Auditing Final Exam
Course Introduction
Auditing is a comprehensive course that explores the fundamental principles, procedures, and practices involved in the examination of financial statements and internal controls. The course covers the auditor's role in ensuring accuracy, legality, and fairness in financial reporting, emphasizing the importance of professional ethics and standards. Students will learn about audit planning, evidence collection, risk assessment, and the use of various auditing techniques. The course also addresses current trends and challenges in auditing, including the impact of technology and regulatory requirements, preparing students for practical audit engagements in diverse organizational settings.
Recommended Textbook
Auditing and Assurance Services 16th 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) Discuss the differences and similarities between the roles of accountants and auditors.What additional expertise must an auditor possess beyond that of an accountant?
Answer: The role of accountants is to record,classify,and summarize economic events in a logical manner for the purpose of providing financial information for decision making.To provide relevant information,accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information.In addition,accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost.
The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period.Because U.S.or international accounting standards provide the criteria for evaluating whether financial information is properly recorded,auditors must thoroughly understand those accounting standards.In addition to understanding accounting,the auditor must possess expertise in the accumulation and interpretation of audit evidence.It is this expertise that distinguishes auditors from accountants.Determining the proper audit procedures,deciding the number and types of items to test,and evaluating the results are unique to the auditor.
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Chapter 2: The Cpa Profession
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Sample Questions
Q1) In a CPA firm,the audit partner coordinates the performance of audit procedures.
A)True
B)False
Answer: False
Q2) Quality controls are established for the entire CPA firm whereas auditing standards are applicable to the individual engagement.
A)True
B)False
Answer: True
Q3) The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to
A)provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.
B)monitor the risk factors concerning misstatements that arise from the misappropriation of assets.
C)document objective criteria for the CPA firm's peer review.
D)minimize the likelihood of associating with a client whose management may lack integrity.
Answer: D
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Page 4
Chapter 3: Audit Reports
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Sample Questions
Q1) The auditor's responsibility section of the standard unmodified opinion audit report states that the auditor is
A)responsible for the financial statements and the opinion on them.
B)responsible for the financial statements.
C)responsible for the opinion on the financial statements.
D)jointly responsible for the financial statements with management.
Answer: C
Q2) Which of the following is a correct statement regarding materiality?
A)There are well-defined guidelines that enable auditors to determine if something is material.
B)Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP.
C)Pervasiveness is not considered when comparing potential misstatements with a base or benchmark.
D)To evaluate overall materiality,the auditor does not combine all unadjusted misstatements.
Answer: B
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Chapter 4: Professional Ethics
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Sample Questions
Q1) Which part of the AICPA's Code of Professional Conduct is enforceable?
A)ethical rulings
B)rules of conduct
C)principles
D)interpretations
Q2) The CPA must not subordinate his or her professional judgment to that of others in any
A)engagement.
B)audit engagement.
C)engagement excluding tax services.
D)engagement where the opinion of a specialist is used.
Q3) Information obtained by a CPA from a client is legally privileged in federal court.
A)True
B)False
Q4) CPAs are prohibited from which of the following forms of advertising?
A)self-laudatory advertising
B)celebrity endorsement advertising
C)use of trade names,such as "Awesome Auditors"
D)use of phrases,such as "Guaranteed largest tax refunds in town!"
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Chapter 5: Legal Liability
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Sample Questions
Q1) A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated.This is an example of which of the following legal liability concepts?
A)liability to clients
B)liability to third parties under common law
C)civil liability under federal securities law
D)criminal liability
Q2) Under the Ultramares doctrine,ordinary negligence is insufficient for liability to third parties unless the third party is
A)a primary beneficiary.
B)an injured party.
C)a foreseen user.
D)a bank.
Q3) Under the Securities Exchange Act of 1934,most of the litigation against the auditor has been generated because of the auditor's involvement with the
A)8-K form.
B)10-K form.
C)10-Q form.
D)S-1 form.
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Page 7
Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) When an auditor has reduced assessed control risk based on tests of controls,he or she may then reduce the extent to which the accuracy of the financial statement information directly related to those controls must be supported through the accumulation of evidence using substantive tests.
A)True
B)False
Q2) When an auditor knows that an illegal act has occurred,she must
A)report it to the proper governmental authorities.
B)consider the effects on the financial statements,including the adequacy of disclosure.
C)withdraw from the engagement.
D)issue an adverse opinion.
Q3) Balance-related audit objectives follow from management assertions.
A)True
B)False
Q4) The auditors determine which disclosures must be presented in the financial statements.
A)True
B)False
Q5) List the four phases of a financial statement audit.
