Advanced Auditing Solved
Exam Questions
Course Introduction
Advanced Auditing is designed to deepen students' understanding of auditing principles, standards, and procedures, building on foundational knowledge to address complex audit scenarios in various industries. The course explores advanced topics such as audit planning and risk assessment, evaluation of internal controls, forensic and IT auditing, and handling of audit evidence in complex transactions. Students will analyze contemporary issues including fraud detection, professional ethics, the use of data analytics, and evolving regulatory requirements. Case studies and real-world scenarios will be used to develop critical thinking and problem-solving skills, preparing students for professional certification and leadership roles in auditing practice.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian 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) A reason for a nonprofit organization to be audited is to
A) comply with the laws requiring them to be audited.
B) meet requirements of lenders or funding sources.
C) have a professional accountant perform their bookkeeping.
D) ensure that their financial statements do not contain errors.
Answer: B
Q2) Blader Ng. Inc. has recently placed new air-cleaning systems in their smokestacks to meet air quality regulations. An auditing firm has been engaged to assess air quality and compare results to legislated requirements. What type of audit or engagement is the auditor conducting?
A) financial statement
B) compliance
C) operational
D) review
Answer: B
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Page 3
Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) CAS 200 provides overall objectives of the independent auditor during the conduct of an audit in three categories: qualifications and conduct, performance of the audit, and reporting of results. How do these standards provide guidance to auditors?
A) They detail what an auditor should do during each financial statement audit.
B) They represent a framework for further discussion of detailed standards.
C) They provide specific rules about how work should be done for evidence gathering.
D) They explain how the audit report should be developed and distributed.
Answer: B
Q2) Stafford & Sandiford is a public accounting firm with 30 clients who are reporting issuers. Stafford & Sandiford can expect to be inspected by the CPAB
A) once per year.
B) once every 3 years.
C) once every 5 years.
D) randomly.
Answer: B
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Chapter 3: Legal Liability
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Sample Questions
Q1) What are the 6 major factors contributing to the high number of lawsuits against pubic accountants and the high amounts in settlements being awarded to plaintiffs?
Answer: The six reasons are:
growing awareness of the responsibilities of public accountants by users of financial statements
increased consciousness on the part of provincial securities commissions for their responsibility for protecting investors' interests increasing complexity of auditing and accounting functions tough economic times resulting in business failures, which prompt stakeholders to seek restitution from others, including external auditors the common belief that public accounting firms have deep pockets many public accounting firms being willing to settle legal problems out of court in order to avoid costly legal fees and adverse publicity
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) The requirement for an attitude of skepticism means that the auditor should A) not be blind to evidence that suggests the documents, books, or records have been altered or are incorrect.
B) plan and conduct the audit with an attitude of distrust in management.
C) perform additional tests of controls to increase the probability of discovering fraud or errors.
D) not consider management's explanation as evidence on any subject.
Q2) To ensure that employees remain independent, an audit firm should
A) ask employees to sign a form confirming that they do not have an investment in a company that they are auditing.
B) prohibit an employee from the Toronto office to have an investment in a company audited by the Hong Kong branch of the PA firm.
C) include a section in the code of conduct indicating that the employees should not invite their client to dinner.
D) refuse an audit mandate where the cousin of a staff member works in the marketing department.
Q3) What are the common judgement traps and how can they be avoided?
Q4) List the components of the auditor's professional judgment framework.
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) In May 2015, the firm of Chang and Crown (C&C) became the auditors of Laua Limited (LL) for the fiscal year ended December 31, 2014. LL's shareholders and Board approved the change from its previous audit firm on the recommendation of LL's senior management. One of the new board members is a bit confused about management's role with respect to the financial statements and thought that Chang and Crown would be preparing the financial statements. He was also glad that the auditors would be able to help prevent illegal acts and fraud.
Required:
A) Distinguish between management's responsibility and the auditor's responsibility for the financial statements under audit.
B) Explain to the board member why the auditor does NOT help prevent illegal acts and fraud. What is the role of the auditor with respect to illegal acts and fraud?
Q2) If the purchase of a long-term note receivable is included as cost of goods sold, there is a violation of the
A) existence objective.
B) completeness objective.
C) classification objective.
D) timing objective.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) Michum Inc. has related parties with a company owned by the CEO's brother that comprise about $500 000. There are also related party transactions with the owner (about $250) and with two of the officers ($750 and $1000) respectively. Which related parties should be identified and included in audit documentation?
A) those with material transactions only
B) those that had transactions in the current year only
C) all related parties
D) only those that could lead to a conflict of interest
Q2) Knowledge of the client's industry and external environment can be obtained in different ways. Discuss some of the ways that this knowledge can be obtained.
Q3) Three conditions for fraud are referred to as the "fraud triangle." One of the sides of this triangle is incentives or pressures. The other two sides are
A) opportunities and a desire to meet debt repayment obligations.
