Auditing Principles
Midterm Exam
Course Introduction
Auditing Principles provides an in-depth introduction to the fundamental concepts and standards of auditing as practiced in the public and private sectors. The course covers the objectives and responsibilities of auditors, audit planning and risk assessment, design and implementation of audit procedures, and the ethical and legal environment of the audit profession. Emphasis is placed on understanding the framework of generally accepted auditing standards (GAAS), internal control evaluation, evidence gathering techniques, and the preparation of audit reports. Through practical case studies and real-world examples, students will develop critical thinking skills necessary to identify and address auditing issues in diverse business contexts.
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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Sample Questions
Q1) Which of the following best describes the reason why independent auditors report on financial statements?
A)A management fraud may exist and it is more likely to be detected by independent auditors.
B)Different interests may exist between the company preparing the statements and the persons using the statements.
C)A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.
D)Poorly designed internal control may be in existence.
Answer: B
Q2) The right to practice as a CPA is given by which of the following organizations?
A)State Boards of Accountancy.
B)The AICPA.
C)The SEC.
D)The General Accounting Office.
Answer: A
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Page 3
Chapter 2: Professional Standards
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Sample Questions
Q1) If the auditors discover illegal acts by a client,they ordinarily should immediately resign from the engagement.
A)True
B)False
Answer: False
Q2) The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies? \[\begin{array} { c c c } & \text { Attestation Standards } & \text { Ethics Standards } \\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No }
\end{array}\]
A)Option A.
B)Option B.
C)Option C.
D)Option D.
Answer: A
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Chapter 3: Professional Ethics
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Sample Questions
Q1) An accounting association established a code of ethics for all members.The most likely primary purpose for establishing the code of ethics was to:
A)Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.
B)Establish standards to follow for effective accounting practice.
C)Provide a framework within which accounting policies could be effectively developed and executed.
D)Outline criteria that can be utilized in conducting interviews of potential new accountants.
Answer: A
Q2) 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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Sample Questions
Q1) Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?
A)It provides certain small investors better recovery rights than it does large investors.
B)It retains joint and several liability in certain circumstances.
C)It makes recovery against CPAs more difficult under common law litigation.
D)It eliminates securities fraud as an offense under civil RICO.
Q2) Most charges made against auditors under common law are criminal.
A)True
B)False
Q3) Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?
A)The CPA knew of the misstatement.
B)The CPA was negligent.
C)Material misstatements were contained in the financial statements.
D)The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA.
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Chapter 5: Audit Evidence and Documentation
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Sample Questions
Q1) As planning materiality is decreased,the auditor should plan more work on individual accounts to.
A)Find smaller misstatements.
B)Find larger misstatements.
C)Increase the tolerable misstatement in the accounts.
D)Decrease the risk of assessing control risk too low.
Q2) Adjusting journal entries are ordinarily recorded by the client,while reclassifying journal entries need not be recorded.
A)True
B)False
Q3) An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry.This technique is referred to as:
A)Vertical analysis.
B)Horizontal analysis.
C)Cross-sectional analysis.
D)Comparison analysis.
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Chapter 6: Audit Planning, understanding the Client, assessing Risks, and Responding
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Sample Questions
Q1) Confirming a bank account establishes existence but not rights to the cash balance.
A)True
B)False
Q2) A form filed with the SEC when a company changes auditors is a:
A)Form 8-K.
B)Form 10-K.
C)Form S-1.
D)Form B-1.
Q3) Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
A)Are all financial reporting operations at one location?
B)Does it have knowledge of fraud or suspect fraud?
C)Does it have programs to mitigate fraud risks?
D)Has it reported to the audit committee the nature of the company's internal control?
Q4) The substantive approach to an audit is appropriate for many small businesses.
A)True
B)False
8
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Chapter 7: Internal Control
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Sample Questions
Q1) Which of the following is an advantage of describing internal control through the use of a standardized questionnaire?
A)Questionnaires highlight weaknesses in the system.
B)Questionnaires are more flexible than other methods of describing internal control.
C)Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system.
D)Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control.
Q2) Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?
A)Salaried sales personnel.
B)Implementation of a new information system.
C)Rapid growth of the organization.
D)Corporate restructuring.
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9
Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Sample Questions
Q1) Which of the following is least likely to be a general control over computer activities?
A)Procedures for developing new programs and systems.
B)Requirements for system documentation.
C)A change request log.
D)A control total.
Q2) Which of the following procedures would an entity most likely include in its disaster recovery plan?
A)Convert all data from external formats to an internal company format.
B)Maintain a program to prevent illegal activity.
C)Develop an auxiliary power supply to provide uninterrupted electricity.
D)Store duplicate copies of files in a location away from the computer center.
