Financial Statement Auditing
Textbook Exam Questions
Course Introduction
Financial Statement Auditing is a comprehensive course that introduces students to the fundamental principles and practices involved in the independent examination of financial statements. The course covers the professional standards that govern audits, the ethical and legal responsibilities of auditors, audit planning and risk assessment, evidence gathering techniques, internal controls, and the preparation of audit reports. Students will gain insights into audit methodologies, the role of materiality and sampling, and the procedures for detecting and reporting fraud. Through practical examples and case studies, the course equips future auditors and financial professionals with the skills necessary to analyze, interpret, and verify financial statement information to ensure its accuracy and reliability for stakeholders.
Recommended Textbook
Principles of Auditing and Other Assurance Services 19th Edition by Ray Whittington
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Page 2
Chapter 1: The Role of the Public Accountant in the American Economy
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Q1) Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management?
A)Integrity.
B)Competence.
C)Independence.
D)Keeping informed on current professional developments.
Answer: C
Q2) The Statements on Auditing Standards have been issued by the:
A)Auditing Standards Board.
B)Financial Accounting Standards Board.
C)Securities and Exchange Commission.
D)Federal Bureau of Investigation.
Answer: A
Q3) Which of the following are issued by the Securities and Exchange Commission?
A)Accounting Research Studies.
B)Accounting Trends and Techniques.
C)Industry Audit Guides.
D)Financial Reporting Releases.
Answer: D
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Chapter 2: Professional Standards
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Q1) An audit provides reasonable assurance of detecting which of the following types of material illegal acts? \(\begin{array} { c}
& \text { Direct Effect} & \text { Without a} \\
&\text { } & \text { Direct Effect} \\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No } \end{array}\)
A)Option A.
B)Option B.
C)Option C.
D)Option D.
Answer: B
Q2) Which of the following is not a type of auditors' opinion?
A)Adverse.
B)Ordinary.
C)Qualified.
D)Unmodified.
Answer: B
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Chapter 3: Professional Ethics
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Sample Questions
Q1) As compared to the AICPA Code of Professional Conduct,IFAC's International Code of Ethics for Professional Accountants:
A)Applies to more types of services.
B)Has more specific restrictions.
C)Has less specific restrictions.
D)Is less conceptual.
Answer: C
Q2) The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA.
A)True
B)False
Answer: True
Q3) The communications between CPAs and their clients are privileged under federal law.
A)True
B)False
Answer: False
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Chapter 4: Legal Liability of CPAS
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Q1) The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:
A)Less than the Securities Act of 1933.
B)The same as the Securities Act of 1933.
C)Greater than the Securities Act of 1933.
D)Indeterminate in relation to the Securities Act of 1933.
Q2) Under common law,which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
A)The CPA is liable only to third parties in privity of contract with the CPA.
B)The CPA is liable only to known users of the financial statements.
C)The CPA probably is liable to any person who suffered a loss as a result of the fraud.
D)The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.
Q3) The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act.
A)True
B)False
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Chapter 5: Audit Evidence and Documentation
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Q1) Which of the following is not a primary purpose of audit working papers?
A)To coordinate the examination.
B)To assist in preparation of the audit report.
C)To support the financial statements.
D)To provide evidence of the audit work performed.
Q2) Adjusting journal entries are ordinarily recorded by the client,while reclassifying journal entries need not be recorded.
A)True
B)False
Q3) Which of the following is not a typical analytical procedure?
A)Study of relationships of the financial information with relevant nonfinancial information.
B)Comparison of the financial information with similar information regarding the industry in which the entity operates.
C)Comparison of recorded amounts of major disbursements with appropriate invoices.
D)Comparison of the financial information with budgeted amounts.
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Sample Questions
Q1) Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?
A)Inability to generate positive cash flows from operations, while reporting large increases in earnings.
B)Management's lack of interest in increasing the dividend paid on common stock.
C)Large amounts of liquid assets that are easily convertible into cash.
D)Inability to borrow necessary capital without obtaining waivers on debt covenants.
Q2) Which measure of materiality (or both)considers quantitative considerations?
\[\begin{array} { c }
&\text { Planning}&\text{ Evaluation}\\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No }
\end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
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Chapter 7: Internal Control
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Sample Questions
Q1) To provide for the greatest degree of independence in performing internal auditing functions,an internal auditor most likely should report to the:
A)Financial vice-president.
B)Corporate controller.
C)Audit committee.
D)Corporate stockholders.
Q2) The use of fidelity bonds protects a company from embezzlement loses and also: A)Minimizes the possibility of employing persons with dubious records in positions of trust.
B)Reduces the company's need to obtain expensive business interruption insurance.
