Internal Auditing Exam Questions
Course Introduction
Internal Auditing explores the principles, practices, and professional standards essential to the internal audit function within organizations. The course covers the role of internal auditors in risk management, internal control evaluation, and compliance with regulations, as well as methods for planning and conducting audits. Students learn about audit processes, documentation techniques, and reporting findings, while emphasizing ethical considerations and the importance of independence and objectivity in auditing. Through case studies and practical applications, students develop skills to assess organizational operations, identify weaknesses, and make recommendations for process improvements.
Recommended Textbook
Auditing Assurance Services A Systematic Approach 11th Edition by William F Messier Jr
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21 Chapters
1456 Verified Questions
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Q1) Which of the following is not a concept that is included in the scope paragraph of the auditor's report?
A)The conformance of the financial statements with generally accepted accounting principles.
B)The audit was conducted in accordance with applicable auditing standards.
C)The audit was planned and performed to obtain reasonable, rather than absolute, assurance.
D)An audit involves examining items on a test (i.e., sampling)basis.
Answer: A
Q2) For publicly-held companies, which of the following is integrated into the audit of financial statements?
A)Budgetary information audit.
B)The audit of internal controls.
C)Audit of management forecasts.
D)Audit of interim financial statements.
Answer: B
Q3) Decision makers demand reliable information that is provided by accountants.
A)True
B)False
Answer: True
Page 3
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of:
A)the stock exchange officials.
B)the independent auditor.
C)the company's management.
D)the securities and exchange commission.
Answer: C
Q2) Due professional care requires:
A)auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence.
B)the examination of all available corroborating evidence.
C)the exercise of error-free judgment.
D)a study and review of internal controls that includes tests of controls.
Answer: A
Q3) One of the five basic business processes is the warehousing cycle.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:
A)methods of statistical sampling to be used in confirming accounts receivable.
B)pending legal matters to be included in the inquiry of the client's attorney.
C)evidence to be gathered to provide a sufficient basis for the auditor's opinion.
D)timing of the audit.
Answer: D
Q2) As generally conceived, the audit committee of a publicly held company should be made up of:
A)representatives of the major equity interests (preferred stock, common stock).
B)the audit partner, the chief financial officer, the legal counsel, and at least one outsider.
C)representatives from the client's management, investors, suppliers, and customers.
D)members of the board of directors who are not officers or employees.
Answer: D
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Page 5
Chapter 4: Risk Assessment
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Sample Questions
Q1) All of the following represent an increased opportunity for management to commit fraud except:
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 statements include highly subjective estimates.
Q2) Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A)Inability to generate cash flows from operations while reporting substantial earnings growth.
B)Management's lack of interest in increasing the entity's earnings trend.
C)Large amounts of liquid assets that are easily converted into cash.
D)Inability to borrow necessary capital without granting debt covenants.
Q3) In one sentence each, define misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.
Q4) Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of audit risk for the audit of accounts payable at 0.06. The risk of material misstatement is assessed at 0.65. What is the detection risk for this audit?
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Page 6
Chapter 5: Evidence and Documentation
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Sample Questions
Q1) The text discusses three main categories of audit procedures. List and describe these three main categories of audit procedures and describe their purpose.
Q2) An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor?
A)The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
B)Twice as many accounts receivable were written off in the prior year than in the current year.
C)A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.
D)The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
Q3) Several factors may influence the reliability of evidence. Identify and describe two of these factors.
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) An entity's internal controls are most relevant to the auditor when the policies and procedures:
A)affect the financial statement assertions.
B)relate to management's planning decisions.
C)address management's operating decisions.
D)reflect management's philosophy and operating style.
Q2) After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that:
A)the available evidential matter obtained through tests of controls would not support an increased level of control risk.
B)a reduction in the assessed level of control risk is justified for certain financial statement assertions.
C)it would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.
D)the assessed level of inherent risk exceeded the assessed level of control risk.
Q3) Why might an auditor decide to test controls at an interim date?
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) Which of the following is not a primary objective of internal control as established by COSO?
A)Efficiency and effectiveness of operations.
B)Effective purchasing systems.
C)Compliance with laws and regulations.
D)Reliable financial reporting.
Q2) The auditor is least likely to use generalized audit software to:
A)perform analytical procedures on the entity's data.
B)access information stored on the entity's IT files.
C)identify material weaknesses in the entity's IT controls.
D)test the accuracy of the entity's computations.
Q3) Most public companies must follow Sarbanes-Oxley requirements.
A)True
B)False
Q4) An auditor performing an audit of internal control over financial reporting would be required to:
A)rely on the work of internal auditors.
B)test all of the entity's internal controls.
C)form an opinion on the effectiveness of internal control.
D)randomly identify accounts for an audit of internal control.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of avoided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher:
A)constitutes a deviation.
B)has been properly voided.
C)cannot be located.
D)represents an immaterial dollar amount.
Q2) A Type II error is the risk of incorrect acceptance.
A)True
B)False
Q3) For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control?
A)Tolerable deviation rate and confidence level.
B)Expected deviation rate and confidence level.
C)Population size and tolerable deviation rate.
D)Tolerable deviation rate and expected deviation rate.
