Auditing and Assurance Study Guide Questions
Course Introduction
Auditing and Assurance introduces students to the principles and practices of auditing in contemporary business environments, focusing on the role and responsibilities of auditors in providing independent assurance on financial statements and other information. The course covers the regulatory framework, ethical requirements, risk assessment, the audit process, evidence gathering, internal controls, audit planning, and reporting. Students will gain insights into both external and internal auditing, the application of professional standards, and current issues impacting the assurance profession, preparing them for challenges they may encounter in their auditing careers.
Recommended Textbook
Principles of Auditing and Other Assurance Services 19th Edition by Ray Whittington
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Chapter 1: The Role of the Public Accountant in the American Economy
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Q1) Which of the following is not correct relating to the Sarbanes-Oxley Act?
A)It toughens penalties for corporate fraud.
B)It restricts the types of consulting CPAs may perform for audit clients.
C)It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.
D)It eliminates a significant portion of the accounting profession's system of self-regulation.
Answer: C
Q2) The Government Accountability Office (GAO):
A)Is primarily concerned with rapid processing of all accounts payable incurred by the federal government.
B)Conducts operational audits and reports the results to Congress.
C)Is a multinational organization of professional accountants.
D)Is primarily concerned with budgets and forecasts approved by the SEC.
Answer: B
Q3) An annual peer review is a requirement of the AICPA.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Professional Standards
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Q1) Which of the following is not a type of auditors' opinion?
A)Adverse.
B)Ordinary.
C)Qualified.
D)Unmodified.
Answer: B
Q2) A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm 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: C
Q3) If the auditors discover illegal acts by a client,they ordinarily should immediately resign from the engagement.
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 family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"?
A)A close relative has a material investment in that client of which the CPA is not aware.
B)A cousin has an immaterial investment in the client of which the CPA is aware.
C)The CPA's father is president of the audit client.
D)The CPA's spouse participates in a savings plan sponsored by the client.
Answer: C
Q2) The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors.
A)True
B)False
Answer: False
Q3) The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA.
A)True
B)False
Answer: True
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Chapter 4: Legal Liability of CPAS
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Q1) 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.
Q2) Most charges made against auditors under common law are criminal.
A)True
B)False
Q3) The auditors can be held liable for negligence in audits of financial statements,but not in reviews of financial statements.
A)True
B)False
Q4) Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?
A)Due Diligence Approach.
B)Ultramares Approach.
C)Restatement of Torts Approach.
D)Rosenblum Approach.
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Chapter 5: Audit Evidence and Documentation
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Q1) Confirmation would be most effective in addressing the existence assertion for the:
A)Addition of a milling machine to a machine shop.
B)Payment of payroll during regular course of business.
C)Inventory held on consignment.
D)Granting of a patent for a special process developed by the organization.
Q2) The inspection of a vendor's invoice by the auditors is:
A)Direct evidence about occurrence of a transaction.
B)Physical evidence about occurrence of a transaction.
C)Documentary evidence about occurrence of a transaction.
D)Part of the client's accounting system.
Q3) Which of the following is required documentation in an audit?
A)A list of major accounts.
B)A flowchart of the client's organization.
C)A written audit program.
D)A memo setting forth the scope of the audit.
Q4) The auditors should propose an adjusting journal entry for all material related-party transactions.
A)True
B)False
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Chapter 6: Audit Planning, understanding the Client, assessing
Risks, and Responding
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Q1) Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries:
A)Completeness.
B)Existence.
C)Rights.
D)Valuation.
Q2) The auditors' understanding established with a client should be established through a(an)
A)Oral communication with the client.
B)Written communication with the client.
C)Written or oral communication with the client.
D)Completely detailed audit plan.
Q3) Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.
A)True
B)False
Q4) The substantive approach to an audit is appropriate for many small businesses.
A)True
B)False
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Chapter 7: Internal Control
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Sample Questions
Q1) A material weakness involves an amount that could result in a misstatement that is
A)Smaller than inconsequential.
B)Larger than inconsequential.
C)Tolerable.
D)Material.
Q2) Internal control is concerned with the reliability of financial information.
A)True
B)False
Q3) An auditor's purpose for performing tests of controls is to provide reasonable assurance that:
A)Controls are operating effectively.
B)The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized.
C)Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions.
D)Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles.
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Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Q1) Distributive data processing eliminates the need for data security.
A)True
B)False
Q2) A problem for a CPA associated with advanced IT systems is that:
A)The audit trail normally does not exist.
B)The audit trail is sometimes generated only in machine readable form.
C)The client's internal auditors may have been involved at the design stage.
