Risk-Based Auditing Question
Bank
Course Introduction
Risk-Based Auditing is a course that introduces students to the principles and methodologies of auditing with a focus on identifying and addressing areas of greatest risk within an organization. The course covers risk assessment frameworks, the evaluation of internal controls, and the development of audit plans that prioritize resources according to risk levels. Students learn how to analyze business processes, recognize potential threats, and implement audit techniques that provide assurance over the most significant risks. Through practical case studies and simulations, participants gain hands-on experience in designing and executing risk-based audit engagements, communicating findings effectively, and providing recommendations to improve organizational effectiveness and compliance.
Recommended Textbook
Auditing A Risk Based Approach to Conducting a Quality Audit 10th Edition by
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Page 2
Karla Johnstone
Chapter 1: Auditing: Integral to the Economy
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Q1) In all states, a CPA must have completed at least 150 hours of college semester hours to receive their license.
A)True
B)False
Answer: False
Q2) A quality audit is one performed "in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles (GAAP) and (2) are not materially misstated whether due to errors or fraud."
A)True
B)False
Answer: True
Q3) The FASB is responsible for creating International Financial Reporting Standards. A)True
B)False Answer: False
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Chapter 2: The Auditors Responsibilities Regarding Fraud
and Mechanisms to Address Fraud: Regulation and Corporate Governance
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Q1) Which of the following statements is true concerning the fraud risk model?
A) Assessing incentive is the first phase of the model.
B) The fraud risk model should be reviewed with the audit team.
C) The fraud risk model should be modified based on a review of internal controls.
D) Auditors do not use a fraud risk model.
Answer: D
Q2) Management of companies should have the ability to hire and fire the external auditor.
A)True
B)False
Answer: False
Q3) What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening?
A) Skimming.
B) Ponzi Scheme
C) Channel Stuffing.
D) Payroll Fraud.
Answer: B
Page 4
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Chapter 3: Internal Control Over Financial Reporting:
Responsibilities of Management and the External Auditors
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Q1) Integrated audit.
Explain the application of an integrated audit as it relates to regulation. Discuss the reasons that this integrated approach may occur.
Answer: The Sarbanes-Oxley Act of 2002 requires reporting by management of publicly-held companies on the effectiveness of internal control over financial reporting. The Public Company Accounting Oversight Board (PCAOB) requires the external auditor to perform an integrated audit of the effectiveness of internal controls and financial reporting. In other words, the same auditor must attest to both the financial statements and management's assertions regarding the effectiveness of internal controls over financial reporting.
Because of the above mentioned regulatory requirements, auditors will perform an audit on both financial statements and internal controls for all public clients.
Q2) The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement.
A)True
B)False
Answer: True
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Chapter 4: Professional Liability, Auditor Judgment
Frameworks, and Professional Responsibilities
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Q1) A CPA firm may include the name of only one past owner in the firm name.
A)True
B)False
Q2) Which of the following represents a situation in which auditors may disclose client information to outside parties?
A) Bringing working papers to a professional CPA workshop as an example of quality work.
B) Complying with a validly issued and enforceable subpoena or summons.
C) Showing the client's bank statement to a neighbor who is a shareholder to emphasize its cash position.
D) Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods.
Q3) A covered member under the AICPA's rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and all professional staff in the office of the engagement.
A)True
B)False
Q4) Expectations Gap. What is the expectations gap?
Page 6
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Chapter 5: Professional Auditing Standards and the Audit
Opinion Formulation Process
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Q1) Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk?
A) Controls over significant, unusual transaction.
B) Controls over related-party transactions.
C) Controls related to marketable securities.
D) Controls related to significant management estimates.
Q2) The ten standards of auditing, adopted by the PCAOB encompass three broad categories including: general standards, fieldwork standards and reporting standards.
A)True
B)False
Q3) If the auditor's assessment of the materiality of the account balance is high, what would be the respective effect on the extent of substantive testing and the nature of procedures performed. Extent of Tests Nature of Procedures
A) Less More rigorous
B) Less Less rigorous.