C)Allows the company to substitute the fidelity bonds for various parts of internal control.
D)Protects employees who made unintentional errors from possible monetary damages resulting from such errors.
Q3) Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud.
A)True
B)False
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9
Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Q1) Various characteristics of IT systems can present special audit risks.Explain each of the following characteristics of an IT system and the special audit risks that they present.
a.Data base system.
b.Distributive data processing.
c.End user computing.
Q2) Which of the following is least likely to be tested with generalized audit software?
A)An aging of accounts receivable.
B)A schedule of inventory.
C)A depreciation schedule.
D)A computer operations manual.
Q3) Which of the following is not a data transmission control?
A)Echo checks.
B)Data encryption.
C)File labels.
D)Parity checks.
Q4) Distributive data processing eliminates the need for data security.
A)True
B)False
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Chapter 9: Audit Sampling
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Q1) Stratification of the population generally results in a more efficient sampling plan.
A)True
B)False
Q2) Auditors project the misstatements found in the sample to the population when using statistical sampling,but not when using nonstatistical sampling.
A)True
B)False
Q3) Which of the following statistical selection techniques is least desirable for use by an auditor?
A)Systematic selection.
B)Stratified selection.
C)Block selection.
D)Sequential selection.
Q4) Statistical sampling cannot be used to test all control activities.
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 not a universal rule for achieving internal control over cash?
A)Separate recordkeeping from accounting for cash to the extent possible.
B)Deposit each day's cash receipts intact.
C)Separate cash handling from recordkeeping.
D)Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.
Q3) Which of the following is correct concerning "window dressing" for cash?
A)A segregation of duties within the cash function effectively eliminates its occurrence.
B)It generally involves manipulation of inventory.
C)It is illegal, and an audit is designed to provide reasonable assurance of its detection.
D)Many forms of it require no action by the auditors.
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12
Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
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Q1) When there are a large number of relatively small account receivable balances,negative confirmation requests may be appropriate if the combination of inherent risk and control risk is:
A)Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.
B)High, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
C)High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.
D)Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
Q2) The department approving a sales transaction should be the shipping department. A)True B)False
Q3) Material accounts receivable from related parties should be stated separately from other receivables.
A)True B)False
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Chapter 12: Inventories and Cost of Goods Sold
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Q1) Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?
A)Confirmation of goods in the hands of public warehouses.
B)Supervising the taking of the annual physical inventory.
C)Carrying out physical inventory procedures at an interim date.
D)Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory.
Q2) Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?
A)To document every test count.
B)For subsequent comparison with the completed inventory listing.
C)To document compliance with generally accepted accounting principles.
D)For use in subsequent audits.
Q3) Auditors should not review the client's planning of the physical inventory.
A)True
B)False
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14
Chapter 13: Property Plant and Equipment: Depreciation and Depletion
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Q1) Even when internal control is weak,a significant portion of the audit work on property,plant and equipment may be performed at an interim date.
A)True
B)False
Q2) A continuing audit client's property,plant and equipment and accounts receivable accounts have approximately the same year-end balance.In this circumstance,when compared to property,plant and equipment one would normally expect the audit of accounts receivable to require:
A)More audit time.
B)Less audit time.
C)Approximately the same amount of audit time.
D)Similar confirmation procedures.
Q3) In testing for unrecorded retirements of equipment,an auditor might.
A)Select items of equipment from the accounting records and then attempt to locate them during the plant tour.
B)Compare depreciation expense with the prior year's depreciation expense.
C)Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
D)Scan the general journal for unusual equipment retirements.
Page 15
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Chapter 14: Accounts Payable and Other Liabilities
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Q1) Which of the following is a control procedure that is usually applied to accounts payable?
A)Periodic confirmation of accounts payable.
B)Mailing statements to vendors detailing their account.
C)Periodic aging of accounts payable.
D)Reconciliation of vendor statements with accounts payable.
Q2) Overstatement of financial results can involve failure to record a transaction.
A)True
B)False
Q3) Accounts payable from an officer should be classified separately from other accounts payable.
A)True
B)False
Q4) The confirmation of accounts payable is most closely associated with:
A)Assertion risk.
B)Detection risk.
C)Inherent risk.
D)Relative risk.
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Chapter 15: Debt and Equity Capital
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Q1) During an audit of a publicly-held company,the auditors should obtain written confirmation regarding debenture transactions from the:
A)Debenture holders.
B)Client's attorney.
C)Internal auditors.
D)Trustee.
Q2) The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income.
A)True
B)False
Q3) For audit purposes,a corporation's articles of incorporation are normally:
A)Copied and placed on the owners' equity lead schedule.
B)Copied and placed in the permanent file.
C)Confirmed with the transfer agent.