B) opportunities and attitudes or rationalizations.
C) attitudes or rationalizations and the need to maintain stock prices.
D) the need to maintain stock prices and the need to meet debt repayment obligations.
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Chapter 7: Materiality and Risk
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Sample Questions
Q1) The first step in applying materiality is
A) estimating the misstatement in a segment for each functional cycle.
B) setting a judgment about materiality for the financial statements as a whole.
C) estimating the combined effects of errors.
D) comparing the error estimate with the materiality levels.
Q2) If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be
A) significant.
B) insignificant.
C) material.
D) relevant.
Q3) Further possible misstatement considers
A) possible presence of management fraud.
B) possible lack of knowledge of the audit team.
C) imprecision in the sampling process.
D) imprecision in the audit procedures.
Q4) A) Explain how auditors use the audit risk model when planning an audit.
B) Describe the audit risk model and each of its components.
Q5) Discuss three factors that affect client business risk and therefore audit risk.
Page 9
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) Paul is in the process of performing procedures to obtain the necessary understanding of the client's internal controls. As part of this process, Paul received from the client completed narratives, flowcharts, and internal control questionnaires. Paul can use this information from the client
A) if the entity-level controls and tone at the top were found to be effective.
B) if there has not been any significant change in the internal controls since the prior year.
C) as long as any subsequent reliance on controls is adequately substantiated with testing.
D) since it was prepared by management, which is unbiased.
Q2) A secondary objective of the auditor's study and evaluation of internal control is that the study and evaluation provide
A) a basis for constructive suggestions concerning improvements in internal control.
B) a basis for reliance on the accounting system.
C) an assurance that the records and documents have been maintained in accordance with existing company policies and procedures.
D) an indication that management and employees are trustworthy.
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Page 10
Chapter 9: Audit Evidence
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Sample Questions
Q1) To facilitate the working paper preparation process, defaults can be established to automatically insert client name, period covered, and preparer. This can best be done using
A) the junior staff assigned to the engagement.
B) an old-fashioned rubber stamp on each printed page.
C) cut and paste tools in word processing or spreadsheet software.
D) automated working paper software.
Q2) The auditor is tracing from the duplicate sales invoices to related shipping documents with respect to the occurrence transaction-related audit objective. This type of evidence is
A) independent.
B) relevant.
C) timely.
D) related to external documentation.
Q3) In determining the quantity and quality of evidence to gather, the auditor will be satisfied when the evidence is
A) irrefutable.
B) conclusive.
C) highly persuasive.
D) sufficiently convincing.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Which of the following ultimately determines the specific audit procedures necessary to provide an auditor with a reasonable basis for the expression of an opinion?
A) the audit program
B) the auditor's professional judgment
C) generally accepted auditing standards
D) the auditor's working papers
Q2) Which of the following audit tests is usually the most costly to perform?
A) analytical procedures
B) tests of controls
C) tests of details of balances
D) procedures to obtain an understanding of internal control
Q3) Last year the materiality for the client was $590 000. This year it is $400 000. All things being equal, how will this change in materiality affect the extent of tests of details?
A) increase
B) decrease
C) no effect as the tests of controls will be increased
D) no effect as the tests of controls will be decreased
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12
Chapter 11: Audit Sampling Concepts
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Sample
Questions
Q1) During the audit of the fixed asset section, the auditor decided to inspect source documents supporting all fixed asset additions exceeding $3000. This type of audit procedure is called a
A) census of the strata over $3000.
B) analytical review.
C) attribute sample.
D) monetary unit sample.
Q2) The sample exception rate equals the number of
A) exceptions in the population divided by the sample size.
B) items in the population multiplied by the number of exceptions in the sample.
C) exceptions in the sample divided by the sample size.
D) exceptions in the population divided by the population size.
Q3) A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is
A) population-proportional-to-size sampling.
B) attribute sampling.
C) variables sampling.
D) estimation sampling.
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13
Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) Proper accounting requires that an account receivable must be written off by the client when
A) the client company concludes that an amount is no longer collectible.
B) the customer files for bankruptcy.
C) a collection agency cannot inspire the customer to pay the debt.
D) the account is at least six months old.
Q2) Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?
A) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
B) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.
C) Write-offs must be approved by the cashier who is in a position to know if the accounts receivable have, in fact, been collected.
D) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The most common fraud in the acquisitions area is for the perpetrator to A) alter the cheque payment file before it is printed so that the payee name is changed. B) issue payments to fictitious vendors and deposit the cheques to a fictitious account. C) change the optical characters at the bottom of a cheque to alter the account to be credited.
D) issue duplicate payments for invoices and then pocket the second cheque.
Q2) Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.
Q3) The test of transactions that requires the recomputing of cash discounts satisfies the objective of A) occurrence. B) completeness.
