Auditing Principles Practice Exam
Course Introduction
Auditing Principles introduces students to the foundational concepts and practices of auditing, emphasizing the purpose, scope, and ethical responsibilities of auditors in both the public and private sectors. The course covers the audit process, including risk assessment, evidence collection, internal control evaluation, sampling methods, and audit reporting. Students will learn about professional standards, legal and regulatory frameworks, and the role of technology in auditing. By exploring real-world case studies and practical examples, the course prepares students to understand the auditors role in ensuring the accuracy and reliability of financial information.
Recommended Textbook
Auditing and Assurance Services 15th Edition by Alvin A Arens
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2759 Verified Questions
2759 Flashcards
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Chapter 1: The Demand for Audit and Other Assurance Services
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46 Verified Questions
46 Flashcards
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Sample Questions
Q1) What is a WebTrust engagement?
What is a SysTrust engagement?
How do they differ?
Answer: WebTrust is a service provided by a CPA where the CPA provides assurance that the Web Site owner has met established criteria related to business practices, transaction integrity, and information processes.
SysTrust is a service provided by a CPA to evaluate and test a system reliability in areas such as security and data integrity.There are five principles that must be addressed on a SysTrust engagement: security, availability, processing integrity, online privacy, and confidentiality.
WebTrust is primarily designed to provide assurance to third party users of a Web site.SysTrust provides assurance to management, the board of directors or third parties about the reliability of information systems used to generate real-time information.
Q2) CPA firms are never allowed to provide bookkeeping services for clients.
A)True
B)False
Answer: False
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Chapter 2: The Cpa Profession
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Sample Questions
Q1) Practice monitoring by a CPA firm for another CPA firm.
A)AICPA
B)PCAOB
C)Securities Exchange Commission
D)Form 10-k
E)IAASB
F)Form S-1
G)Due professional care
H)Limited Liability Partnership
I)Professional Corporation
J)Limited Liability Company
K)Peer review
L)1933 Securities Act
M)1934 Securities Act
N) Form 8-k
O) State Regulation
P) Code of Professional Conduct
Q) Quality Control Standards
R) GAAS Standards
Answer: K
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Page 4
Chapter 3: Audit Reports
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140 Flashcards
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Sample Questions
Q1) When there is a scope restriction, what type of audit report can be issued?
A)Unqualified opinion
B)Qualification of scope and opinion
C)Disclaimer of opinion
D)Any of the above
Answer: D
Q2) A modified unqualified audit report arises when the auditor believes the financials are fairly stated but also believes additional information should be provided.
A)True
B)False
Answer: True
Q3) Financial statement users are typically more concerned with an unqualified report with explanatory paragraphs than they are with a disclaimer of opinion.
A)True
B)False
Answer: False
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Chapter 4: Professional Ethics
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Sample Questions
Q1) Discuss Rule 301-Confidential Client Information, including the four exceptions to the rule.
Q2) For which of the following professional services must CPAs be independent?
A)Management advisory services
B)Audits of financial statements
C)Preparation of tax returns
D)All three of the above
Q3) The provisions of the Sarbanes-Oxley Act of 2002 are most likely to allow which of the following non-audit services for audit clients?
A)Appraisal or valuation services (e.g., pension, post-employment benefit liabilities)
B)Financial information systems design and implementation
C)Internal audit outsourcing
D)Tax consulting
Q4) Auditors are allowed to have an indirect financial interest in an audit client, such as ownership of stock in a client's company by the auditor's brother, as long as the amount of the financial interest is immaterial to the brother.
A)True
B)False
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Chapter 5: Legal Liability
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Sample Questions
Q1) Several states have statutes that permit privileged communication between the client and auditor, allowing a CPA to refuse to testify in state and federal courts.
A)True
B)False
Q2) A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients.Which one of the following is generally not a defense?
A)Lack of duty
B)Nonnegligent performance
C)Contributory negligence
D)Foreseeable users
Q3) Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as:
A)the antifraud provisions.
B)the new issues provisions.
C)the full employment act for accountants.
D)the RICO provisions.
Q4) Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) Which of the following statements is true about the completeness and occurrence assertions?
A)Both assertions are relevant to classes of transactions and events and account balances.
B)If management asserts that recorded sales transactions represent exchanges of goods or services that actually took place, they are asserting to completeness.
C)Violations of the occurrence assertion relate to account overstatements.
D)The failure to record a sale that did occur is a violation of the occurrence assertion.
Q2) In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of: A)GAAP.
B)the Sarbanes-Oxley Act.
C)the Securities Exchange Act of 1934. D)GAAS.
Q3) Briefly explain each management assertion related to classes of transactions and events for the period under audit.
