Advanced Auditing Exam Solutions
Course Introduction
Advanced Auditing delves into the complex procedures and methodologies involved in the modern audit process, focusing on issues pertinent to large organizations, group audits, specialized industries, and regulatory compliance. The course explores topics such as risk assessment, audit evidence, internal controls, fraud detection, forensic auditing, and ethical responsibilities of auditors. Emphasis is placed on auditing standards, quality assurance, the use of advanced data analytics, and reporting requirements in both local and international contexts. Students will enhance their critical thinking and decision-making skills through case studies, simulations, and hands-on practice, preparing them for senior roles in the auditing profession.
Recommended Textbook Principles of Auditing and Other Assurance Services 19th Edition by Ray Whittington
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Page 2
Chapter 1: The Role of the Public Accountant in the
Economy
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Sample Questions
Q1) Passage of the Sarbanes-Oxley Act led to the establishment of the:
A)Auditing Standards Board.
B)Accounting Enforcement Releases Board.
C)Public Company Accounting Oversight Board.
D)Securities and Exchange Commission.
Answer: C
Q2) An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):
A)Peer Review Engagement.
B)Quality Control Engagement.
C)Quality Assurance Engagement.
D)Attestation Engagement.
Answer: A
Q3) A company is either audited by the GAO or internal auditors,but not both.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Professional Standards
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Sample Questions
Q1) To present fairly in conformity with generally accepted accounting principles the financial statements should:
A)Be consistently applied.
B)Inform users of all matters that could materially affect a decision.
C)Reflect transactions and events within a range of reasonable limits.
D)Be considered preferable to the users of those financial statements.
Answer: C
Q2) A requirement that working papers be reviewed by the supervisor,and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of:
A)Acceptance and continuance of client relationships and specific engagements.
B)Engagement performance.
C)Human resources.
D)Relevant ethical requirements.
Answer: B
Q3) An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws.
A)True
B)False
Answer: False
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Chapter 3: Professional Ethics
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Sample Questions
Q1) Which of the following organizations issue international ethics standards for auditors?
A)The AICPA.
B)The IFAC.
C)The SEC.
D)The FASB.
Answer: B
Q2) Which of the following acts by a CPA would be most likely to be a violation of the AICPA Code of Professional Conduct?
A)Assisting a client in preparing a financial forecast.
B)Forming a professional corporation to practice as a CPA.
C)Accepting a fee in a tax matter relating to an administrative proceeding.
D)A "covered member" owns an immaterial amount of stock in an audit client.
Answer: D
Q3) A CPA firm may not designate itself as "members of the AICPA" unless:
A)All of its partners or shareholders are members of the Institute.
B)All of its professional staff are members of the Institute.
C)A majority of its professional staff are members of the Institute.
D)At least one partner or shareholder is a member of the Institute.
Answer: A
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Chapter 4: Legal Liability of CPAS
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Sample Questions
Q1) Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?
A)Ultramares v.Touche.
B)Restatement of Torts.
C)Rule 10b-5.
D)Rosenblum v.Adler.
Q2) A principle that may reduce or entirely eliminate auditor liability to a client is:
A)Client constructive negligence.
B)Client contributory negligence.
C)Auditor ordinary negligence.
D)Auditor gross negligence.
Q3) Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?
A)The CPA knew of the misstatement.
B)The CPA was negligent.
C)Material misstatements were contained in the financial statements.
D)The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA.
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Chapter 5: Audit Evidence and Documentation
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Sample Questions
Q1) Which of the following groups are not considered a specialist by AICPA Professional Standards:
A)Appraisers.
B)Internal auditors.
C)Engineers.
D)Geologists.
Q2) Which of the following is not an assertion relating to classes of transactions?
A)Accuracy.
B)Sufficiency.
C)Cutoff.
D)Classification.
Q3) CPA wishes to use a representation letter as a substitute for performing other audit procedures.Doing so:
A)Violates professional standards.