C) More Less rigorous
D) More More rigorous
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Chapter 6: A Framework for Audit Evidence
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Q1) While inspecting documents, auditors should use original documents rather than copies, because copies are easy for management to falsify.
A)True
B)False
Q2) Audit documentation should contain which of the following?
A) A heading that includes the name of the audit client, an explanatory title, and the balance sheet date.
B) The initials or electronic signature of the auditor performing the audit test and the date the test was completed.
C) The initials or electronic signature of the manager or partner who reviewed the documentation and the date the review was completed.
D) All of the above.
Q3) In a reasonableness test, the auditor develops an expected value of an account by using data wholly or partly independent of the client's accounting information system.
A)True
B)False
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Chapter 7: Planning the Audit: Identifying and Responding
to the Risks of Material Misstatement
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Q1) Which of the following ratios provide information about liquidity?
A) Net profit margin.
B) Current ratio.
C) Inventory turnover.
D) Sales to assets.
Q2) Detection risk is measured on a scale of 0% to 5%.
A)True
B)False
Q3) A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level.
A)True
B)False
Q4) When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently.
A)True
B)False
Q5) Tolerable misstatement is always less than or equal to performance materiality.
A)True
B)False
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Chapter 8: Specialized Audit Tools: Sampling and
Generalized Audit Software
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Q1) In selecting a sample for attribute testing, block sampling involves which of the following approaches?
A) Each item in the population having an equal chance of selection.
B) Every nth item being selected after a random start.
C) An arbitrary selection with no conscious bias.
D) Selecting all items on a day or week.
Q2) In attribute sampling if the upper limit of the possible deviation rate exceeds the tolerable rate the auditor can rely upon the control as being effective.
A)True
B)False
Q3) Which of the following are limitations of using the MUS sampling method?
A) MUS is not very useful in testing for understatement.
B) MUS is not very useful in testing for zero and negative amounts.
C) N MUS is not very useful in testing if the auditor expects numerous misstatements.
D) All of the above.
Q4) Increasing the expected failure rate will cause the sample size to increase.
A)True
B)False
Page 10
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Chapter 9: Auditing the Revenue Cycle
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Q1) The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to revenue misstatements on every engagement.
A)True
B)False
Q2) The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction and collecting the receivable.
A)True B)False
Q3) Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud.
A)True
B)False
Q4) An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.
A)True B)False
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Chapter 10: Auditing Cash and Marketable Securities
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Q1) Gains and losses are not considered in audit testing, as they do not need to be disclosed.
A)True
B)False
Q2) Lockbox arrangements for the collection of cash have which of the following advantages?
A) The manual processing associated with maintaining control of the receipts is now shifted to a computer.
B) Cash is deposited directly into the bank.
C) The bank usually establishes only one lockbox geographically next to the client to minimize delay in collections.
D) Eliminates the customer decision for the due date of payment.
Q3) Customer checks received at the client company should be restrictively endorsed within one week of receipt in the mail.
A)True
B)False
Q4) Notes issued by major corporations are known as commercial paper.
A)True
B)False
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Chapter 11: Auditing Inventory, Goods and Services, and
Accounts Payable: the Acquisition and Payment Cycle
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Q1) In observing the client's inventory at year-end the auditor makes test counts that are later traced into the client's inventory compilation.
A)True
B)False
Q2) The internal control that requires that "checks are pre-numbered and accounted for" satisfies which assertion?
A) Accuracy.
B) Existence.
C) Completeness.
D) Posting and summarization.
Q3) Acquisition and payment processes. What are the five major phases of the acquisition and payment process?
Q4) The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.
A)True
B)False
Q5) Valuation is the most complex assertion related to inventory.
A)True
B)False
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Chapter 12: Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
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Q1) Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors?
A) Physically inspect tangible assets, including major additions, and agree serial numbers with invoices or other supporting documents.
