Advanced Auditing Test Questions
Course Introduction
Advanced Auditing delves into complex audit concepts, practices, and standards beyond the introductory level, focusing on contemporary issues faced by professional auditors. The course covers advanced audit methodologies, risk assessment strategies, audit sampling, internal controls evaluation, and the application of auditing standards in different industries. Students critically examine topics such as forensic auditing, audit of group financial statements, audit reports for specialized entities, and the impact of information technology on auditing practices. Ethical issues, professional responsibilities, fraud detection, and regulatory frameworks are also explored, preparing students for advanced roles in auditing and assurance services.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 9th Edition by William F. Messier
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1528 Verified Questions
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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46 Verified Questions
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Sample Questions
Q1) Conflicts of interest often occur between absentee owners and managers. A)True
B)False Answer: True
Q2) The basic purpose of a financial statement audit is to A) Detect fraud.
B) Examine individual transactions so that the auditor may certify as to their validity.
C) Provide assurance regarding whether the auditee's financial statements are fairly stated.
D) Assure the consistent application of correct accounting procedures.
Answer: C
Q3) Decision makers demand reliable information that is provided by accountants. A)True
B)False Answer: True
Q4) Testing all transactions that occurred during the period is cost prohibitive. A)True
B)False
Answer: True
Page 3
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) A typical objective of an operational audit is for the auditor to
A) Determine whether the financial statements present fairly the entity's operations.
B) Evaluate the feasibility of attaining the entity's operational objectives.
C) Make recommendations for improving performance.
D) Report on the entity's relative success in attaining profit maximization.
Answer: C
Q2) The auditor must be independent of the auditee unless
A) The lack of independence does not influence his or her professional judgment.
B) Both parties agree that the independence issue is not a problem.
C) The lack of independence is insignificant.
D) None of the above-the auditor cannot lack independence.
Answer: D
Q3) PCAOB auditing standards must be followed on all audits of public companies' financial statements.
A)True
B)False
Answer: True
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4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if
A) The payments violated the client's policies regarding the prevention of illegal acts.
B) The client receives financial assistance from a federal government agency.
C) Documentation that is necessary to prove that the bribes were paid does not exist.
D) Management fails to take the appropriate remedial action.
Answer: D
Q2) Evaluating a prospective client requires which of the following steps?
A) Communicate with the predecessor auditor.
B) Preplan the audit.
C) Establish the terms of the engagement.
D) None of these.
Answer: A
Q3) There are five general types of audit tests.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Risk Assessment
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Sample Questions
Q1) What is the difference between audit risk and engagement risk?
Q2) The primary responsibility for preventing fraud in an organization lies with A) The audit committee of the board of directors.
B) The internal audit function.
C) The external auditor.
D) The organization's management.
Q3) Which of the following is correct concerning required auditor communications about fraud?
A) Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C) Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.
D) The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Analytical procedures may be classified as being primarily which of the following?
A) Tests of controls.
B) Substantive procedures.
C) Tests of ratios.
D) Detailed tests of balances.
Q2) Which of the following presumptions does not relate to the appropriateness of audit evidence?
A) The more effective the internal control system, the more assurance it provides about the accounting data and financial statements.
B) An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
C) Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D) The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.
Q3) For an auditor, how are management assertions useful?
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7
Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except:
A) Consider factors that affect the risk of material misstatement.
B) Ascertain whether internal control policies and procedures have been placed in operation.
C) Identify the types of potential misstatements that can occur.
D) Obtain knowledge about the operating effectiveness of the internal control.
Q2) Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements?
A) Scanning the journals produced by the internal control system.
B) Performing analytical procedures using data aggregated at a high level.
C) Vouching a sample of transactions directly related to the controls.
D) Observing the entity's personnel applying the controls.
Q3) Internal control includes monitoring of controls.
A)True
B)False
Q4) Data capture occurs through source documentation, direct data entry, or a combination of the two. List three purposes of data capture controls.
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) You are performing an audit on North South Natural Gas (NSNG). Alana, an NSNG employee, has responsibility for reconciling bank statements with the entity's cash accounts. You determine, however, that Alana has never been taught how to reconcile statements. In effect, the statements have not been properly reconciled for two years. How would you judge the significance of this control deficiency? How would you classify this deficiency?
Q2) Which of the following is not true?
A) The auditor should not communicate with management until the audit of internal control over financial reporting is finished.