Q3) Data encryption is an example of data transmission control.
A)True
B)False
Q4) The operating system is an example of system software.
A)True
B)False
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Chapter 9: Audit Sampling
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Sample Questions
Q1) Various factors influence the sample size for a substantive test of details of an account balance.All other factors being equal,which of the following would lead to a larger sample size?
A)Lower assessment of control risk.
B)Greater reliance on analytical procedures.
C)Smaller expected frequency of misstatements.
D)Smaller measure of tolerable misstatement.
Q2) To determine sample size in an attribute sampling application,what must be specified?
A)Population mean, expected error rate, allowance for sampling risk.
B)Allowance for sampling risk, risk of assessing control risk too low, standard deviation.
C)Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.
D)Population mean, standard deviation, allowance for sampling risk.
Q3) Using ratio and difference estimation for a sample is an example of a dual purpose test.
A)True
B)False
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Chapter 10: Cash and Financial Investments
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Sample Questions
Q1) In the audit of a client's financial statements,the auditors must be concerned with the possibility that client personnel might be engaged in kiting or lapping.
a.Define lapping and describe an audit procedure that might detect lapping.
b.Define kiting and describe an audit procedure that might detect kiting.
Q2) Which of the following is correct relating to kiting?
A)It is ordinarily used to understate cash.
B)It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.
C)It is a lapping approach performed using receivable accounts.
D)It is seldom, if ever, used.
Q3) Which of the following is not a control that generally is established over cash transactions?
A)Separating cash handling from recordkeeping.
B)Centralizing the receipt of cash.
C)Depositing each day's receipts intact.
D)Obtaining a receipt for every disbursement.
Q4) Signed checks should be returned to the cash disbursements clerk for mailing.
A)True
B)False
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Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
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Sample Questions
Q1) The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests.Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?
A)A substantial number of accounts are in disputes.
B)The combination of inherent risk and control risk is high.
C)Client records include a large number of relatively small balances.
D)The auditors believe that recipients of the requests are unlikely to give them consideration.
Q2) Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?
A)Examine bills of lading.
B)Physically examine items sold.
C)Examine correspondence.
D)Examine subsequent cash receipts.
Q3) Accounts receivable that are written-off should not be turned over to a collection agency.
A)True
B)False
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Chapter 12: Inventories and Cost of Goods Sold
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Sample Questions
Q1) The receiving department should accept only goods for which there is an approved purchase order on hand.
A)True
B)False
Q2) To measure how effectively a client employs its assets,an auditor calculates inventory turnover by dividing the average inventory into:
A)Net sales.
B)Cost of good sold.
C)Operating income.
D)Gross sales.
Q3) The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.
A)True
B)False
Q4) Observation of inventories is a generally accepted auditing standard.
A)True
B)False
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Chapter 13: Property Plant and Equipment: Depreciation and Depletion
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Sample Questions
Q1) In the audit of depletion the auditors must often rely on the work of specialists.
A)True
B)False
Q2) The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.
A)True
B)False
Q3) Which of the following is a customary audit procedure for the verification of the legal ownership of real property?
A)Examination of correspondence with the corporate counsel concerning acquisition matters.
B)Examination of ownership documents registered and on file at a public hall of records.
C)Examination of corporate minutes and resolutions concerning the approval to acquire property, plant and equipment.
D)Examination of deeds and title guaranty policies on hand.
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Chapter 14: Accounts Payable and Other Liabilities
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Sample Questions
Q1) A client recorded a payable for a large purchase twice.Which of the following controls would be most likely to detect this error in a timely and efficient manner?
A)Footing the purchases journal.
B)Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
C)Tracing totals from the purchases journal to the ledger accounts.
D)Sending written quarterly confirmations to all vendors.
Q2) The auditors may decide to confirm accounts payable on an audit engagement.
a.Describe two reasons why the confirmation of accounts payable is not a presumptively mandatory auditing procedure.
b.Describe the audit circumstances in which the auditors are likely to decide to confirm accounts payable.
c.Describe the types of accounts payable the auditors are likely to select for confirmation.
Q3) Most of the audit work on accounts payable is typically performed:
A)Before the balance sheet date.
B)At the balance sheet date in conjunction with inventory cutoff tests.
C)After the balance sheet date.
D)Simultaneously with the audit of accrued liabilities.
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Page 16
Chapter 15: Debt and Equity Capital
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Sample Questions
Q1) Which of the following most likely would approve the issuance of notes payable?
A)Controller.
B)Payroll.
C)Personnel.
D)Treasurer.
Q2) 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.
Q3) Internal control over bonds payable is best when:
A)The company utilizes the services of a bond trustee.
