External Auditing Practice Questions
Course Introduction
External Auditing is an in-depth course that explores the principles, procedures, and ethical standards involved in independent financial statement audits. Students will learn the fundamentals of audit planning, risk assessment, evidence collection, sampling techniques, evaluation of internal controls, and the preparation of audit reports. The course covers the regulatory environment, including relevant auditing standards, professional responsibilities, and legal considerations. Practical case studies and real-world examples are used to develop critical thinking and decision-making skills essential for the external audit process.
Recommended Textbook
Auditing Assurance Services A Systematic Approach 11th Edition by William F Messier Jr
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Page 2
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Sample Questions
Q1) In the context of agency theory, information asymmetry refers to the idea that:
A)information can vary in its reliability.
B)information can vary in its relevance.
C)management has more information about the entity's true financial position than do the absentee owners (i.e., stockholders).
D)management likely will not act in the best interests of the absentee owners.
Answer: C
Q2) Which of the following is not a benefit of emerging audit technologies?
A)Automate much of the more tedious work that auditors perform.
B)The potential to dramatically enhance the effectiveness and the value of the external audit.
C)Leave more time for auditors to better understand the businesses they are auditing the underlying risks related to financial reporting.
D)Remove the challenge of junior auditor work and make that work less interesting. Answer: D
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) A financial statement audit is generally organized based on the five basic business processes or cycles.
A)True
B)False
Answer: True
Q2) Who bears ultimate responsibility for the financial statements?
A)Management of the organization, equally with the external auditor that audits the statements.
B)Management and the shareholders of the organization.
C)The external auditor that audits the statements.
D)Management of the organization.
Answer: D
Q3) Typically, an external auditor first gets supervisory experience at what level of authority?
A)Associate.
B)Senior.
C)Manager.
D)Partner.
Answer: B
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Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) There are five general types of audit tests.
A)True
B)False
Answer: False
Q2) In the context of an audit of financial statements, substantive procedures are audit procedures that:
A)may be eliminated under certain conditions.
B)are primarily designed to discover significant subsequent events.
C)may be either tests of details of transactions, tests of details of account balances, or analytical procedures.
D)will increase proportionately with an increase in the auditor's reliance on internal control.
Answer: C
Q3) When the prospective client has previously been audited, auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.
A)True
B)False
Answer: True
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Chapter 4: Risk Assessment
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Sample Questions
Q1) When an entity moves into a significant new line of business, all of the following increase except:
A)client risk.
B)acceptable audit risk.
C)risk of material misstatement.
D)entity business risk.
Q2) Which of the following is correct concerning required auditor communications about fraud?
A)Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B)Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C)Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.
D)The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
Q3) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Q1) In creating lead schedules for an audit engagement, what financial information is needed to begin?
A)Interim financial information, such as third quarter sales, net income, and inventory and receivables balances.
B)Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year.
C)General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.
D)Adjusting entry information, such as deferrals and accruals and reclassification journal entries.
Q2) Which of the following presumptions is correct about the reliability of audit evidence?
A)Information obtained indirectly from outside sources is the most reliable audit evidence.
B)To be reliable, audit evidence should be convincing rather than persuasive.
C)Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D)An effective internal control system provides more reliable audit evidence.
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) Which of the following procedures most likely would be included as part of an auditor's tests of controls?
A)Inspection.
B)Reconciliation.
C)Confirmation.
D)Analytical procedures.
Q2) What are the differences between document flowcharts, system flowcharts, and program flowcharts?
Q3) Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?
A)Incompatible duties.
B)Management override.
C)Mistakes in judgment.
D)Collusion among employees.
Q4) An effective control environment:
A)identifies and responds to business risks.
B)creates a commitment to competence.
C)guarantees that all controls are followed as prescribed.
D)does not need an effective board of directors or internal audit function.
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) In a public company, management must assess and report on internal control over financial reporting.
A)True
B)False
Q2) The advantages of generalized audit software include all of the following except:
A)it involves auditing while the data are being processed (real-time).
B)it is easy to use.
C)the time to develop the application is usually short.
D)an entire population can be examined in some instances.
Q3) CBA Associates is auditing a large publicly traded company. The audit of internal controls over financial reporting has been properly planned and the auditors have already identified controls to test using a top-down, risk-based approach. What is the next step? Give three examples of procedures that may be completed in the next step in the audit.
Q4) Management's written representations concerning internal control are:
A)addressed to the users of the financial statements.
B)normally drafted by management.
