Audit Theory and Practice Solved Exam Questions
Course Introduction
Audit Theory and Practice introduces students to the fundamental principles, concepts, and methodologies of auditing. The course covers the theoretical framework underpinning the auditing profession, including generally accepted auditing standards, ethical requirements, and the legal responsibilities of auditors. Through practical case studies and real-world examples, students will learn how to plan and execute audit engagements, assess risks, evaluate internal controls, gather audit evidence, and report audit findings. The course also explores contemporary issues in auditing, such as emerging technologies, fraud detection, and the impact of regulatory changes. By the end of the course, students will be equipped with the knowledge and skills necessary to undertake both internal and external audits in a professional environment.
Recommended Textbook
Auditing and Assurance Services 6th Edition by Timothy J. Louwers
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Page 2
Chapter 1: Auditing and Assurance Services
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Sample Questions
Q1) Which of the following is the essential purpose of the audit function?
A) Detection of fraud
B) Examination of individual transactions to certify as to their validity
C) Determination of whether the client's financial statement assertions are fairly state
D) Assurance of the consistent application of correct accounting procedures
Answer: C
Q2) The auditor's judgment concerning the overall fairness of the presentation of financial position,results of operations,and cash flows is applied within the framework of A) quality control.
B) generally accepted auditing standards, which include the concept of materiality.
C) the auditor's evaluation of the audited company's internal control.
D) the applicable financial reporting framework (i.e., GAAP in the United States).
Answer: D
Q3) What are the four basic requirements for becoming a CPA?
Answer: Education,the CPA Examination,experience,and a state certificate.
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Chapter 2: Professional Standards
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Sample Questions
Q1) Which of the following is not included in the auditors' standard report representing an unmodified opinion?
A) A brief indication of the responsibility of auditors and management for the financial statements
B) An indication that all appropriate disclosures have been made and included in the financial statements
C) An indication that the audit was conducted in accordance with standards established by the PCAOB
D) The auditors' opinion on the fairness of the financial statements
Answer: B
Q2) The standard auditors' report refers to standards of the PCAOB and GAAP in which paragraph?
A) Standards of the PCAOB: Scope only; GAAP: Opinion only
B) Standards of the PCAOB: Introductory only; GAAP: Scope and opinion
C) Standards of the PCAOB: Introductory and scope; GAAP: Opinion only
D) Standards of the PCAOB: Introductory only; GAAP: All paragraphs
Answer: A
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Chapter 3: Engagement Planning
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Sample Questions
Q1) In auditing accrued liabilities,an auditor's procedures most likely would focus primarily on management's assertion of
A) existence or occurrence.
B) completeness.
C) presentation and disclosure.
D) valuation or allocation.
Answer: B
Q2) The basic auditing application of the personal computer as an audit tool would not include
A) spreadsheet analysis.
B) sample planning, selection, and evaluation.
C) continuous monitoring of a client's internal control system.
D) analytical review.
Answer: C
Q3) Which of the following is not a category of audit documentation?
A) Temporary files
B) Permanent files
C) Audit administrative files
D) Current documentation files
Answer: A
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Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) External auditors are responsible
A) for authenticating documents.
B) for reporting immaterial frauds to a level of management at least one level above the people involved.
C) for finding all intentional misstatements concealed by collusion.
D) for reporting all frauds to outside agencies or parties.
Q2) Jones,CPA,is auditing the financial statements of XYZ Retailing Inc.What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements,and noncompliance that has a material,but indirect effect on the financial statements will be detected?
A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None
B) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable
C) Direct effect noncompliance: Limited; Indirect effect noncompliance: None
D) Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable
Q3) What are the independent auditor's responsibilities to detect and report errors and frauds?
Q4) Why is it important for auditors to understand their clients' business risks?
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Chapter 5: Risk Assessment: Internal Control Evaluation
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Sample Questions
Q1) What constitutes a material weakness?
Q2) Which of the following is an Information Technology General Control?