Q4) List the four phases of a Financial Statement Audit
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8
Chapter 7: Audit Evidence
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103 Flashcards
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Sample Questions
Q1) When determining sufficient and appropriate audit evidence in order to form an opinion on the client's financial statements the auditor compiles audit documentation to support the opinion.The largest portion of audit documentation will include detailed supporting schedules prepared by the client or the auditor in support of specific accounts on the financial statements.The major types of supporting schedules include analysis schedules and tests of reasonableness.Discuss those two schedules and give an example for each schedule.
Q2) When the auditor foots the journals and the subsidiary ledgers, it is considered reperformance.
A)True
B)False
Q3) Audit documents:
A)are kept by the client for easy reference for their accounting staff.
B)should be considered as a substitute for the clients accounting records.
C)are designed to facilitate the review and supervision of the work performed by the audit team by a reviewing partner.
D)prepared during the engagement are the property of the client once the audit bill is paid.
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9
Chapter 8: Audit Planning and Analytical Procedures
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Sample Questions
Q1) Obtaining sufficient appropriate evidence is essential if the CPA firm is to minimize legal liability.
A)True
B)False
Q2) There are three main reasons why an auditor should properly plan audit engagements.Discuss each of these reasons.
Q3) An engagement letter sent to a publicly held audit client usually would not include a:
A)reference to the auditor's responsibility for the detection of errors or irregularities.
B)estimation of the time to be spent on the audit work by audit staff and management.
C)statement that management advisory services would be made available upon request.
D)reference to management's responsibility for the financial statements.
Q4) Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.
A)True
B)False
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Page 10
Chapter 9: Materiality and Risk
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Sample Questions
Q1) Which of the following is a correct statement regarding performance materiality?
A)Determining performance materiality is necessary because auditors accumulate evidence by segments.
B)The level of performance materiality does not affect the amount of evidence needed.
C)Performance materiality cannot vary for different classes of transactions.
D)Performance materiality is required for public companies, but not for private companies.
Q2) Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, performance materiality, and planned evidence, state the effect on planned evidence (increase or decrease)of changing each of the following factors, while the other factors remain unchanged.
1.An increase in acceptable audit risk.________.
2.An increase in inherent risk.________.
3.A decrease in control risk.________.
4.An increase in planned detection risk.________.
5.An increase in performance materiality.________.
Q3) Describe the audit risk model and each of its components.
Q4) Why do auditors use the audit risk model when planning an audit?
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Page 11
Chapter 10: Internal Control, Control Risk, and Section 404
Audits
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Proper segregation of functional responsibilities calls for separation of:
A)authorization, execution, and payment.
B)authorization, recording, and custody.
C)custody, execution, and reporting.
D)authorization, payment, and recording.
Q2) In an audit of a non-public company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.
A)True
B)False
Q3) To issue a report on internal control over financial reporting for a public company, an auditor must:
A)evaluate management's assessment process.
B)independently assess the design and operating effectiveness of internal control.
C)evaluate management's assessment process and independently assess the design and operating effectiveness of internal control.
D)test controls over significant account balances.
Q4) Define the following terms: control deficiency, significant deficiency, and material weakness.
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Chapter 11: Fraud Auditing
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Sample Questions
Q1) Explain professional skepticism and the need for maintaining professional skepticism during an audit.
Q2) When dealing with revenue frauds:
A)the most egregious form of revenue fraud involves premature revenue recognition.
B)premature revenue recognition involves recognizing the revenue after the accounting standards requirements have been met.
C)premature revenue recognition is the same as cutoff errors.
D)side agreements can modify the terms of the sales transaction and should be analyzed carefully.
Q3) ________ is fraud that involves theft of an entity's assets.
A)Fraudulent financial reporting
B)A "cookie jar" reserve
C)Misappropriation of assets
D)Income smoothing
Q4) The same three fraud triangle risk conditions apply to fraudulent financial reporting and misappropriation of assets.
A)True
B)False
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Chapter 12: The Impact of Information Technology on the Audit Process
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Sample Questions
Q1) A ________ is responsible for controlling the use of computer programs, transaction files and other computer records and documentation and releases them to the operators only when authorized.
A)software engineer
B)chief computer operator
C)librarian
D)data control operator
Q2) The auditor's objective in determining whether the client's automated controls can correctly handle valid and invalid transactions as they arise is accomplished through the:
A)test data approach.
B)generalized audit software approach.
C)microcomputer-aided auditing approach.
D)generally accepted auditing standards.
Q3) What are three specific risks to IT systems?
Q4) "Auditing around the computer" is acceptable only if the auditor has access to the client's data in a machine-readable language.