C)included in the auditor's final report.
D)signed by the CEO and CFO.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) The computed upper deviation rate is:
A)the maximum rate of deviations that the auditor is willing to accept before deciding not to rely on the control.
B)the rate of deviations that the auditor expects to occur in the population.
C)a point estimate of the population deviation rate.
D)the sum of the sample deviation rate and an appropriate allowance for sampling risk.
Q2) In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a:
A)higher tolerable deviation rate.
B)lower expected deviation rate.
C)larger sample size.
D)smaller sample size.
Q3) With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test.
A)True
B)False
Q4) Define Type I and Type II errors.
Q5) Define sampling risk and nonsampling risk.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) When auditing accounts payable using classical variables sampling, Sue finds evidence indicating that the account may be materially misstated. What are Sue's options?
Q2) For monetary-unit sampling, the number of items tested is:
A)always equal to sample size.
B)always greater than sample size.
C)always greater than or equal to sample size.
D)always less than or equal to sample size.
Q3) MUS logical unit
A)an individual dollar
B)the total of the projected misstatement plus the allowance for sampling risk
C)the difference between monetary amounts in the entity's records and amounts supported by audit evidence
D)the account or transaction that contains the selected dollar
Q4) Confidence level is inversely related to sample size.
A)True
B)False
Q5) What is one advantage and one disadvantage of classical variables sampling?
Q6) Summarize the concept behind monetary-unit sampling (MUS). How does MUS use attribute-sampling theory? Page 11
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) The revenue process affects numerous accounts in the financial statements.
A)True
B)False
Q2) To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:
A)customer order file.
B)bills of lading file.
C)open invoice file.
D)sales invoice file.
Q3) Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to:
A)evaluate internal control over credit sales.
B)test the accuracy of recorded credit sales.
C)evaluate the allowance for doubtful accounts.
D)verify the existence of the recorded receivables.
Q4) Order entry is the initial function in the revenue cycle.
A)True
B)False
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Chapter 11: Auditing the Purchasing Process
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Q1) Identify the primary functions in the purchases cycle and describe each function. Functions in the purchasing process include:
Q2) The principal business objectives of the purchasing process are acquiring goods and services and paying for those goods and services.
A)True
B)False
Q3) Identify whether the following tests are substantive analytical procedures, tests of details of transactions, or tests of details of account balances:
1)Test a sample of purchase requisitions for proper authorization.
2)Test transactions around year-end to determine if they are recorded in the proper period.
3)Review results of confirmation of selected accounts payable.
4)Compare payables turnover to previous years' data.
5)Obtain selected vendors' statements and reconcile to vendor accounts.
6)Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data.
Q4) Describe three categories of expenses outlined in FASB Concept Statement No. 5.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) For each of the following tests, identify the assertion to which the test applies.
1)Trace a sample of payroll checks to the master employee list.
2)Recalculate a sample of payroll checks.
3)Review supporting documentation to determine that the entity is legally obligated to pay the liability.
4)Estimate sales commissions by applying commission formulas to recorded sales totals.
5)Compare amounts accrued to supporting documentation, such as payroll tax returns.
6)Compare payroll costs as a percentage of sales to industry data.
Q2) In the substantive audit procedures for payroll where the control risk is set at low, an auditor most likely would:
A)verify that checks representing unclaimed wages are mailed.
B)trace individual employee deductions to entity journal entries.
C)observe entity employees during a payroll distribution.
D)compare payroll costs with entity standards or budgets.
Q3) Explain how the human resource management process can affect the financial statements.
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Page 15
Chapter 13: Auditing the Inventory Management Process
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Q1) When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably:
A)want the entity to schedule the physical inventory count at the end of the year.
B)insist that the entity perform physical counts of inventory items several times during the year.
C)increase the extent of tests for unrecorded liabilities at the end of the year.
D)have to disclaim an opinion on the income statement for that year.
Q2) Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?
A)Obsolete inventory.
B)New product line where sales exceed production.
C)Manufacturing overhead was not allocated to the production process.
D)Manufacturing salaries were recorded as administrative expenses.
Q3) An approved purchase requisition form authorizes shipment of goods to customers.
A)True
B)False
Q4) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated or incorrectly classified?
A)Depreciation expense.
B)Accounts payable.
C)Cash.
D)Repairs and maintenance expense.
Q2) Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for:
A)segregation of duties of employees in the accounts payable department.
B)independent verification of invoices for disbursements recorded as equipment acquisitions.