B) Written communication between the auditor and management about internal control over financial reporting should include the definitions of control deficiencies, significant deficiencies, and material weaknesses.
C) The auditor should not include in the audit report that no significant deficiencies were noted during an audit of internal control over financial reporting.
D) If fraud is discovered, the auditor must report it to the appropriate level of management.
Q3) Identify indicators of a material weakness in internal control over financial reporting.
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Page 9
Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) Which of the following risks is related to efficiency of testing?
A) The risk of incorrect rejection.
B) Inherent risk.
C) The risk of incorrect acceptance.
D) None of these.
Q2) For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true?
A) The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate.
B) The auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate.
C) The auditor must increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate.
D) The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate.
Q3) Define Type I and Type II errors.
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Page 10
Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) Which of the following sampling methods would be used to estimate a numerical measurement of population, such as the dollar value of an account?
A) Attributes sampling.
B) Stop-or-go sampling.
C) Classical variables sampling.
D) Random-number sampling.
Q2) An auditor is preparing to sample an entity's customer receivables for overstatement. A statistical sampling method that automatically provides stratification when using systematic selection is
A) Attribute sampling.
B) Ratio-estimation sampling.
C) Monetary-unit sampling.
D) Mean-per-unit sampling.
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-unit sampling (MUS).
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) In connection with the examination of financial statements by an independent auditor, management suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?
A) Selection of accounts receivable for confirmation, based upon the internal auditor's judgment as to how many accounts and which accounts will provide sufficient coverage.
B) Preparation of schedules for negative accounts receivable responses.
C) Evaluation of the internal control for accounts receivable and sales.
D) Determination of the adequacy of the allowance for doubtful accounts.
Q2) What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?
Q3) Which is not a key segregation of duties for the revenue process? Different parties should
A) Prepare shipping orders and prepare bills of lading.
B) Perform the credit and billing functions.
C) Perform the shipping and billing function.
D) Receive cash and adjust accounts receivable.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) When searching for unrecorded liabilities at year-end, the population identified for sampling would be
A) Cash receipts from related parties recorded before year-end.
B) Creditors whose accounts appear on a subsidiary trial balance of accounts payable.
C) Cash disbursements recorded in the period subsequent to year-end.
D) Invoices dated a few days before and after year-end.
Q2) Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
A) Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.
B) Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.
C) Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
D) Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.
Q3) Describe three categories of expenses outlined in FASB Concept Statement No. 5.
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Page 13
Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) The payroll-processing function is responsible for paying employees for services and benefits.
A)True
B)False
Q2) Which of the following is an effective internal control used to prove that production department employees are properly validating payroll timecards at a time-recording station?
A) Timecards should be carefully inspected by those persons who distribute pay envelopes to the employees.
B) One person should be responsible for maintaining records of employee time for which salary payment is not to be made.
C) Daily reports showing time charged to jobs should be approved by the foreman and compared to the total hours worked on the employee timecards.
D) Internal auditors should make observations of distribution of paychecks on a surprise basis.
Q3) FASB ASC Topic 715 requires specific disclosures regarding human resources, which of course must be verified and audited by the CPA. What are those disclosures?
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Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) Below is information relating to the inventory management of Quick Sell. Using analytical procedures, identify any concerns you have about misstatements in the financial statements.
Q2) An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably
A) Increase the extent of tests of controls for the inventory cycle.
B) Request that the entity schedule the physical inventory count at the end of the year. C) Insist that the entity perform physical counts of inventory items several times during the year.
D) Apply gross profit tests to ascertain the reasonableness of the physical counts.
Q3) The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.
A)True B)False
Q4) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financing Investing Process:
Expenses
Assets and Property Plant and Equipment
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Sample Questions
Q1) Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals?
A) Examination of insurance policies for evidence of a dropped or cancelled policy.
B) Review of repairs and maintenance expense.
C) Review of property tax files.
D) Scanning of invoices for fixed asset additions for evidence of a purchase to replace a previously owned fixed asset.
Q2) To achieve effective control over fixed asset additions, a company should establish activities that require
A) Capitalization of the cost of fixed asset additions in excess of a specific dollar amount.
B) Performance of recurring fixed asset maintenance work solely by maintenance department employees.
C) Any fixed asset additions that are not used in the business to be classified as investments.
D) Authorization and approval of major fixed asset additions.