C) accuracy.
D) posting and summarization.
Q4) Discuss the key internal controls related to the disposal of manufacturing equipment.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to
A) fraud.
B) audit risk.
C) illegal acts.
D) business risks.
Q2) When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
A) all goods purchased before year-end are received before the physical inventory count.
B) no goods held on consignment for customers are included in the inventory balance. C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the current period inventory balance.
Q3) State the six functions that make up the inventory and distribution cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.
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16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the
A) payroll master file.
B) payroll transaction file.
C) payroll journal.
D) job time ticket.
Q2) The human resources department would likely provide which of the following internal controls for the human resources and payroll cycle?
A) recalculation of net pay for every pay
B) independent verification of wage rate
C) account for the continuity of employee numbers
D) account for the continuity of payroll check numbers
Q3) In auditing the imprest payroll account, which of the following procedures will take the least amount of auditor time?
A) tests of controls
B) risk analysis and obtaining an understanding of controls
C) analytical procedures
D) tests of details of balances
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Kumar is the internal auditor of Tarragon Inc. Kumar wants to put procedures in place to prevent misstatements in owners' equity and ensure proper record keeping. Kumar has suggested that management implement well-defined policies for preparing stock certificates and recording capital stock transactions. What else should Kumar recommend?
A) independent internal verification of information in the records
B) having all journal entries in the equity account reviewed by the controller
C) performing a monthly reconciliation of shareholder's equity
D) reconciling the dividend payments with the bank statement
Q2) Proper authorization for the issuance of notes payable requires that
A) whenever notes are renewed (refinanced), they should be subject to the same authorization procedures as used when they were first issued.
B) responsibility for authorizing notes should lie with the manager who will receive the benefits of the loan.
C) responsibility for authorization should lie with the treasurer's function, since the treasurer's department will receive the cash generated.
D) responsibility for authorization should lie with the manager who must generate the revenue to repay the loan.
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Page 18
Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) A) Discuss the methodology for designing tests of details of balances for cash in the bank.
B) An effective monthly bank reconciliation by client personnel includes nine procedures. List these nine bank reconciliation procedures.
C) Discuss two analytical procedures commonly performed during the audit of the cash account.
Q2) In addition to the possibility of kiting, inaccurate handling of bank transfers could result in
A) a misclassification between cash and accounts receivable.
B) an incorrect balance in the accounts receivable account.
C) a misclassification between cash and accounts payable.
D) an incorrect balance in the bank loan account.
Q3) Which of the following misstatements could be detected as part of the tests of a bank reconciliation?
A) payment of interest to a related party at an incorrect rate
B) exclusion of mortgage interest receivable from the balance sheet
C) deposits recorded as cash receipts at the end of year, but included as outstanding deposits (deposits in transit)
D) a defalcation of cash by interception of collections before they are recorded
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Page 19
Chapter 18: Completing the Audit
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Sample Questions
Q1) The initial review of the working papers prepared by any given auditor is normally done by the
A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.
Q2) State the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.
Q3) There are two categories of lawsuits: outstanding (or asserted) claims, and
A) possible or unasserted claims.
B) disputed claims among several parties.
C) settled claims.
D) claims that could result in material misstatements.
Q4) Besides the search for contingent liabilities and the review for subsequent events, the auditor has four important final evidence accumulation responsibilities, all of which are required by current professional auditing standards. Discuss each of these four responsibilities.
Q5) Discuss three audit procedures commonly used to search for contingent liabilities.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) The phrase "in our opinion" indicates that
A) the auditor performed the audit on a test basis.
B) the auditor's judgment can be relied upon.
C) the auditor relied on his or her knowledge to perform the audit.
D) there may be some information risk associated with the financial statements.
Q2) The auditor's report of the Huge Mega Company indicates that the financial statements are fairly presented except for the goodwill balance, which does not comply with International Financial Reporting Standards. The auditor's report is
A) unqualified.
B) unqualified with an explanatory paragraph.
C) qualified.
D) adverse.
Q3) The least severe type of report for disclosing departures from an unqualified report is the
A) adverse opinion.
B) disclaimer of opinion.
C) qualified opinion.
D) report on unaudited financial statements.
Q4) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) You have just signed off the audit report on the financial statements of your client. What type of engagement did you complete?
A) review
B) direct reporting
C) attest and assurance
D) operational
Q2) Which of the following matters would be addressed in a report on the results of applying specified auditing procedures to financial information other than financial statements?
A) an opinion with respect to the quality of the information examined
B) explanations of the differences between audits, reviews, and special engagements
C) the factual results of the procedures
D) provision of negative assurance with respect to the accounts examined
Q3) The level of assurance that is provided by the public accountant on a compilation report is
A) none.
B) low.
C) medium.
D) high.
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Page 22