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Chapter 7: Audit Evidence
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Sample Questions
Q1) When the auditor scans the sales journal looking for large and unusual transactions,he is gathering what type of evidence?
A)inspection
B)recalculation
C)physical examination
D)analytical procedures
Q2) Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size.
A)True
B)False
Q3) The two most important factors when determining the appropriate sample size in an audit are the auditor's expectation of misstatements and the objectivity of the evidence.
A)True
B)False
Q4) When the auditor foots the journals and the subsidiary ledgers,it is considered reperformance.
A)True
B)False
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Chapter 8: Audit Planning and Analytical Procedures
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Sample Questions
Q1) An auditor must evaluate a specialist's professional qualifications and understand the objectives of the specialist's work.
A)True
B)False
Q2) Amounts involving fraud are not usually considered qualitative factors affecting the preliminary materiality judgment.
A)True
B)False
Q3) If the auditor approaches the audit of the accounts in s sequential manner,the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.
A)True
B)False
Q4) Because auditors are responsible for having appropriate competence and capabilities to perform an audit,auditors are not normally permitted to consult with outside specialists during an audit engagement.
A)True
B)False
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) The risk of material misstatement refers to
A)control risk and acceptable audit risk.
B)inherent risk.
C)the combination of inherent risk and control risk.
D)inherent risk and audit risk.
Q2) An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence,assignment of more experienced personnel,and/or a more extensive review of audit files.
A)True
B)False
Q3) Which is a True statement about audit risk?
A)Audit risk measures the risk that a material misstatement could occur and not be detected by internal control.
B)When auditors decide on a higher acceptable audit risk,they want to be more certain that the financial statements are not materially misstated.
C)Audit assurance is the complement of acceptable audit risk.
D)There is an inverse relationship between acceptable audit risk and planned detection risk.
Q4) Why do auditors use the audit risk model when planning an audit?
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) Most cases of fraudulent reporting involve
A)inadequate disclosures.
B)an overstatement of income.
C)an overstatement of liabilities.
D)an overstatement of expenses.
Q2) Incentives and opportunities are two conditions that are generally present when financial statement fraud occurs.
A)True
B)False
Q3) Which of the following is a risk factor related to opportunities and financial statement fraud?
A)ineffective communication of company values
B)promotions inconsistent with expectations
C)significant related-party transactions
D)adverse relationships between management and employees
Q4) For significant risks,including fraud risks,the auditor should obtain an understanding of the internal controls related to the risks.
A)True
B)False
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Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) Backup and contingency plans should also identify alternative hardware that can be used to process company data.
A)True
B)False
Q2) In IT systems,if general controls are effective,it increases the auditor's ability to rely on application controls to reduce control risk.
A)True
B)False
Q3) Which of the following activities would be least likely to strengthen a company's internal control?
A)separating accounting from other financial operations
B)maintaining insurance for fire and theft
C)fixing responsibility for the performance of employee duties
D)carefully selecting and training employees
Q4) Who is responsible for establishing a private company's internal control?
A)senior management
B)internal auditors
C)FASB
D)audit committee
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) When determining what type of report to issue on internal control under Section 404, A)an adverse opinion on internal control must be given if any weaknesses in a key internal control is discovered.
B)a scope limitation requires the auditor to disclaim an opinion on internal controls.
C)if the auditor gives a qualified opinion on the financial statements,they must give a qualified opinion on internal controls.
D)a scope limitation requires the auditor to express a qualified opinion or a disclaimer of opinion on internal controls.
Q2) Which of the following is not seen as an advantage to using generalized audit software (GAS)?
A)Auditors can learn the software in a short period of time.
B)It can be applied to a variety of clients after detailed customization.
C)It can be applied to a variety of clients with minimal adjustments to the software.
D)It greatly accelerates audit testing over manual procedures.
Q3) Discuss the advantages and benefits of using generalized audit software.
Q4) Describe three computer auditing techniques available to the auditor.
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) An exception or deficiency found in a test of controls
A)indicates a financial statement misstatement.
B)indicates the likelihood of a misstatement.
C)indicates that the financial statements are fairly stated.
D)indicates that an adverse opinion is warranted on the audit of internal control.
Q2) The cost of each type of evidence does not vary in different situations.
A)True
B)False
Q3) Management implements internal controls to ensure that all required footnote disclosures are accurate.Auditors tests those controls to provide evidence supporting the ________ presentation.
A)completeness and valuation
B)completeness and accuracy
C)rights and obligations and existence
D)occurrence and accuracy
Q4) Tests of controls should be performed after substantive tests of transactions.