A)True
B)False
14
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) Describe the five types of audit tests.Identify which of the five types are substantive tests, and which are used to reduce assessed control risk.
Q2) Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor's use of tests of details of balances.Which of the following is true?
A)They are likely to be performed prior to the clients end of the fiscal year.
B)They are likely to eliminate the need for tests of details of balances.
C)They are likely to have no impact on the planned tests of details of balances.
D)They are likely to be used only in the audit of internal control.
Q3) Auditing standards recognize that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests.
A)True
B)False
Q4) There are three stages of the audit in which analytical procedures are performed.Identify each of these three stages and, for each stage, discuss the purpose of performing analytical procedures in that stage.Also indicate in which stage(s)analytical procedures are required by current professional auditing standards.
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Page 15
Chapter 14: Audit of the Sales and Collection Cycle: Tests of
Controls and Substantive Tests of Transactions
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Sample Questions
Q1) A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.
A)sales order
B)customer order
C)vendor invoice
D)sales invoice
Q2) Before goods are shipped on account, a properly authorized person must:
A)prepare the sales invoice.
B)approve the journal entry.
C)approve the customer's credit.
D)verify that the unit price is accurate.
Q3) ________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.
A)Tracing, vouching
B)Vouching, tracing
C)Verifying, tracking
D)Tracking, verifying
Q4) Customer billing is a critical process which auditors must understand.What are the most important aspects of billing and what are the related objectives?
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) Nonprobabilistic sampling methods are not based on mathematical probabilities and therefore the representativeness of the sample may be difficult to determine.
A)True
B)False
Q2) Which of the following is most correct when using audit sampling for exception rates?
A)Auditor is concerned with the lowest rate.
B)Auditor is concerned with the highest rate.
C)Auditor is concerned with the average on previous audits.
D)This doesn't impact the auditor's decision.
Q3) Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated?
A)Sample exception rate
B)Estimated population exception rate
C)Computed upper exception rate
D)Exception
Q4) It is virtually impossible to reduce sampling risk to zero.
A)True
B)False
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) Which of the following is a correct statement regarding analytical procedures?
A)If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement.
B)Auditors should also compare the results of their analytical procedures to budgets and industry trends.
C)If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct.
D)If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.
Q2) Cutoff misstatements can occur for sales, sales returns, and cash receipts.List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.
Q3) Which of the following most likely would be detected by a review of a client's sales cutoff?
A)Excessive sales discounts
B)Unrecorded sales for the year
C)Unauthorized goods returned for credit
D)Lapping of year-end accounts receivable
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) If analytical procedures are performed with no indications of likely misstatements, ARIA will ________ and the sample size will ________.
A)remain the same, increase
B)decrease, decrease
C)increase, decrease
D)decrease, increase
Q2) Accounts with zero or negative year-end balances have no chance of being included in a standard probability proportional to size (PPS)sample.
A)True
B)False
Q3) Which of the following is not a type of statistical method that provides results in dollar terms?
A)Variables sampling
B)Attributes sampling
C)Monetary unit sampling
D)Sampling with probability proportional to size
Q4) An auditor using nonstatistical sampling cannot formally measure sampling error.
A)True
B)False
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Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and Accounts Payable
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Sample Questions
Q1) Listed below are some management assertions made for the acquisition and payment cycle.For each one give an example of how the auditor by using the documents normally found in the process can apply an auditing procedure to test the assertion.
Completeness
Timing
Accuracy
Q2) An auditor is using audit sampling to test transactions in the acquisition and payment cycle.She would normally set the tolerable exception rate at what level?
A)Low
B)Medium
C)High
D)Indeterminate
Q3) After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services.
A)purchase order
B)vendor order
C)call order
D)vendor invoice
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Chapter 19: Completing the Tests in the Acquisition and Payment Cycle:
Verification of Selected Accounts
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Sample Questions
Q1) When auditing accrued property taxes:
A)the source for the debits to the liability account is the acquisitions journal.
B)realizable value is an important balance-related audit objective.
C)the ending balance in the account should be confirmed with the applicable taxing authority.
D)the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceeding year is used in the current year.
Q2) Which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and deferred charges?
A)Tests of controls
B)Tests of transactions
C)Tests of details of balances
D)Analytical procedures
Q3) Describe the audit procedures used to verify the accuracy and detail tie-in objectives for prepaid insurance.
Q4) What are several analytical procedures used in the audit of prepaid insurance and insurance expense?
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) Which of the following is an accurate statement regarding nonexistent employees?
A)In order to prevent this type of fraud, the foreman should distribute the paychecks and approve the time cards.