A) Check digit
B) Run-to-run totals
C) Distribution of computerized output
D) Separation of duties in the IT department
Q3) Which of the following procedures is considered a test of controls?
A) An auditor reviews the entity's check register for unrecorded liabilities.
B) An auditor evaluates whether a general journal entry was recorded at the proper amount.
C) An auditor interviews and observes appropriate personnel to determine segregation of duties.
D) An auditor reviews the audit workpapers to ensure proper sign-off.
Q4) The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with
A) knowledge necessary for audit planning.
B) evidential matter to use in assessing inherent risk.
C) a basis for modifying tests of controls.
D) an evaluation of the consistency of application of management's policies.
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Chapter 6: Employee Fraud and the Audit of Cash
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Sample Questions
Q1) Which of the following is not considered one of the three factors increasing the probability of fraud?
A) Motive
B) Lack of training
C) Opportunity
D) Rationalization
Q2) The mail which includes payments should be opened by two people.This control is called
A) separation of duties.
B) joint custody.
C) anti-collusion.
D) lapping.
Q3) A proof of cash
A) is required by GAAS.
B) can be used to test the transactions process.
C) is most helpful when control risk for cash is low.
D) always detects lapping.
Q4) List,and briefly describe,the three factors that increase the probability of fraud.
Q5) Describe how a lockbox works and indicate the advantages of such a system.
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Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) A computer generally cannot be used for scanning large files of accounts receivable for unusual credit balances.
Question also found in study guide
A)True
B)False
Q2) Custody of inventory is transferred to the shipping area upon authorization of A) the customer order.
B) the shipping order.
C) the invoice.
D) the purchase order.
Q3) What procedures should an auditor perform for a positive confirmation that is not returned by the client's customer?
Q4) When an account receivable is considered uncollectible,the person who generally authorizes the write-off is the client's
A) credit manager.
B) treasurer.
C) accountant.
D) internal auditor.
Q5) What is dual direction testing?
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Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) The typical functions of the personnel and payroll cycle would not include A) labor relations.
B) report of attendance and work performed.
C) allocation to cost of goods sold.
D) payroll accounting.
Q2) The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
A) human resources function from the controllership function.
B) administrative controls from the internal accounting controls.
C) authorization of transactions from the custody of related assets.
D) operational responsibility from the record keeping responsibility.
Q3) The auditors' "search for unrecorded liabilities" should emphasize payments made shortly after the end of the year.
A)True
B)False
Q4) The principal goal of the physical inspection of property,plant,and equipment is to determine actual valuation of property.
A)True
B)False
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Chapter 9: Production Cycle
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Sample Questions
Q1) The physical observation procedures for inventory are principally designed to audit for the balance assertions of ____________________________,____________________________,and
Question also found in study guide
Q2) Materials requisitions should be compared in the __________________________________ department with the ______________________________________ on the production order.
Question also found in study guide
Q3) A client maintains perpetual inventory records in quantities and in dollars.If the assessed control risk is high,an auditor would probably
A) apply gross profit tests to ascertain the reasonableness of the physical counts.
B) increase the extent of tests of controls relevant to the inventory cycle.
C) request the client to schedule the physical inventory count at the end of the year.
D) insist that the client perform physical counts of inventory items several times during the year.
Q4) Prepare an audit plan for inventory pricing and compilation.
Q5) Prepare an audit plan for the observation of an inventory count.
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Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) A related party is a person or entity that
A) has a family tie to a management member.
B) does business with the company.
C) can exert significant influence over or be influenced by the company.
D) is a member of the company's management.
Q2) Which of the following is not an estimate required in the finance and investment cycle?
A) Actuarial assumptions for pension accruals.
B) Residual values for leases.
C) Stated market value of publicly traded stocks.
D) All the above are estimates.
Q3) The typical business activity of the finance and investment cycle would not include A) proposals for cash forecasts, capital budgets, and business expansion.
B) analysis of excess cash funds.
C) reconciliation of cash.
D) sale of stocks, bonds, or notes.