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16
Chapter 15: Auditing the Financing Investing Process:
Long-Term Liabilities Stockholders Equity and Income
Statement Accounts
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Sample Questions
Q1) The auditor can best verify an entity'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) The auditor's program for the examination of long-term debt should include steps that require the
A) Verification of the existence of the bond holders.
B) Examination of any bond agreement.
C) Inspection of the accounts payable subsidiary ledger.
D) Investigation of credits to the bond interest income account.
Q3) An audit of stockholders' equity ordinarily should include
A) Tracing individual dividend payments to the capital stock records.
B) Reviewing minutes of board meetings to determine the number of shares outstanding.
C) Confirming shares outstanding with state officials.
D) Determining that dividend declarations comply with debt agreements.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) For each assertion about cash listed below, give an example of a test of transactions for (1) cash receipts and (2) cash disbursements.
a. Classification.
b. Occurrence.
c. Authorization.
d. Completeness.
Q2) When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the A) Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
B) Securities are registered in the name of the trust company, rather than the entity itself. C) Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.
D) Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
Q3) Explain how cash plays a role in all business processes.
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) What information is typically requested in a legal letter to an entity's attorney?
Q2) The purpose of analytical procedures at the completion of the audit includes all of the following except:
A) Revising the audit plan.
B) Considering overall reasonableness of the financial statements.
C) Reviewing adequacy of evidence gathered to investigate unusual fluctuations.
D) Recalculating some of the ratios examined during audit planning.
Q3) Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.
Q4) Which of the following situations would require adjustment to or disclosure in the financial statements?
A) A merger discussion.
B) The application for a patent on a new production process.
C) Discussions with a customer that could lead to a 40 percent increase in the entity's sales if agreement is successful.
D) The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
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Chapter 18: Reports on Audited Financial Statements
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Q1) Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements?
A) A change in accounting estimate.
B) A change from an unacceptable accounting principle to a generally accepted one.
C) Correction of an error not involving a change in accounting principle.
D) A change in classification.
Q2) Changes in an entity's accounting choices either affect "consistency" in the application of GAAP or they do not. For each item listed below, state whether the item affects consistency and identify the effect the change will have on the audit report.
1. Change in accounting estimate.
2. Correction of an error in principle.
3. Change in reporting entity.
4. Correction of an error that does not involve an accounting principle.
5. Change in accounting principle.
6. Change in classification and reclassification.
7. Change expected to have a material future effect.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Sample Questions
Q1) In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances
A) Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.
B) Jackson may accept a referral fee from the other CPA firm.
C) Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance.
D) Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.
Q2) Which of the following is allowable for a CPA?
A) A used car loan from a banking client where the client has a lien on the car.
B) An uncollateralized signature loan from a client.
C) Owning more than five percent of the outstanding shares of client stock in a retirement account.
D) The audit engagement partner serves on the client's audit committee.
Q3) 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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Sample Questions
Q1) A CPA's duty of due care to a client most likely will be breached when a CPA
A) Gives a client an oral instead of a written report.
B) Gives a client incorrect advice based on an honest error of judgment.
C) Fails to give tax advice that saves the client money.
D) Fails to follow generally accepted auditing standards.
Q2) Ford & Co., CPAs, issued an unqualified opinion on Owens Corp.'s financial statements. Relying on these financial statements, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove, in addition to other elements, that Century was
A) Free from contributory negligence.
B) In privity of contract with Ford.
C) Justified in relying on the financial statements.
D) In privity of contract with Owens.
Q3) Suits are often brought against auditors that allege that the auditors did not detect some type of fraud or defalcation. List the six defenses that the auditors could mount against client negligence claims.
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Sample Questions
Q1) Which of the following is the authoritative body designated to promulgate attestation standards for nonpublic entities?
A) AICPA (Auditing Standards Board).
B) Governmental Accounting Standards Board.
C) Financial Accounting Standards Board.
D) General Accounting Office.
Q2) For a practitioner to examine management's assertions about the effectiveness of internal controls, all of the following conditions are necessary except:
A) Sufficient competent evidence can be developed to support the evaluation.
B) The practitioner must have already concluded that the financial statements are fairly presented in accordance with the applicable accounting framework.
C) The entity's management accepts responsibility for the effectiveness of its internal control.
D) All of the conditions listed are necessary.
Q3) To bridge the gap between a changing business environment and the guidance that was then available, the IIA developed a Professional Practices Framework. This framework consists of two broad categories of guidance. List these categories of guidance and what they include.
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