Auditing Principles
Midterm Exam
Course Introduction
Auditing Principles introduces students to the fundamental concepts, objectives, and processes of external and internal auditing in contemporary organizations. The course covers the regulatory and ethical frameworks that govern the auditing profession, audit planning and risk assessment, and techniques for gathering and evaluating audit evidence. Students will learn about audit documentation, internal controls, and the preparation and interpretation of audit reports. Emphasis is placed on applying auditing standards and procedures to real-world scenarios, identifying fraud risks, and understanding the auditor's role in enhancing the reliability of financial information.
Recommended Textbook
Auditing and Assurance Services 5th edtion by Grant Gay
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16 Chapters
732 Verified Questions
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Page 2
Chapter 1: Assurance and Auditing: An Overview
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Sample Questions
Q1) Which of the following statements is not true concerning assurance services?
A) Assurance services focus on improving the quality of information, or its context, for decision makers.
B) The growth in assurance services has been driven in part by users' demands for more relevant and reliable information.
C) Auditing services can be viewed as a subset of assurance services.
D) Unlike audit engagements, an engagement to perform assurance services does not require the auditor to consider information reliability.
Answer: D
Q2) Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of economy, efficiency and:
A) evaluation.
B) effectiveness.
C) compliance.
D) accuracy.
Answer: B
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Chapter 2: The Structure of the Profession
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Q1) Which of the following bodies is able to impose penalties on auditors who have failed to carry out their duties properly?
A) Financial Reporting Council.
B) Companies Auditors and Liquidators Disciplinary Board.
C) Auditing and Assurance Standards Board.
D) All of the options listed here are correct.
Answer: B
Q2) Which of the following bodies monitors the operation of the Australian Accounting Standards Board?
A) Australian Securities Exchange.
B) Financial Reporting Council.
C) Australian Securities and Investments Commission.
D) Auditing and Assurance Standards Board.
Answer: B
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4
Chapter 3: Ethics, Independence and Corporate Governance
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Q1) Tegan Walker is about to begin a recurring annual audit engagement. As the continuing auditor, her independence would ordinarily be considered to be impaired if the previous year's audit fee:
A) was only partially paid and the balance is being disputed.
B) has not been paid and will not be paid for at least twelve months.
C) has not been paid and the client has filed voluntary bankruptcy.
D) was settled by litigation.
Answer: B
Q2) Which of the following is a correct statement with respect to a listed company?
A) The Australian Securities and Investments Commission does not have to be given notice of the removal of an auditor.
B) An auditor of a public company does not have to have the approval of the Australian Securities and Investments Commission to resign.
C) An auditor of a public company must be appointed within three months of incorporation.
D) Once the auditor is re-appointed at the first annual general meeting, it is not necessary for the auditor to be re-appointed each following year.
Answer: D
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Chapter 4: The Legal Liability of Auditors Part Two: Planning
and Risk
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Q1) An auditor finds evidence that warehouse staff are fraudulently claiming overtime. The auditor should:
A) further investigate the matter and report it to management when concrete evidence has been obtained.
B) report the matter to management in the year-end management letter.
C) report the matter to management immediately if the expected financial effect of the fraud is material.
D) report the matter to management immediately.
Q2) ASA 240 (ISA 240) provides that primary responsibility for fraudulent reporting rests with:
A) the board of directors.
B) management.
C) the external auditor.
D) the audit committee.
Q3) In the Caparo case, the court held that the auditor owes a duty of care to:
A) all users of the published financial report.
B) only those parties specified in the engagement letter.
C) the shareholders as a body but not individual shareholders or third parties.
D) all shareholders but not third parties.
Page 6
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Chapter 5: Overview of Elements of the Financial Report
Audit Process
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Q1) Vouching is used primarily to test which of the following assertions about classes of transaction?
A) Occurrence.
B) Completeness.
C) Authorisation.
D) Classification.
Q2) Who is responsible for the preparation of the financial report?
A) Auditor.
B) Management.
C) Both auditor and management.
D) None of the answers given are correct.
Q3) Which audit assertion relates to ensuring that all recorded sales are valid?
A) Existence.
B) Completeness.
C) Occurrence.
D) Valuation and allocation.