B) Use the work of a specialist for asset valuations, including impairments.
C) Confirm the terms of significant additions of property or intangibles with other parties involved in the transaction.
D) All of the above are fraud-related audit procedures.
Q2) Asset impairment.
Describe what is meant by asset impairment and explain where inherent risks related to asset impairment stems from.
Q3) The auditor performs substantive procedures related to property, plant and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing?
A) Valuation.
B) Rights.
C) Completeness.
D) Existence.
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Chapter 13: Auditing Debt Obligations and Stockholders
Equity Transactions
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Q1) Typically, when determining the appropriate audit procedures to perform for debt accounts, the auditor will usually decide to test debt obligations, including interest, using only substantive procedures.
A)True
B)False
Q2) Stockholders' equity accounts will be tested with only substantive analytical procedures.
A)True
B)False
Q3) Rights/obligations is the most relevant audit assertion associated with an inherent risk for finding stock options or warrants being granted without being properly approved.
A)True
B)False
Q4) Which of the following is not a relevant account when auditing stockholders' equity?
A) Treasury stock.
B) Dividends.
C) Sinking fund for plant expansion.
D) Retained earnings.
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Chapter 14: Activities Required in Completing a Quality Audit
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Q1) If the auditor concludes that there may be a going-concern problem with the client, which of the following is the best course of action for the auditor to follow?
A) Issue a qualified opinion.
B) Identify and assess management's plan to overcome the situation.
C) Chart the negative trends as an addendum to the audit report.
D) Increase fees to cover the probable exposure.
Q2) Which of the following would be a Type II subsequent event?
A) Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year end.
B) A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end.
C) A stock dividend or split that takes place during the subsequent period should be disclosed. In addition, earnings-per-share figures should be adjusted to show the retroactive effect of the stock dividend or split.
D) A material change occurs in the value of investment securities after the balance sheet date.
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Chapter 15: Audit Reports on Financial Statements
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Q1) Adverse opinions can only be issued by auditors based on which of the following?
A) Violations of GAAP.
B) Scope limitations.
C) Going concern.
D) Lack of independence.
E) Either B or D.
Q2) The auditor should only provide an opinion on the financial statements if the opinion indicates that the financial statements are fairly stated in all material respects.
A)True
B)False
Q3) The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will require the audit firm to do which of the following?
A) Merge with the other CPA firm.
B) Perform a peer review on the other CPA firm.
C) Ensure the independence of the other CPA firm of the client.
D) List the other firm in the footnotes to the client's financial statements.
Q4) Types of Audit Opinions.
What are the five basic types of financial statement audit reports?
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Chapter 16: Advanced Topics Concerning Complex
Auditing Judgments
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Q1) The discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of which of the following?
A) The client's external controls.
B) The client's interim financial statements.
C) The client's internal controls over financial reporting.
D) The client's segment reports.
Q2) Current FMV of assets and liabilities of non-goodwill assets is one of the factors affecting goodwill impairment valuations.
A)True
B)False
Q3) A best practice is to have an oversight of the internal audit function as a responsibility of which of the following?
A) Management.
B) Internal auditors.
C) Audit committee.
D) External auditors.
Q4) Internal auditors can perform both consulting services and assurance services.
A)True
B)False
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Chapter 17: Other Services Provided by Audit Firms
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Q1) A compilation performed in accordance with AICPA standards may be performed by CPAs or accountants who are not certified or licensed.
A)True
B)False
Q2) The subject matter of an attestation engagement has to be as of a point in time.
A)True
B)False
Q3) When forming an opinion on special purpose financial statements, which of the following items does the auditor not need to evaluate?
A) Whether the financial statements adequately describe the applicable financial reporting framework.
B) Whether the financial statements have the appropriate title.
C) Whether the financial statements include a summary of significant accounting policies.
D) Whether the financial statements differ in GAAS presentation.
Q4) A special purpose framework can use a cash basis financial reporting framework.
A)True
B)False
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