A)True
B)False
Q5) List each of the five types of audit tests.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) Cash receipts from sales on account have been misappropriated.Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?
A)understating the sales journal by not recording cash sales
B)overstating the accounts receivable control account by intentionally misstating prices charged for goods sold
C)overstating the accounts receivable subsidiary ledger by not recording payments made by customers
D)understating the cash receipts journal by purposely recording incorrect amounts
Q2) Which one of the following statements is True? In deciding on substantive tests of transactions
A)some procedures are commonly employed on every audit regardless of the circumstances.
B)all procedures are dependent on the adequacy of the controls and the results of the tests of controls.
C)results obtained in the prior year's audit will not affect the procedures used this year. D)the materiality of the item will not influence the choice of procedures used.
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) When deciding the acceptability of the population,
A)the methodology for deciding the acceptability of the population for attributes differs from determining the acceptability for nonstatistical sampling.
B)before the population can be considered acceptable,the CUER determined on the basis of the actual sample results must be less than or equal to TER when both are based on the same ARO.
C)when the CUER is greater than the TER,the auditor must increase the sample size.
D)the CUER is compared with the TER in total,not for each attribute.
Q2) Explain the effect on sample size of increasing each of the following: (1)tolerable exception rate,(2)estimated population exception rate,(3)acceptable risk of overreliance,and (4)population size.
Q3) The upper limit of the probable population exception rate is the A)upper exception rate.
B)estimated population exception rate.
C)computed upper exception rate.
D)the tolerable exception rate.
Q4) List the three phases in audit sampling for both statistical and nonstatistical sampling.
Page 17
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Chapter 16: Completing the Tests in the Sales and Collection Cycle:
Accounts Receivable
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Sample Questions
Q1) Below are listed possible misstatements that could occur in the sales and collections cycle.Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a. overstatement of sales and accounts receivable
b. uncollectible accounts receivable that have not been provided for c. overstatement of sales returns and allowances
Q2) Blank confirmations are considered less reliable than standard positive confirmations.
A)True
B)False
Q3) The two primary classes of transactions in the sales and collection cycle are A)sales and sales discounts.
B)sales and cash receipts.
C)sales and sales returns.
D)sales and accounts receivable.
Q4) Recording a sale that did not occur violates the occurrence transaction-related audit objective and the existence balance-related audit objective.
A)True
B)False
18
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) You are auditing Raji and Company.You discover an item of inventory with an audited value of $5,000 with a recorded amount of $3,000.If this is the only error you discover,the projected misstatement for the sample would be
A)$5,000.
B)$2,000.
C)$3,000.
D)$4,000.
Q2) When auditors apply MUS to a sample,the sample is selected using random sampling techniques.
A)True
B)False
Q3) The risk the auditor is willing to take of accepting a balance as correct when the True misstatement in the balance under audit is greater than the tolerable misstatement is A)the upper bound.
B)the tolerable risk.
C)the acceptable risk of incorrect acceptance.
D)the lower bound.
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Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls,
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Sample
Questions
Q1) Auditors typically perform the acquisitions and cash disbursements tests at different times.
A)True
B)False
Q2) Cutoff information for inventory acquisitions should be obtained during
A)the interim period prior to year-end.
B)the interim period immediately following year-end.
C)the physical observation of inventory.
D)either the interim period prior to or immediately following year-end.
Q3) Which of the following should sign checks under conditions of effective internal control?
A)treasurer
B)purchasing agent
C)accounts payable clerk
D)person preparing the checks
Q4) The cash account is not part of the acquisitions and payment cycle.
A)True
B)False
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Q5) Describe purchase requisitions and purchase orders.What is a key difference between the two documents?
Chapter 19: Completing the Tests in the Acquisition and Payment
Cycle:
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Q1) The audit procedure "foot the schedule of fixed assets acquisitions and trace the total to the general ledger" relates most closely to the completeness objective for fixed assets acquisitions.
A)True
B)False
Q2) Discuss the key internal controls related to the disposal of property,plant,and equipment.
Q3) The audit procedure that requires an auditor to "foot the acquisition schedule" relates to which balance-related audit objective?
A)classification
B)detail tie-in
C)existence
D)cut-off
Q4) In the audit of accrued property taxes,the two most important balance-related audit objectives are completeness and accuracy.
A)True
B)False
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) Which of the following best describes inherent risk for balance-related audit objectives as they relate to payroll?
A)not considered
B)low
C)moderate
D)high
Q2) Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount A)in the expense account.
B)used in the prior period.
C)authorized in the minutes of the board.
D)paid in the subsequent period.