B)Is acceptable, but should only be done when cost justified.
C)Is acceptable, but only for non-public clients.
D)Is acceptable and desirable under all conditions.
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Chapter 6: Audit Planning, understanding the Client, assessing
Risks, and Responding
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Sample Questions
Q1) Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
A)Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques.
B)Management's disregard for internal control.
C)The existence of related party transactions.
D)Management's attempt to meet earnings per share growth rate goals.
Q2) Which of the following is least likely to be required on an audit?
A)Evaluate the business rationale for significant, unusual transactions.
B)Make a legal determination of whether fraud has occurred.
C)Review accounting estimates for biases.
D)Test appropriateness of journal entries and adjustments.
Q3) The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts.
A)True
B)False
Q4) The substantive approach to an audit is appropriate for many small businesses.
A)True
B)False
Page 8
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Chapter 7: Internal Control
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Sample Questions
Q1) Which of the following is not considered one of the five major components of internal control?
A)Risk assessment.
B)Segregation of duties.
C)Control activities.
D)Monitoring.
Q2) Which of the following must the auditor communicate to the audit committee?
A)Significant deficiencies and material weaknesses.
B)Only significant deficiencies.
C)Only material weaknesses.
D)Neither significant deficiencies nor material weaknesses.
Q3) The program flowcharting symbol representing a decision is a:
A)Triangle.
B)Circle.
C)Rectangle.
D)Diamond.
Q4) Internal control is concerned with the reliability of financial information.
A)True
B)False
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Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Sample Questions
Q1) Various characteristics of IT systems can present special audit risks.Explain each of the following characteristics of an IT system and the special audit risks that they present.
a.Data base system.
b.Distributive data processing.
c.End user computing.
Q2) When conducting field work for a physical inventory,an auditor cannot perform which of the following steps using a generalized audit software package?
A)Observing inventory.
B)Selecting sample items of inventory.
C)Analyzing data resulting from inventory.
D)Recalculating balances in inventory reports.
Q3) Magnetic tape drives have the advantage of direct access to stored data. A)True
B)False
Q4) Distributive data processing eliminates the need for data security.
A)True B)False
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Chapter 9: Audit Sampling
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Sample Questions
Q1) The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated.In this situation,to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample,which of the following statements is correct?
A)The adjusted allowance for sampling risk will be smaller than had been planned.
B)The adjusted allowance for sampling risk will be larger than had been planned.
C)The risk of incorrect rejection will necessarily decrease.
D)The size of the population must be decreased.
Q2) When performing a test of a control over cash disbursements,a CPA may use a systematic sampling technique with a start at any randomly selected item.The biggest disadvantage of this type of sampling is that the items in the population:
A)Must be recorded in a systematic pattern before the sample can be drawn.
B)May occur in a systematic pattern and destroy the sample randomness.
C)May systematically occur more than once in the sample.
D)Must be systematically replaced in the population after sampling.
Q3) Statistical sampling cannot be used to test all control activities.
A)True
B)False
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Chapter 10: Cash and Financial Investments
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Sample Questions
Q1) An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year.However,the allowance for doubtful accounts,as a percentage of accounts receivable remained about the same.Which of the following client explanations most likely would satisfy the auditor?
A)Credit standards were liberalized in the current year.
B)Twice as many accounts receivable were written off in the prior year as compared to this year.
C)A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year.
D)The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
Q2) Properly designed internal control will permit the same employee to:
A)Receive and deposit checks, and also approve write-offs of customer accounts.
B)Approve vouchers for payment, and also receive and deposit cash.
C)Reconcile the bank statements, and also receive and deposit cash.
D)Sign checks, and also cancel supporting documents.
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Page 12
Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
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Sample Questions
Q1) An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
A)No reply to a positive confirmation request is received.
B)No reply to a negative confirmation request is received.
C)Collectibility of the receivables is in doubt.
D)Pledging of the receivables is probable.