Q4) An ___________________________________ is an approximation of a financial statement element,item,or account. Question also found in study guide
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Chapter 11: Completing the Audit
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Sample Questions
Q1) The primary objective of analytical procedures used near the end of an audit is to
A) obtain evidence from details tested to corroborate management assertions.
B) obtain evidence on the validity of the assessment of control risk.
C) assist auditors in evaluating the overall financial statement presentation.
D) identify areas that represent specific risks relevant to the audit.
Q2) Interim testing normally occurs between the ____ and the ____.
A) beginning of the year under audit; audit report release date
B) date of the financial statements; audit report release date
C) beginning of the year under audit; date of the financial statements
D) end of the year under audit; date of the auditors' report
Q3) Analytical procedures performed near the end of an audit generally include
A) considering unusual or unexpected account balances that were not previously identified.
B) performing tests of transactions to corroborate management's financial statement assertions.
C) gathering evidence concerning account balances that have not changed from the prior year.
D) retesting control activities that appeared to be ineffective during the assessment of control risk.
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Page 13
Chapter 12: Reports on Audited Financial Statements
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Sample Questions
Q1) When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure,the auditors should describe the nature of the omission in an additional paragraph and modify
A) the introductory paragraph and Auditor's Responsibility sections.
B) the introductory paragraph only.
C) the Auditor's Responsibility section only.
D) neither the introductory paragraph nor Auditor's Responsibility section.
Q2) Auditors are required to reference consistency in their report when there are changes in
A) accounting estimates.
B) the format of the Statement of Cash Flows.
C) the classification of financial statement amounts.
D) accounting principles.
Q3) Define a scope limitation and distinguish between client-imposed and circumstance-imposed scope limitations.What reporting options are available to auditors when scope limitations are encountered during the engagement?
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14
Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) Attestation engagements include
A) only examinations.
B) examinations and assurance services.
C) examinations, reviews, and agreed-upon procedures.
D) examinations, reviews, compilations, agreed-upon procedures and assurance services.
Q2) At a minimum,in order to comply with PCAOB AS 5,an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization
A) a description of its internal controls.
B) a type one service auditors' report.
C) a type two service auditors' report.
D) a Service Organization Control (SOC) 3 report.
Q3) Review work on unaudited financial statements consists primarily of conducting inquiries,performing analytical procedures,and obtaining a management representation letter.List the typical procedures accountants would perform on a review engagement.
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15
Chapter 14: Professional Ethics
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Sample Questions
Q1) Which of the following is NOT one of the AICPA Principles of Professional Conduct?
A) Responsibilities
B) Reliability
C) Objectivity
D) Due Care
Q2) Which of the following defines the imperative principle of ethics?
A) Ethic decisions cannot be resolved without evaluating all possible outcomes of all choices.
B) Ethics are a function of moral rules and principles.
C) All ethical decisions will have positive and negative consequences.
D) It is essential that decisions be made for the greater good of society.
Q3) Which of the following sections is no longer included in the AICPA Rules of Conduct?
A) Responsibilities to Clients
B) Independence, Integrity, and Objectivity
C) Responsibilities to Colleagues
D) General and Technical Standards
Q4) What are (a)the AICPA Principles of Professional Conduct,(b)Rules of Conduct,and (c)Interpretation of Rules of Conduct?
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Page 16
Chapter 15: Legal Liability
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Sample Questions
Q1) To prevail in an action brought under common law,the plaintiff must show all of the following except
A) he or she was damaged or suffered a loss.
B) the financial statements contained a material misstatement.
C) auditors knew the financial statements contained a material misstatement.
D) he or she relied on the financial statements.
Q2) Failure to provide any level care in fulfilling a duty owed to another party,including reckless disregard for the truth,is called
A) breach of contract.
B) ordinary negligence.
C) privity.
D) constructive fraud.
Q3) A principle that may reduce or eliminates auditors' liability to clients is
A) client's constructive negligence.
B) client's contributory negligence.
C) auditors' ordinary negligence.
D) auditors' gross negligence.