D)Tests of controls are not possible.
Q3) Which of the following is an example of general computer control?
A)Input validation checks.
B)Control total.
C)Operations manual.
D)Generalized audit software.
Q4) A system in which the end user is responsible for the development and execution of the computer application that he or she uses is referred to as:
A)Laptop computing.
B)End-user computing.
C)Distributed computing.
D)Decentralized computing.
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Chapter 9: Audit Sampling
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Sample Questions
Q1) The 2000 accounts receivable of ABC Company have a total book value of $40,000.Bob Rotter,CPA,has selected and audited a sample of 100 accounts with a total book value of $1,950.The audited value of the 100 accounts in the sample is $1,875. Using the mean-per-unit estimation technique,Rotter's estimate (to the nearest dollar)of year-end accounts receivable balance would be:
A)$37,500
B)$38,462
C)$38,500
D)$41,600
Q2) Which of the following statistical sampling techniques involves taking samples in a series of stages?
A)Systematic sampling.
B)Sequential sampling.
C)Continuous sampling.
D)Multiple location sampling.
Q3) Which of the following may be used to reduce the risk of nonsampling errors?
A)Increasing the size of audit samples.
B)Stratifying audit samples.
C)Adequately planning audit samples.
D)Using statistical sampling techniques.
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Chapter 10: Cash and Financial Investments
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Q1) In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date?
A)Confirmation from the broker.
B)Inspection of year-end brokers' statements.
C)Vouching all changes during the year to brokers' advises and statements.
D)Examination of paid checks issued in payment of securities purchased.
Q2) Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.
A)True
B)False
Q3) Signed checks should be returned to the cash disbursements clerk for mailing.
A)True
B)False
Q4) The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements.
A)True
B)False
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Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
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Sample Questions
Q1) In your review of ABC Company's financials,you note that Receivables have increased approximately 200% from the previous year,while Cash has declined.Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter.If financial statement fraud is involved,which type is most likely?
A)Fictitious revenues
B)Timing differences
C)Improper asset valuations
D)Improper disclosures
Q2) An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the
A)Collection of receivables.
B)Purchase of merchandise inventory.
C)Payment of accounts payable.
D)Sale of long-term debt.
Q3) Accounts receivable that are written-off should not be turned over to a collection agency.
A)True
B)False
Page 13
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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 that the auditors record their inventory test counts in the working papers?
A)To document every test count.
B)For subsequent comparison with the completed inventory listing.
C)To document compliance with generally accepted accounting principles.
D)For use in subsequent audits.
Q2) In verifying debits to perpetual inventory records of a non-manufacturing firm,the auditor would be most interested in examining the:
A)Purchases journal.
B)Purchase requisitions.
C)Purchase orders.
D)Vendors' invoices.
Q3) When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist,they normally may still give an unqualified opinion on the client's income statement.
A)True
B)False
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Chapter 13: Property Plant and Equipment: Depreciation and Depletion
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Sample Questions
Q1) A continuing audit client's property,plant and equipment and accounts receivable accounts have approximately the same year-end balance.In this circumstance,when compared to property,plant and equipment one would normally expect the audit of accounts receivable to require:
A)More audit time.
B)Less audit time.
C)Approximately the same amount of audit time.
D)Similar confirmation procedures.
Q2) Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for:
A)Investigation of variances within a formal budgeting system.
B)Review and approval of the monthly depreciation entry by the plant supervisor.
C)Segregation of duties of employees in the accounts payable department.
D)Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions.
Q3) Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.
A)True
B)False
Page 15
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Chapter 14: Accounts Payable and Other Liabilities
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Q1) A major concern of the auditors is obtaining evidence about the completeness of recorded accounts payable.
a.Describe the reason that the auditors are concerned with the completeness of accounts payable.
b.Describe three ways in which the auditors establish the completeness of accounts payable.
Q2) For good internal control,a copy of a receiving report should be sent to all of the following departments except:
A)Accounts payable.
B)Purchasing.
C)Stores.
D)Shipping.
Q3) Which of the following is an example of an accrued liability?
A)Accounts payable.
B)Notes payable.
C)Prepaid Insurance.
D)Product warranty liability.
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Chapter 15: Debt and Equity Capital
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Q1) To establish effective internal control over a corporation's stock transactions,the corporation should utilize the services of an independent registrar and transfer agent.
a.Describe the functions performed by the stock registrar.
b.Describe the functions performed by the transfer agent.
c.Describe the information that is typically requested by the auditors in a confirmation sent to the registrar.
Q2) The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income.