C)investigation of variances within a formal budgeting system.
D)authorization by the board of directors of significant equipment acquisitions.
Q3) Generally, auditors rely on controls when auditing the property management function and therefore less substantive testing is used.
A)True
B)False
Page 17
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders' Equity, and Income
Statement Accounts
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Q1) One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.
A)True
B)False
Q2) For each of the following substantive procedures, first note whether it is a test of details of transactions or a test of details of account balances. Then decide for which assertion the test provides the best evidence.
1. Trace large cash receipts and payments to the general ledger.
2. Examine copies of note, bond, and financing lease agreements.
3. Recompute accrued interest payable.
4. Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period.
5. Examine due dates on notes and bonds for proper classification between current and long-term debt.
Q3) The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.
A)True
B)False
Page 18
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding:
A)existence.
B)rights and obligations.
C)completeness.
D)existence, rights and obligations, and completeness.
Q2) What should an auditor look for when testing for proper classification and presentation of securities?
Q3) The general cash account is normally the principal account used to disburse payroll. A)True B)False
Q4) Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of:
A)completeness.
B)disclosure.
C)valuation and allocation.
D)rights and obligations.
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Chapter 17: Completing the Audit Engagement
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Q1) What is the difference between a contingent liability and a commitment?
Q2) Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?
A)Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records.
B)Ask legal counsel about any developments relating to litigation, claims, or assessments against the company.
C)Review the treasurer's monthly reports on temporary investments owned, purchased, and sold.
D)Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.
Q3) Which of the following auditing procedures is ordinarily performed last?
A)Confirming accounts payable.
B)Testing the purchasing function.
C)Reading the minutes of directors' meetings for evidence of authorization of acquisition of fixed assets.
D)Obtaining a management representation letter.
Q4) State the two primary purposes of the management representation letter.
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Chapter 18: Reports on Audited Financial Statements
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Q1) The following four situations require a modification to the standard unqualified audit report for public companies. Identify the modification required for each.
a. Opinion based in part on the report of another auditor.
b. Going concern.
c. Lack of comparability.
d. Emphasize a matter.
Q2) A basic assumption that underlies financial reporting is that an entity will continue as a going concern.
A)True
B)False
Q3) Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?
A)Required supplementary information is omitted or departs materially from the requirement of the applicable financial reporting framework.
B)Lack of comparability in the financial statements due to accounting changes.
C)Going concern.
D)Opinion based in part on the report of another auditor.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Q1) In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee?
A)A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.
B)A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience.
C)A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement.
D)A fee based on the fee charged by the prior auditor.
Q2) As per the Conceptual Framework for AICPA Independence Standards, a CPA is required to identify and assess the extent to which a threat to independence exists. A)True
B)False
Q3) Distinguish between the following theories of ethical behavior: a utilitarian approach, a rights-based approach, and a justice-based approach.
Q4) When can a CPA disclose confidential information without the client's consent?
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Page 22
Chapter 20: Legal Liability
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Q1) Under the antifraud provisions of Section 10(b)of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted:
A)negligently.
B)with independence.
C)without due diligence.
D)without good faith.
Q2) An audit client loses a lawsuit and the judgment is for an amount in excess of the contingent liability the client had recorded in the audited financial statements. The auditor, using the typical degree of due care as other members of the profession, determined that the amount of contingent liability recorded by the client in the financial statements for the pending lawsuit was reasonable, given the facts at the time of the audit. This judgment by the auditor is likely to result in:
A)sanctions by the PCAOB levied against the individual auditor as well as the accounting firm.
B)a successful lawsuit claiming auditor negligence.
C)a successful lawsuit claiming breach of contract.
D)no legal action whatsoever since due care was exercised.
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Q1) The party responsible for assumptions identified in the preparation of prospective financial statements is usually:
A)a third-party lending institution.
B)the entity's management.
C)the reporting accountant.
D)the entity's independent auditor.
Q2) Internal auditors fall into two primary categories-assurance services and consulting services. Briefly explain these two categories in relation to internal auditors.
Q3) An examination of a financial forecast is a professional service that involves:
A)compiling or assembling a financial forecast that is based on management's assumptions.
B)limiting the distribution of the accountant's report to management and the board of directors.
C)assuming responsibility to update management on key events for one year after the report's date.
D)evaluating whether the computations of prospective amounts are mathematically accurate and assumptions are internally consistent.
Q4) How has the advancement in technology led to the creation of the Trust Services?
Page 24
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