Q4) Distinguish between the "due diligence" and the "causation" defenses available to auditors under section 11 of the Securities Act of 1933.
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Chapter 16: Internal Audits governmental Audits and Fraud
Examinations
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Sample Questions
Q1) In a single audit of federal financial assistance programs,which of the following does the auditor not need to determine and report for each organization?
A) An expanded scope audit of economy, efficiency, and program results.
B) That the financial statements are presented fairly in accordance with GAAP.
C) That an adequate internal control system is in place.
D) That the laws and regulations have been complied with.
Q2) Internal auditors should be independent when obtaining evidence in the sense of being free financial relationships such as owning stock.
A)True
B)False
Q3) An internal auditor's report should contain five elements for each finding.Which of the following are the correct elements?
A) Condition, criteria, cause, effect, recommendation.
B) Condition, relevance, cause, effect, recommendation.
C) Condition, evidence, cause, effect, recommendation.
D) Condition, relevance, evidence, effect, recommendation.
Q4) Explain briefly the purpose and requirements under the Single Audit Act.
Q5) What are the different types of internal audits?
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) The upper limit on misstatement is
A) an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk.
B) an adjustment of the sample deviation rate to reflect the desired level of sampling risk.
C) the maximum rate of deviation that could exist before auditors would reduce the reliance on an internal control.
D) the maximum misstatement that could exist before auditors would conclude that the account balance is not fairly stated.
Q2) The audit team decided to reduce planned reliance on internal controls based on the results of attributes sampling.However,the actual rate of deviation in the population is lower than the tolerable rate of deviation.Which type of risk and loss is the audit team exposed to?
A) Risk of assessing control risk too low; efficiency loss
B) Risk of assessing control risk too high; effectiveness loss
C) Risk of assessing control risk too low; effectiveness loss
D) Risk of assessing control risk too high; efficiency loss
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Chapter 18: Attributes Sampling
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Sample Questions
Q1) Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whether
A) the control procedures are operating effectively.
B) the financial statements are materially misstated.
C) the risk of incorrect acceptance is too high.
D) overall materiality for planning purposes is at a sufficiently low level.
Q2) Assume that the audit team established a tolerable rate of deviation of 5%,an expected population deviation rate of 1%,and desired to control the risk of overreliance to 5%.What is the appropriate sample size in this situation?
A) 77 items
B) 93 items
C) 132 items
D) 124 items
Q3) For which of the following audit tests would an auditor most likely use attributes sampling?
A) Making an independent estimate of the amount of a LIFO inventory
B) Examining invoices in support of the valuation of fixed asset additions
C) Selecting accounts receivable for confirmation of account balances
D) Inspecting employee time cards for proper approval by supervisors
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Page 20
Chapter 19: Variables Sampling
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Sample Questions
Q1) The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value)of the population is
A) attributes sampling.
B) balance sampling.
C) discovery sampling.
D) variables sampling.
Q2) Which of the following selection methods selects individual dollars within an account balance or class of transactions for examination?
A) Attribute sampling
B) Classical variables sampling
C) Monetary unit sampling
D) Nonstatistical variables sampling
Q3) Which of the following components of the upper limit on misstatements is based on the possibility that the sampling interval contains a greater degree of misstatement than the item examined by the auditor?
A) Basic allowance for sampling risk
B) Incremental allowance for sampling risk
C) Projected misstatement
D) Risk of incorrect acceptance
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Page 21
Chapter 20: Auditing and Information Technology
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Sample Questions
Q1) To obtain evidence that controls over access to computer programs are properly functioning,audit teams most likely would
A) create checkpoints at periodic intervals after data processing to test for unauthorized use of the system.
B) examine the transaction log to discover whether any transactions were lost or entered twice due to a system malfunction.
C) enter invalid identification numbers or passwords to ascertain whether the system rejects them.
D) vouch a random sample of processed transactions to assure proper authorization.
Q2) In end-user computing environments,the processing control procedures would ordinarily not include
A) transaction logs.
B) control totals.
C) comparing input to output.
D) online editing and sight verification.
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