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Chapter 6: Planning, Understanding the Entity and Evaluating Business Risk
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Q1) An audit program should be designed for each individual audit and should include audit steps and procedures to:
A) ensure that only material items are audited.
B) detect all fraud.
C) identify all internal control weaknesses.
D) ensure an efficient and effective audit.
Q2) Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?
A) Relationships involving statement of financial position accounts.
B) Transactions subject to management discretion.
C) Relationships involving income statement accounts.
D) Data subject to audit testing in the prior year.
Q3) Which of the following factors most likely would cause an auditor to not accept a new audit engagement?
A) An inadequate understanding of the entity's internal control.
B) The close proximity to the end of the entity's fiscal year.
C) The conclusion that the entity's management probably lacks integrity.
D) An inability to perform preliminary analytical procedures before assessing control risk.
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Chapter 7: Assessing Specific Business Risk
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Q1) If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the engagement, the auditor should:
A) notify all parties who may rely upon the company's illegal act.
B) consult with legal counsel as to what other action, if any, should be taken.
C) return all incriminating evidence and working papers to the client's audit committee for follow-up.
D) contact the successor auditor to make the successor aware of the possible consequences of relying on management's representations.
Q2) Which of the following does not represent an opportunity to commit fraud?
A) Significant related-party transactions.
B) The auditor's relationship with management is strained.
C) Management is dominated by a single person.
D) The financial report included highly subjective estimates.
Q3) Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
A) Potential for fraud.
B) The entity is close to violating loan covenants.
C) Firm policy sets materiality at five per cent of pre-tax income.
D) A small misstatement would interrupt an earnings trend.
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Page 9
Chapter 8: Understanding and Assessing Internal Control
Part Three: Tests of Control and Tests of Details
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Q1) How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk?
A) Randomly.
B) Disproportionately.
C) Directly.
D) Inversely.
Q2) A primary purpose of internal controls is to:
A) form a basis for evaluating employees.
B) monitor production quality.
C) avoid clerical errors.
D) meet objectives of maintaining sound documents and records and accurate financial reporting.
Q3) Procedures directed towards obtaining evidence concerning the effectiveness of the design or operation of an internal control policy or procedure are referred to as:
A) analytical procedures.
B) substantive tests.
C) tests of controls.
D) confirmations.
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Chapter 9: Tests of Controls
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Q1) An approach to testing real-time processing of a computer-based information system is known as the integrated test facility (ITF) technique. This approach involves:
A) testing the computer hardware at the same time as test transactions enter the real-time system.
B) validating as well as editing all input transactions entering the real-time system.
C) running monthly activities simultaneously with current transactions so that the two are integrated in the result of the test.
D) setting up a small set of records for a fictitious entity in the master files and then processing dummy transactions against the fictitious entity.
Q2) Which of the following is not among the errors that an auditor might include in the test data when auditing a client's IT system?
A) Authorisation code.
B) Numeric characters in alphanumeric fields.
C) Illogical entries in fields whose logic is tested by programmed consistency checks.
D) Differences in description of units of measure.
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Chapter 10: Substantive Tests of Transactions and Balances
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Q1) The auditor is least likely to use generalised audit software to:
A) access information stored on the client's IT files.
B) perform analytical procedures on the client's data.
C) test the accuracy of the client's computations.
D) directly test weaknesses in the client's programmed controls.
Q2) Which of the following audit procedures would an auditor be least likely to perform using generalised audit software?
A) Inputting test transactions to ensure that the check digit control is operating.
B) Searching records of accounts receivable balances for credit balances.
C) Listing unusually large inventory balances.
D) Selecting accounts receivable for positive and negative confirmation.
Q3) Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory:
A) purchased and received before the year-end was recorded.
B) on the year-end statement of financial position was recorded at lower of cost or market.
C) on the year-end statement of financial position was paid for by the company.
D) owned by the company is in the possession of the company.
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Chapter 11: Audit Sampling Part Four: Completion and Communication
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Q1) Which of the following is a distinguishing feature between statistical sampling and non-statistical sampling?
A) Stratification.
B) The use of probability theory to evaluate sample results.
C) Allowing every item in the population a chance of selection.
D) Definition of the population.
Q2) Auditors who prefer statistical to non-statistical sampling believe that the principal advantage of statistical sampling flows from its ability to:
A) provide a mathematical measurement of uncertainty.