Q3) The primary purpose of a surprise payroll payoff is to detect employees who have reported more time than was actually worked (fraudulent hours).
A)True
B)False
Q4) Discuss the procedures involved in,and the purpose of a surprise payroll payoff.
Q5) How do auditors commonly verify sales commission expense?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) Management typically allocates overhead using total raw materials as the basis for the allocation.
A)True
B)False
Q2) Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client's physical inventories?
A)confirmation of goods in the hands of public warehouses
B)supervising the taking of the annual physical inventory
C)carrying out physical inventory procedures at an interim date
D)obtaining written representation from the client as to the existence,quality,and dollar amount of the inventory
Q3) Auditing standards recommend that auditors observe physical inventory counts by the client.
A)True
B)False
Q4) State the six functions that make up the inventory and warehousing cycle and,for each function,identify the related documents that would be used by a manufacturing company.
Q5) What are two factors affecting the complexity of the audit of inventory?
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) When auditing interest-bearing debt,the auditor should ________ verify the related interest expense and interest payable.
A)not
B)attempt to
C)simultaneously
D)never
Q2) Why are substantive analytical procedures essential for notes payable?
Q3) List the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q4) The two most important balance-related audit objectives for notes payable are
A)completeness and detail tie-in.
B)completeness and valuation.
C)accuracy and valuation.
D)accuracy and completeness.
Q5) All corporations must have
A)preferred stock.
B)capital stock.
C)paid-in capital in excess of par.
D)dividends payable.
Q6) Discuss the overall objectives of the audit of notes payable. Page 24
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Chapter 23: Audit of Cash and Financial Instruments
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Q1) Based on the schedule of interbank transfers above,which of the cash transfers would appear as a deposit in transit on the December 31,2015 bank reconciliation?
Q2) Examples of cash equivalents include time deposits,certificates of deposit,and marketable securities.
A)True
B)False
Q3) What should be audited on an interbank transfer schedule?
Q4) Financial instruments
A)include debt securities and money market funds.
B)such as derivatives can be used as a way of hedging.
C)must be classified as held-to-maturity securities.
D)All of the above are correct.
Q5) Internal controls over year-end cash balances in the general account can be divided into two categories.List the two below.
Q6) Explain kiting,and discuss how it is performed.
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Chapter 24: Completing the Audit
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Q1) An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to
A)extend auditing procedures and assume responsibility for a greater period of time.
B)accept responsibility for subsequent events.
C)permit inclusion of a footnote captioned: event (unaudited)subsequent to the date of the auditor's report.
D)assume responsibility for events subsequent to the issuance of the auditor's report.
Q2) As directed by the Sarbanes-Oxley Act,
A)an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer.
B)attorneys cannot breach confidentiality rules even if a client is committing a crime or a fraud.
C)if the audit committee fails to remedy any material violations of the federal securities law,the attorney must report the violation to the SEC.
D)All of the above are required by Sarbanes-Oxley.
Q3) What are the three required conditions for a contingent liability to exist?
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Chapter 25: Other Assurance Services
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Q1) Statements on Standards for Attestation Engagements (SSAEs )are issued by the Auditing Standards Board of the AICPA.
A)True
B)False
Q2) One of the bases other than GAAP or IFRS is the Financial reporting framework for small- and medium-sized businesses.This basis
A)has not yet been approved by the AICPA.
B)is the same as the income tax basis.
C)draws upon a blend of traditional accounting principles and accrual income tax methods of accounting.
D)must be used by a business with sales under $1 million.
Q3) In a preparation service engagement,
A)the CPA's responsibilities are similar to those performed during a review.
B)the CPA does not provide any assurance of the financial statements.
C)the CPA must issue a preparation service engagement report.
D)the CPA must be independent.
Q4) Discuss each of the three types of compilation reports and the circumstances in which each should be used.
Q5) Define forecast and projection.
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Q1) Which of the following is not one of the major differences between financial and operational auditing?
A)The financial audit is oriented to the past,but an operational audit concerns performance for the future.
B)The financial audit report has widespread distribution,but the operational audit report has limited distribution.
C)Financial audits deal with the information on the financial statements,but operational audits are concerned with the information in the ledgers.
D)Financial audits are limited to matters that directly affect the fairness of the financial statement presentation,but operational audits cover any aspect of efficiency and effectiveness.
Q2) The correct title of the Yellow Book is
A)Government Auditing Standards.
B)Institute of Internal Auditors (IIA)Practice Standards.
C)Statement of Responsibilities of Internal Auditing.
D)Statement of Standards on Accounting and Review Services.
Q3) External auditors typically consider internal auditors effective if they meet three criteria.What are these criteria?
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