disadvantage of classical variables sampling?
Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) Credit authorization is used to determine if a customer is able to pay for goods.
A)True
B)False
Q2) According to the Association of Certified Fraud Examiners,there are eight common methods for committing financial statement fraud.List 4 of the 8.
Q3) Upon receipt of customers' checks in the mailroom,a responsible employee should prepare a listing of remittances that is forwarded to the cashier.A copy of the listing should be sent to the
A) Internal auditor to investigate the listing for unusual transactions.
B) Treasurer to compare the listing with the monthly bank statement.
C) Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D) Entity's bank to compare the listing with the cashier's deposit slip.
Q4) Which of the following is not an inherent risk factor for the revenue process?
A) Complexity of revenue recognition issues.
B) Difficulty of auditing transactions.
C) Special industry practices.
D) The client does not follow its stated policies for sales order approvals.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) In assessing control risk for purchases,an auditor vouches a sample of entries in the voucher register to the supporting documents.Which assertion would this test of controls most likely support?
A) Completeness.
B) Occurrence.
C) Accuracy.
D) Classification.
Q2) Which of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received?
A) Counting of goods upon receipt in the storeroom.
B) Matching of purchase order, receiving report, and vendor invoice for each voucher in the accounts payable department.
C) Comparison of goods received with goods requisitioned in the receiving department.
D) Verification of vouchers for accuracy and approval in the internal audit department.
Q3) Identify the primary functions in the purchases cycle and describe each function.
Q4) Describe three categories of expenses outlined in FASB Concept Statement No.5.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) Listed below are descriptions of various types of documents used in the payroll process.Identify the document being described for each of the following
1)The document used to record hours worked by an employee.
2)The document that summarizes all payroll payments issued to employees.
3)The document that contains information on an employee's work history.
4)The form used to authorize deductions from an employee's pay.
5)The computer file that contains all the entity's records related to payroll.
Q2) Which of the following could test the assertion of classification for payroll-related liabilities?
A) Compare items in accrued payroll taxes to the supporting payroll tax return.
B) Search for unrecorded liabilities.
C) Examine payroll tax returns to determine that the expense was recorded in the proper period.
D) Review payroll liabilities for proper reporting as short- or long-term.
Q3) The human resource function is responsible for managing the personnel needs of the organization.
A)True
B)False
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Sample Questions
Q1) Which of the following departments typically approves purchase requisitions?
A) Raw materials stores.
B) Cost accounting.
C) Inventory management.
D) IT.
Q2) In the audit of inventory,the client is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the client's procedures and draw conclusions about the adequacy of the physical inventory.
A)True
B)False
Q3) The audit of inventory is often the most involved aspect of an audit.Describe at least three inherent risk factors that affect the audit of inventory.
Q4) Which of the following is not a misstatement related to the occurrence assertion for inventory?
A) Consigned goods are included as part of inventory.
B) Unauthorized production activity.
C) Fictitious inventory.
D) Recorded inventory is not on hand because of theft.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Which of the following is the best evidence of real estate ownership at the balance sheet date?
A) Title insurance policy.
B) A duplicate of the original deed held in the client's safe.
C) Paid real estate tax bills.
D) Closing statements.
Q2) Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse.The CPA examining Tennessee's financial statements would most likely learn of this error by
A) Discussing Tennessee's capitalization policies with its controller.
B) Reviewing the titles and descriptions for all construction work orders issued during the year.
C) Observing during the physical inventory observation that the warehouse has been painted.
D) Examining in detail a sample of construction work orders.
Q3) The property,plant,and equipment records function should be segregated from the custodial function.
A)True B)False
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Q1) The auditor can best verify a client'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.
Q2) There are typically only a couple of disclosure items that need to be considered for stockholders' equity.
A)True
B)False
Q3) Identify the four major assertions made regarding stockholders' equity and describe one control activity for each.
Q4) The auditor gathers evidence about dividends that are declared and paid primarily because of
A) Concerns with violations of corporate bylaws or debt covenants.