Q2) Material accounts receivable from related parties should be stated separately from other receivables.
A)True
B)False
Q3) Accounts receivable that are written-off should not be turned over to a collection agency.
A)True
B)False
Q4) An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.
A)True
B)False
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Chapter 12: Inventories and Cost of Goods Sold
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Q1) Which of the following best describes the reason for the auditors' review of the client's cost accounting system?
A)To obtain evidence regarding the quantities of good described as work-in-process.
B)To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold.
C)To obtain evidence about the profit margin on specific jobs.
D)To obtain evidence about compliance with Cost Accounting Standards.
Q2) The client's physical count of inventories is lower than the inventory quantities in the perpetual records.This could be the result of a failure to record:
A)Purchases.
B)Purchase discounts.
C)Sales.
D)Sales discounts.
Q3) Observation of inventories is a generally accepted auditing standard.
A)True
B)False
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Chapter 13: Property Plant and Equipment: Depreciation and Depletion
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Sample Questions
Q1) Auditors should obtain evidence that there are no significant amounts of unrecorded retirements of property,plant and equipment.
a.Describe two ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of property (land).
b.Describe three ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment.
Q2) Idle equipment will generally need to be reclassified as a current asset.
A)True
B)False
Q3) When performing an audit of the property,plant and equipment accounts,an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles?
A)Repairs have been capitalized to repair equipment that had broken down.
B)Interest has been capitalized for self-constructed assets.
C)Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements.
D)The cost of freight-in on an acquisition has been capitalized.
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Page 15
Chapter 14: Accounts Payable and Other Liabilities
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Sample Questions
Q1) An entity's internal control requires for every check request that there be an approved voucher,supported by a prenumbered purchase order,and a prenumbered receiving report.To determine whether checks are being issued for unauthorized expenditures,an auditor most likely would select for testing from the population of:
A)Purchase orders.
B)Canceled checks.
C)Receiving reports.
D)Approved vouchers.
Q2) Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
A)Scan the sales journal for sequential and unusual entries.
B)Examine shipping documents for matching sales invoices.
C)Compare the accounts receivable ledger to daily sales summaries.
D)Inspect unused sales invoices for consecutive pre-numbering.
Q3) The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis.
A)True
B)False
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Chapter 15: Debt and Equity Capital
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Q1) During its fiscal year,a company issued,at a discount,a substantial amount of first-mortgage bonds.When performing audit work in connection with the bond issue,the independent auditor should:
A)Confirm the existence of the bondholders.
B)Review the minutes for authorization.
C)Trace the net cash received from the issuance to the bond revenue account.
D)Inspect the records maintained by the bond trustee.
Q2) Long-term liabilities that are maturing must always be classified as a current liability.
A)True
B)False
Q3) An auditor who is auditing for acquired treasury stock will normally expect to see an entry in which journal?
A)Cash disbursements.
B)Cash receipts
C)Purchases.
D)Sales.
Q4) The formal documentation creating bond indebtedness is called the indenture.
A)True
B)False
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Chapter 16: Auditing Operations and Completing the Audit
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Sample Questions
Q1) A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively,immaterial amounts.This year the auditors estimate that the accrual is understated by an additional $60,000.In this year's audit $55,000 represents a material amount.Assuming that the entire understatement is to be recorded,following SEC SAB 108 the decrease in this year's income due to these understatements is:
A)$0
B)$60,000
C)$110,000
D)$140,000
Q2) Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
A)Obtaining a lawyers' letter.
B)Confirming accounts payable.
C)Reviewing the minutes of board of directors' meetings.
D)Review correspondence with banks.
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Chapter 17: Auditors Report
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Q1) An audit client has refused to allow the auditors to perform a presumptively mandatory auditing procedure and there are no other effective alternate procedures available.The circumstance would normally result in the issuance of:
A)A disclaimer of opinion.
B)An adverse opinion.