B)Records for all terminated employees should be destroyed to prevent this type of fraud.
C)The person committing this type of fraud is generally the CEO or CFO of the company.
D)This type of fraud often results from the continuance of an employee on the payroll after the employee has been terminated.
Q2) Discuss each of the following documents and records used in the timekeeping and payroll preparation function in the payroll and personnel cycle: time record, job time ticket, payroll transaction file, payroll journal and payroll master file.
Q3) When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning:
A)fictitious employees.
B)authorization of wage rates.
C)proper classification of payroll transactions.
D)completeness of recorded transactions.
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) A major difficulty in the verification of inventory cost records for the purpose of inventory valuation is in determining the reasonableness of the:
A)direct labor hourly rate.
B)raw material per unit cost.
C)manufacturing overhead costs.
D)number of direct labor hours applied.
Q2) A useful starting point for becoming familiar with the client's inventory is for the auditor to:
A)read the AICPA's Industry Audit Guide.
B)review accounting theory covering special inventory problems.
C)read the client's accounting manual.
D)tour the client's facility.
Q3) From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?
A)Observation of physical inventory counts
B)Written inventory representations from management
C)Confirmation of inventories in a public warehouse
D)Auditor's recomputation of inventory extensions
Q4) 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) The record of the outstanding shares at any given time is maintained in the: A)corporate directory.
B)stock certificate books.
C)schedule of stock owners.
D)shareholders' capital stock master file.
Q2) When a dividend is declared by the board of directors, the source for determining who should receive dividend checks is the:
A)shareholders' capital stock master file.
B)stock certificate books.
C)common stock account in the general ledger.
D)corporate directory.
Q3) Responsibility for the issuance of new notes payable would normally be vested in the:
A)board of directors.
B)purchasing department.
C)accounting department.
D)accounts payable department.
Q4) When a company maintains its own records of stock transactions and capital stock outstanding its internal controls must be adequate to accomplish three objectives.List them below.
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) Because cash is the most desirable asset for people to steal, it has a higher:
A)control risk.
B)inherent risk.
C)detection risk.
D)liquidity risk.
Q2) A proof of cash receipts is not useful for uncovering the theft of cash receipts or the recording and deposit of an improper amount of cash.
A)True
B)False
Q3) The auditor must extend the audit procedures in the audit of year-end cash when there are inadequate internal controls.
A)True
B)False
Q4) Assessing internal controls related to financial instruments may be necessary in order to reduce audit risk to an acceptable level.
A)True
B)False
Q5) Explain kiting, and discuss how it is performed.
Q6) What should be audited on an interbank transfer schedule?
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Chapter 24: Completing the Audit
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Q1) Attorneys in recent years have become reluctant to provide certain information to auditors because of their own exposure to legal liability for providing incorrect or confidential information.State the two main reasons that attorneys refuse to provide the auditors with complete information.
Q2) Current professional auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities.
A)True
B)False
Q3) When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's officials.
A)True
B)False
Q4) Define the term contingent liability and discuss the criteria accountants and auditors use to classify these accounting events.
Q5) Auditing standards require the auditor's assessment of going-concern issues.
A)True
B)False
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) Systrust services are performed under the direction of the SSAEs.
A)True
B)False
Q2) Of the three types of attestation engagements, examination engagements provide a higher level of assurance than agreed-upon procedures engagements but less than review engagements.
A)True
B)False
Q3) What is the best reason that standards prohibit accepting an engagement on a projection for general use?
A)The CPA's procedures would violate SSARS.
B)Reports on projections are not well understood by the general public.
C)Underlying hypothetical assumptions are difficult to interpret without obtaining additional information.
D)The CPA is not qualified to report on the use of GAAP in the projected financial statement.
Q4) SSARS are issued by the SEC.
A)True
B)False
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Chapter 26: Internal and Governmental Financial Auditing and
Operational Auditing
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Sample Questions
Q1) A typical objective of an operational audit is to determine whether an entity's:
A)internal control is adequately operating as designed.
B)financial statements present fairly the results of operations.
C)specific operating units are functioning efficiently and effectively.
D)operational information is in accordance with generally accepted government auditing standards.
Q2) Operational auditing is the review of an organization for efficiency and effectiveness.Discuss what is meant by the terms "effectiveness" and "efficiency."
Q3) The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of:
A)$1,000,000 or more.
B)$500,000 or more.
C)$300,000 or more.
D)$100,000 or more.
Q4) The correct title of the Yellow Book is:
A)Government Auditing Standards.
B)IIA Practice Standards.
C)Statement of Responsibilities of Internal Auditing.
D)Statement of Standards on Accounting and Review Services.
Page 28
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