B) The large dollar value of the transactions.
Page 17
C) The ease with which the transactions can be audited.
D) Fraud concerns.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) A company holds bearer bonds as a short-term investment.Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the
A) Chief Accountant.
B) Internal Auditor.
C) Cashier.
D) Treasurer.
Q2) Of the following,which is the most efficient audit procedure for verification of interest earned on bond investments?
A) Tracing interest declarations to an independent record book.
B) Recomputing interest earned using the interest rate and bond amount.
C) Confirming the interest rate with the issuer of the bonds.
D) Vouching the receipt and deposit of interest checks.
Q3) Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?
A) To determine whether securities are authentic.
B) To determine whether securities are the property of the client.
C) To determine whether securities actually exist.
D) To determine whether securities are properly classified on the balance sheet.
Page 18
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Chapter 17: Completing the Audit Engagement
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Q1) Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the
A) Balance sheet date.
B) Date of the auditor's report.
C) Balance sheet date but prior to the date of the auditor's report.
D) Date of the auditor's report and concern contingencies that are not reflected in the financial statements.
Q2) Communications between the auditor and those charged with governance should include all of the following except:
A) A summary of specific audit procedures used.
B) Significant audit adjustments.
C) Consultations with other accountants.
D) Major issues discussed with management before the auditor was retained.
Q3) A legal letter will include and evaluate all contingent liabilities of the company.
A)True
B)False
Q4) What information is typically requested in a legal letter to a client's attorney?
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Chapter 18: Reports on Audited Financial Statements
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Q1) An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except:
A) An opinion as to whether the basis of accounting used is appropriate under the circumstances.
B) An opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting.
C) Reference to the note to the financial statements that describes the basis of presentation.
D) A statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.
Q2) If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements,the auditor would issue a(n)
A) "Except for" opinion.
B) Adverse opinion.
C) Unqualified/unmodified opinion.
D) Disclaimer of opinion.
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Chapter 19: Professional Conduct,Independence,and Quality Control
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Q1) Within the context of quality control,the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with
A) Technical training that ensures proficiency as an auditor.
B) Opportunities for career advancement outside the accounting firm.
C) Knowledge required to fulfill assigned responsibilities.
D) Knowledge required to perform a peer review.
Q2) A violation of the profession's ethical standards would most likely have occurred when a CPA
A) Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period.
B) Made arrangements with a bank to collect notes issued by a client in payment of fees due.
C) Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name.
D) Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.
Q3) When can a CPA disclose confidential information without the client's consent?
Q4) Identify the primary purposes of Rules 201-203 of the Rules of Conduct.
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Chapter 20: Legal Liability
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Q1) A CPA will most likely be negligent when the CPA fails to
A) Correct errors discovered in the CPA's previously issued audit reports.
B) Detect all of a client's fraudulent activities.
C) Include a negligence disclaimer in the CPA's engagement letter.
D) Warn a client's customers of embezzlement by the client's employees.
Q2) A CPA who fraudulently performs an audit of a corporation's financial statements will
A) Probably be liable to any person who suffered a loss as a result of the fraud.
B) Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements.
C) Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements.
D) Be liable only to third parties in privity of contract with the CPA.
Q3) An auditor can be guilty under federal statutory law if s/he was reckless in performance of her/his professional duties.
A)True
B)False
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Q1) An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when
I.Typing client-prepared financial statements,without modification,as an accommodation to a client.
II.Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.
A) I only.
B) II only.
C) Both I and II.
D) Neither I nor II.
Q2) During a review of financial statements of a nonpublic entity,the CPA would be least likely to
A) Perform analytical procedures designed to identify relationships that appear to be unusual.
B) Obtain written confirmation from banks regarding loans to the entity.
C) Obtain reports from other accountants who reviewed a portion of the total entity.
D) Read the financial statements and consider their conformance with generally accepted accounting principles.
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