A)True
B)False
Q3) A primary responsibility of a registrar of capital stock is to:
A)Determine that dividends paid do not exceed the amount allowable by law.
B)Act as an independent third party between the board of directors and outside investors concerning merger, acquisition, and other major decisions.
C)Avoid any over issuance of stock.
D)Maintain detailed stockholder records and carrying out transfers of stock ownership.
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Chapter 16: Auditing Operations and Completing the Audit
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Q1) The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:
A)Letter of audit inquiry to the client's lawyer.
B)Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C)Confirmation of claims and assessments from the other parties to the litigation.
D)Confirmation of claims and assessments from an officer of the court presiding over the litigation.
Q2) Auditors should perform audit procedures relating to subsequent events?
A)Through year end.
B)Through issuance of the audit report.
C)Through the date of the audit report.
D)For a reasonable period after year end.
Q3) If not adjusted,a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification.
A)True
B)False
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Chapter 17: Auditors Report
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Q1) When there is a significant question about a company's ability to remain a going concern,the report issued is usually unmodified with an emphasis-of-matter paragraph.
A)True
B)False
Q2) The term "except for" in an audit report is:
A)Used in an adverse opinion.
B)No longer considered appropriate.
C)Used in a qualified opinion
D)Used for an unmodified opinion when an emphasis-of-matter paragraph is added.
Q3) A change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an adverse opinion by the auditors.
A)True
B)False
Q4) When evaluating the results of audit tests,materiality depends upon both the dollar amount and the nature of the item.
A)True
B)False
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Chapter 18: Integrated Audits of Public Companies
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Q1) Under PCAOB internal control reporting standards,what are the auditor's communication requirements to the audit committee with respect to material weaknesses?
A)All must be communicated in written form.
B)All must be communicated in written form or orally.
C)Only those that violate the Foreign Corrupt Practices Act need be communicated, but in written form.
D)Only those that violate the Foreign Corrupt Practices Act need be communicated, in written form or orally.
Q2) An auditor identified a material weakness in internal control in August.The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminates the material weakness prior to year-end.The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:
A)Adverse.
B)Unqualified.
C)Disclaimer.
D)Qualified.
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Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) Which of the following is correct concerning financial statements prepared in the United States for use in another country?
A)The auditor must follow GAAP of both the United States and of the other country.
B)The type of audit report issued depends upon whether it is for use primarily outside the United States.
C)The audit must only follow US GAAP.
D)Auditors from the other country must be involved with the audit to assure adequate performance of that country's standards.
Q2) Which of the following is accurate relating to audit reports on tax basis financial statements?
A)No emphasis-of-matter paragraph is included in the audit report.
B)Use of the report need not be restricted.
C)The purpose of the financial statements should be described in the audit report.
D)Only reports with modified opinions are appropriate.
Q3) Compiled financial statements may omit note disclosures.
A)True
B)False
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Chapter 20: Additional Assurance Services: Other Information
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Q1) Which of the following are Trust Services principles? \[\begin{array} {c} &\text { Security} & \text{Availability }\\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No }
\end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q2) An international information format designed specifically for business information: A)ERP.
B)XML.
C)Integrated Systems Format. D)XBRL.
Q3) 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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Q1) When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"),an auditor is required to report on:
I.Recommendations for actions to improve operations.
II.The scope of the auditor's tests of compliance with laws and regulations.
A)I only.
B)II only.
C)Both I and II.
D)Neither I nor II.
Q2) The scope of an internal audit is initially defined by the:
A)Audit objectives.
B)Scheduling and time estimates.
C)Preliminary survey.
D)Audit program.
Q3) In an audit in accordance with Government Auditing Standards,the auditors are required to provide a report on:
A)Compliance with general requirements.
B)The schedule of financial assistance received.
C)The organization's internal control.
D)Findings and questioned costs.
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Chapter 22: Probability-Proportion-To-Size Sampling
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Q1) When no misstatements are identified in a PPS sample,the upper limit on misstatement equals.
A)An amount dependent upon the sample's standard deviation.
B)Basic precision.
C)½ of the allowance for sampling risk.
D)Zero.
Q2) Which of the following statements is correct concerning probability-proportional-to-size sampling?
A)The sampling distribution should approximate the normal distribution.
B)The auditors control the risk of incorrect rejection by specifying that risk level for the sampling plan.
C)The sampling interval is calculated by dividing the population book value by the sample size.
D)The auditors control the risk of incorrect acceptance by incorporating an expected misstatement into the sample size formula.
Q3) Increasing the expected misstatement for a probability-proportional-to-size sample increases the required sample size.
A)True
B)False
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