B) define the precision required to provide audit satisfaction.
C) promote a more legally defensible procedural approach.
D) establish conclusive audit evidence with decreased audit effort.
Q3) For dollar-unit sampling, the number of individual accounts tested is:
A) always greater than the sample size.
B) always equal to the sample size.
C) always less than or equal to the sample size.
D) always greater than or equal to the sample size.
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Page 13
Chapter 12: Completion and Review
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Q1) After an auditor has issued an auditor's report on the financial report of a non-public entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial report covered by that report unless:
A) new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
B) material adverse events occur after the date of the auditor's report.
C) final determination or resolution was made on matters that had resulted in a modification of the auditor's report.
D) final determination or resolution was made of a contingency that had been disclosed in the financial report.
Q2) When an audit is made in accordance with the auditing standards, the independent auditor must:
A) utilise statistical sampling.
B) confirm receivables at year-end.
C) obtain certain written representations from management.
D) observe the taking of physical inventory on the balance date.
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Chapter 13: The Auditors Reporting Obligations Part Five:
Other Assurance Services
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Q1) On 2 July 20X0 Pretty Paint Ltd received a notice from its primary suppliers that all wholesale prices would be increased by 10%, to be effective immediately. On the basis of the notice Pretty Paint Ltd revalued its 30 June 20X0 Inventory to reflect the higher costs. The details of the adjustment were disclosed in the notes to the financial report.The inventory adjustment was material. The auditor of the 30 June 20X0 financial report would issue:
A) an unmodified opinion with an Emphasis of Matter of disclosure.
B) a disclaimer of opinion.
C) a qualified opinion.
D) an unmodified opinion.
Q2) Information in the chairman's address, accompanying the financial report in an entity's annual report, is inconsistent with information contained in the audited financial report. The entity refuses to alter the chairman's address. The Appropriate auditor's report is:
A) an unmodified opinion with an Other Matter paragraph.
B) a qualified opinion.
C) an unmodified opinion.
D) an unmodified opinion with an Emphasis of Matter paragraph.
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Chapter 14: Internal Auditing
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Q1) According to the Institute if Internal Auditors, the best description of internal auditing is that it:
A) certifies the reliability and integrity of financial and operating information.
B) furnishes management with information needed to effectively discharge its responsibilities.
C) appraises the economy and efficiency with which resources are used.
D) reviews the means of safeguarding assets and verifies the existence of those assets.
Q2) An internal auditor who had been supervisor of the accounts payable section should not audit that section:
A) until enough time has elapsed to allow the new supervisor to influence the system of controls over accounts payable.
B) because there is no way to measure a reasonable period of time in which to establish independence.
C) until it is clear that the new supervisor has assumed the responsibilities.
D) until after the next annual review of the external auditors.
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16
Chapter 15: Auditing and Assurance Services in the Public Sector
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Q1) In a compliance audit, which of the following matters is the auditor primarily concerned about?
A) Whether the financial report is fairly presented in accordance with the identified financial reporting framework.
B) Whether the entity has achieved its stated objectives.
C) Whether the entity has followed the relevant requirements applicable to it.
D) Whether the entity has operated in the most economic and efficient manner.
Q2) Which of the following can be considered an example of a performance indicator for effectiveness?
A) A reduction in the number and severity of injuries, resulting from a road safety program.
B) The number of patients treated in a health clinic.
C) A decline in caseloads for social workers.
D) The costs of a job training program for long-term unemployed, per person placed in permanent employment.
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Chapter 16: Other Assurance Services and Advanced Topics
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Q1) An assurance report on internal control structures is least likely to be issued as a result of a:
A) review of the annual financial report of a large company.
B) performance audit of a government agency.
C) special study of related party transactions.
D) special study of a proposed system involving the internal control structure.
Q2) An auditor's study and evaluation of the internal accounting control system made in connection with an annual audit is usually not sufficient to express an opinion on an entity's system because:
A) the audit cost-benefit relationship permits an auditor to express only reasonable assurance that the system operates as designed.
B) the evaluation of weaknesses is subjective enough that an auditor should not express an opinion on the internal accounting controls alone.
C) only those controls on which an auditor intends to rely are reviewed, tested and evaluated.
D) management may change the internal accounting controls to correct weaknesses.
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