D)Ignored since they are not normally considered to be related to the internal control structure.
Q4) The formal documentation creating bond indebtedness is called the indenture.
A)True
B)False
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Chapter 16: Auditing Operations and Completing the Audit
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Q1) To minimize the opportunities for fraud,unclaimed cash payroll should be:
A)Deposited in a safe deposit box.
B)Held by the payroll custodian.
C)Deposited in a special bank account.
D)Held by the controller.
Q2) With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report,the auditors' responsibility for events occurring subsequent to the date of the audit report:
A)Extended to include all events occurring until the date of the last subsequent event referred to.
B)Limited to the specific event referred to.
C)Limited to all events occurring through the date of issuance of the report.
D)Extended to include all events occurring through the date of submission of the report to the client.
Q3) Normally,general risk contingencies need not be disclosed in the financial statements.
A)True
B)False
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Page 18
Chapter 17: Auditors Report
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Q1) The term "except for" in an audit report is:
A)Used in an adverse opinion.
B)No longer considered appropriate.
C)Used in a qualified opinion
D)Used for an unmodified opinion when an emphasis-of-matter paragraph is added.
Q2) Doe,an independent auditor,was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended.Although the inventory count was not observed by Doe,and accounts receivable were not confirmed by direct communication with debtors,Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures.Doe's audit report will probably contain:
A)A standard unmodified opinion.
B)An unmodified opinion and an emphasis-of-matter paragraph.
C)Either a qualified opinion or a disclaimer of opinion.
D)An "except for" qualification.
Q3) If financial statements contain a material departure from generally accepted accounting principles,the auditors usually should issue a disclaimer of opinion.
A)True
B)False
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Chapter 18: Integrated Audits of Public Companies
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Q1) The minimum likelihood of loss involved in the consideration of a possible significant deficiency is:
A)Remote.
B)Reasonably possible.
C)Probable.
D)Not considered.
Q2) An auditor identified a material weakness in internal control in December.The client was informed and the client corrected the material weakness shortly after year-end (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31.The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:
A)Adverse.
B)Unqualified.
C)Unqualified with explanatory language relating to the material weakness.
D)Qualified.
Q3) An auditor's report on internal control ordinarily includes negative assurance on the effectiveness of internal control.
A)True
B)False
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Page 20
Chapter 19: Additional Assurance Services: Historical
Financial Information
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Q1) An auditor is reporting on cash basis financial statements.These statements are best referred to in his opinion by which of the following descriptions?
A)Financial position and results of operation arising from cash transactions.
B)Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.
C)Balance sheet and income statement resulting from cash transactions.
D)Cash balance sheet and the source and application of funds.
Q2) Comfort letters are ordinarily signed by the:
A)Client.
B)Client's lawyer.
C)Independent auditor.
D)Internal auditor.
Q3) The financial statements of nonpublic companies may be compiled or reviewed by the CPAs.
a.Describe a compilation of financial statements.
b.Describe a review of financial statements.
c.Describe three procedures that are performed in the review of a nonpublic company's financial statements.
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Chapter 20: Additional Assurance Services: Other Information
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Q1) The Warren Corporation wants to enhance the market value of its stock by including in its annual report a financial forecast for the next year.They also would like to have their auditors examine the forecast.
a.Define a financial forecast.
b.Is an examination of a financial forecast similar in scope to a review of financial statements?
Q2) Which of the following are Trust Services principles? \[\begin{array} {c} &\text { Security} & \text{Availability }\\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No } \end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q3) SysTrust engagements relate only to database systems.
A)True
B)False
Page 22
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Chapter 21: Internal, Operational, and Compliance Auditing
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Q1) Interviewing operating personnel,identifying he objectives of the auditee,identifying standards used to evaluate performance,and assessing the risk inherent in the auditee's operations are activities typically performed in which phase of an internal audit?
A)The fieldwork phase.
B)The preliminary survey phase.
C)The audit programming phase.
D)The reporting phase.
Q2) For the highest degree of independence the director of internal auditing should report directly to:
A)The controller.
B)The audit committee of the board of directors.
C)The executive vice-president.
D)The chief accountant.
Q3) Operational audits are primarily concerned with whether an organization follows appropriate laws and regulations.
A)True
B)False
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Chapter 22: Probability-Proportion-To-Size Sampling
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Q1) When no misstatements are identified in a PPS sample,the upper limit on misstatement equals.
A)An amount dependent upon the sample's standard deviation.
B)Basic precision.
C)½ of the allowance for sampling risk.
D)Zero.
Q2) 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 most likely amount of misstatement in the population is equal to:
A)$20,000.
B)$20,500
C)$40,000.
D)$40,500.
E)$74,500.
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