B)The company segregates approval from issuance of the bonds.
C)Bonds are countersigned by two officers.
D)Bonds are serially numbered.
Q4) Corporations maintain either a stock certificate book or a stockholders' ledger.
A)True
B)False
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Chapter 16: Auditing Operations and Completing the Audit
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Sample Questions
Q1) An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year,irrespective of whether the misstatements occurred in the current or previous years is referred to as the:
A)Evaluation materiality approach.
B)Iron curtain approach.
C)Projected misstatement approach.
D)Rollover approach.
Q2) Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
A)True
B)False
Q3) The Miscellaneous Revenue account should only be analyzed if it is material in amount.
A)True
B)False
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18
Chapter 17: Auditors Report
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Sample Questions
Q1) In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?
A)The auditor is not independent with respect to the enterprise being audited.
B)The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements.
C)The statements are not in conformity with generally accepted accounting principles regarding pension plans.
D)A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.
Q2) Which of the following is not a difference between the audit report of a nonpublic and public company?
A)The public company report includes the word "Registered" in the title.
B)The public company report refers to standards of the PCAOB.
C)The public company report has an additional paragraph referring to the client's fraud prevention procedures.
D)The public company report is shorter.
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Chapter 18: Integrated Audits of Public Companies
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Sample Questions
Q1) Which of the following is a weakness in internal control that allows a reasonable possibility that a significant (but less than material)misstatement may occur and not be detected?
A)Control deficiency.
B)Material weakness.
C)Reportable material item.
D)Significant deficiency.
Q2) Which of the following is a strong indicator that a material weakness in internal control exists?
A)Restatement of previously issued financial statements to reflect a correction.
B)Inadequate controls over non-routine transactions.
C)Inadequate controls over the period-end financial reporting process.
D)Weaknesses in a control activity.
Q3) Which is least likely to be a question asked of employee personnel during a walkthrough?
A)Have you ever been asked+ to override the process?
B)Have you assessed the operating effectiveness of the system?
C)What do you do when you find an error?
D)What are you looking for to determine if there is an error?
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Page 20
Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) A modification of the CPA's report on a review of the interim financial statements of a publicly-held company would be necessitated by which of the following?
A)An uncertainty.
B)Lack of consistency.
C)Reference to another accountant.
D)Inadequate disclosure.
Q2) When performing a review of a nonpublic company,the auditors must obtain in a representation letter acknowledgement of management for its responsibility for reach of the following except:
A)Responsibility for identifying illegal acts committed by employees.
B)Responsibility for the financial statements conforming with generally accepted accounting principles.
C)Responsibility to prevent and detect fraud.
D)Knowledge of any actual or suspected fraud that is material.
Q3) The balance sheet for an individual may be titled a Statement of Financial Condition.
A)True
B)False
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Page 21
Chapter 20: Additional Assurance Services: Other Information
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Sample Questions
Q1) Which of the following are required on all attestation engagements? \[\begin{array} { c }
&\text { Suitable Criteria} & \text{ Subject Matter }\\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No } \end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q2) Providing assurance using a series of reports provided simultaneously or shortly after the related information is released is referred to as:
A)Continuous auditing.
B)Serial auditing.
C)Systems reliability auditing.
D)Simultaneity auditing.
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Chapter 21: Internal, Operational, and Compliance Auditing
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Q1) When no weaknesses in internal control are discovered during an operational audit,the appropriate report will be either standard unqualified or unqualified with explanatory language.
A)True
B)False
Q2) The first internal auditors were primarily concerned with operational auditing.
A)True
B)False
Q3) Compliance procedures are tests of an organization's controls.
A)True
B)False
Q4) Operational auditing has grown in importance over the last few decades.
a.Define operational auditing.
b.Who are the major users of operational audit reports?
c.List the phases of an operational audit.
Q5) In an audit in accordance with the Single Audit Act of 1984,the auditors must test compliance with the significant requirements of all major programs.
A)True
B)False
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Chapter 22: Probability-Proportion-To-Size Sampling
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Sample Questions
Q1) Assume the following relating to a PPS sample:
Projected Misstatement = $20,000.
Basic Precision = $16,000.
Incremental Allowance = $4,500.
Tolerable Misstatement = $34,000. The upper limit on misstatement equals.
A)$20,000.
B)$20,500
C)$40,500.
D)$74,500.
Q2) In a probability-proportional-to-size sample with a sampling interval of $10,000,an auditor discovered that as selected account receivable with a recorded amount of $12,000 had an audited amount of $9,000.If this were the only misstatement discovered by the auditor,the projected misstatement of this sample would be:
A)$2,000.
B)$2,500.
C)$3,000.
D)$10,000.
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