C)A standard unmodified opinion with a qualified scope paragraph.
D)An unmodified report with an emphasis-of-matter paragraph.
Q2) If audited financial statements include a balance sheet and an income statement,but do not include a statement of cash flows:
A)The auditors may still issue an unmodified opinion.
B)The auditors should issue a qualified report for the departure from generally accepted accounting principles.
C)The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented.
D)The auditors should disclaim an opinion on the overall financial statements.
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Chapter 18: Integrated Audits of Public Companies
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Q1) Which of the following must be included in management's report internal control under section 404 of the Sarbanes/Oxley Act of 2002?
A)It is management's responsibility to eliminate or publicly report on significant deficiencies in internal control.
B)A detailed description of the COSO criteria.
C)Management's assessment of the operating effectiveness for the period from the beginning to the end of the fiscal year under audit.
D)Identification of the framework used for evaluating internal control.
Q2) A client imposed scope limitation relating to the audit of internal control ordinarily results in a qualified report.
A)True
B)False
Q3) Which is least likely to be a question asked of employee personnel during a walkthrough?
A)Have you ever been asked+ to override the process?
B)Have you assessed the operating effectiveness of the system?
C)What do you do when you find an error?
D)What are you looking for to determine if there is an error?
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Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) Which of the following is correct relating to compiled financial statements when third party reliance upon those statements is anticipated?
A)A compilation report must be issued.
B)Omission of note disclosures is unacceptable.
C)A written engagement letter is required.
D)Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only".
Q2) A modification of the CPA's report on a review of the interim financial statements of a publicly-held company would be necessitated by which of the following?
A)An uncertainty.
B)Lack of consistency.
C)Reference to another accountant.
D)Inadequate disclosure.
Q3) The auditors must issue a compilation report if they prepare a client's financial statements and submit them to a client who intends to use them for external purposes.
A)True
B)False
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Page 21
Chapter 20: Additional Assurance Services: Other Information
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Q1) Attestation risk,like audit risk consists of three components--inherent risk,control risk,and substantiation risk.
A)True
B)False
Q2) A Type 2 service auditor's report addresses:
A)Only management's description and design of its controls.
B)Management's description and design of its controls and control operating effectiveness.
C)Only control operating effectiveness.
D)Control operating effectiveness and primary assertion reliability.
Q3) Providing assurance using a series of reports provided simultaneously or shortly after the related information is released is referred to as:
A)Continuous auditing.
B)Serial auditing.
C)Systems reliability auditing.
D)Simultaneity auditing.
Q4) SysTrust engagements relate only to database systems.
A)True
B)False
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Chapter 21: Internal, Operational, and Compliance Auditing
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Sample Questions
Q1) Internal auditing is considered to be part of an organization's:
A)Accounting system.
B)Control activities.
C)Monitoring.
D)External controls.
Q2) Under the Single Audit Act,the auditor must apply procedures to test for compliance and test the effectiveness of controls for: \[\begin{array} { l c c } & \text { Major Programs } & \text { NonMajor Programs } \\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No }
\end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q3) The first internal auditors were primarily concerned with operational auditing.
A)True
B)False
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Chapter 22: Probability-Proportion-To-Size Sampling
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Q1) The upper limit on misstatement in a probability-proportional-to-size sample plan consists of the total of the projected misstatement and the tolerable misstatement.
A)True
B)False
Q2) In a probability-proportional-to-size sample with a sampling interval of $10,000,an auditor discovered that as selected account receivable with a recorded amount of $12,000 had an audited amount of $9,000.If this were the only misstatement discovered by the auditor,the projected misstatement of this sample would be:
A)$2,000.
B)$2,500.
C)$3,000.
D)$10,000.
Q3) When using probability-proportional-to-size sampling,the actual total misstatement in a population is most likely to be closest to the:
A)Projected misstatement.
B)Basic precision.
C)Allowance for sampling risk.
D)Upper limit on misstatement.
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