Q4) Define Type I and Type II errors.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) In monetary-unit sampling, population size is:
A)the dollar balance in an account.
B)the number of items in an account.
C)unrelated to sample size.
D)included in the denominator of the formula to determine sample size.
Q2) Monetary-unit sampling is said to eliminate the need to stratify the sample because:
A)sample items are selected in proportion to their dollar amount.
B)the risk of incorrect acceptance is inversely related to sample size.
C)tolerable misstatement is considered when determining sample size.
D)the upper limit on misstatements can be computed based on statistical principles.
Q3) Which one of the following statements is true regarding two random samples, drawn in the same way, from the same population, one of size 30 and one of size 300?
A)The two samples are expected to have the same sample mean.
B)The larger sample is more likely to produce a large sample mean.
C)The smaller sample will have a smaller 95% confidence interval for the mean.
D)The smaller sample will, on average, produce a lower estimate of the variance of the population.
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Page 11
Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) A positive confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.
A)True
B)False
Q2) An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following?
A)One of the cashiers has been covering a personal embezzlement by lapping.
B)One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C)One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file.
D)The credit manager has misappropriated remittances from customers whose accounts have been written off.
Q3) What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) Which of the following audit procedures is least likely to detect an unrecorded liability?
A)Analysis and recomputation of interest expense.
B)Analysis and recomputation of depreciation expense.
C)Mailing of standard bank confirmation forms.
D)Reading of the minutes of meetings of the board of directors.
Q2) Review the cash disbursements journal for reasonableness of account distribution
A)Completeness
B)Occurrence
C)Accuracy
D)Cutoff
E)Authorization
F)Classification
Q3) Identify the primary functions in the purchases cycle and describe each function. Functions in the purchasing process include:
Q4) After the controls are tested, the auditor sets the achieved level of control risk.
A)True
B)False
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Chapter 12: Auditing the Human Resource Management Process
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Q1) Which of the following is the best way for an auditor to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
A)Examine personnel records for accuracy and completeness.
B)Examine employees' names listed on payroll accounting records.
C)Make a surprise observation of the company's regular distribution of paychecks.
D)Visit the working areas and confirm with employees their badge or identification numbers.
Q2) A substantive test of transactions to test the completeness assertion includes:
A)tracing a sample of time sheets to the payroll register.
B)testing a sample of payroll checks for the presence of an authorized time sheet.
C)testing postings to the payroll register for a sample of payroll checks.
D)recomputing the accuracy of a sample of payroll checks.
Q3) Inherent risk associated with officer compensation is frequently set high because officers have motive and opportunity to take advantage of their high-ranking offices in the form of excessive compensation.
A)True
B)False
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Page 14
Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) Once the controls in the inventory system have been tested, the auditor sets the level of control risk.
A)True
B)False
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) The audit of the inventory management process is affected by the audit results from multiple other processes. Identify the processes, other than the inventory management process, that affect the audit of inventory and explain how each affect the audit of inventory.
Q4) The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.
A)True
B)False
Q5) 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) Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining Tennessee's financial statements would most likely learn of this error by:
A)discussing Tennessee's capitalization policies with its controller.
B)reviewing the titles and descriptions for all construction work orders issued during the year.
C)observing during the physical inventory observation that the warehouse has been painted.
D)examining in detail a sample of construction work orders.
Q2) List two ways an auditor can test the existence and completeness of insurance policies.
Q3) Assets no longer used in operations are accounted for in essentially the same manner as those used in operations.
A)True B)False
Q4) Substantive analytical procedures are commonly used to test prepaid accounts. A)True B)False
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders' Equity, and Income
Statement Accounts
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Sample Questions
Q1) Accounts Receivable
A)Depreciation expense
B)Insurance expense
C)Investment income
D)Interest expense
E)Bad debt expense
Q2) A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to:
A)request a statement from the bond trustee as to the amount of the bonds issued and outstanding.
B)confirm the results of the issuance with the underwriter or investment banker.
C)trace the cash received from the issuance to the accounting records.
D)verify that the net cash received is credited to an account entitled "Bonds Payable."
Q3) The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.
A)True
B)False
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the:
A)check register for the last month is reviewed.
B)cutoff bank statement is reconciled.
C)bank confirmation is reviewed.
D)search for unrecorded liabilities is performed.
Q2) For each test of transactions and each test of account balances for investments listed below, identify the assertion for which the test provides evidence.
1. Determine whether there has been any permanent impairment in the value of the cost basis of an individual security.
2. Inspect securities if they are maintained by the entity or obtain a confirmation from an independent custodian.
3. Search for purchases of securities by examining transactions for a few days after year-end.
4. Examine brokers' advices for a sample of securities purchased during the year.
Q3) Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.
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Chapter 17: Completing the Audit Engagement
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Q1) When obtaining evidence regarding litigation against an entity, the CPA would be least interested in determining:
A)an estimate of when the matter will be resolved.
B)the period in which the underlying cause of the litigation occurred.
C)the probability of an unfavorable outcome.
D)an estimate of the potential loss.
Q2) Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?
A)Significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters.
B)Significant unusual transactions and critical estimates, but not management's consultation with other accountants about significant accounting matters.
C)Management's consultation with other accountants about significant accounting matters but not significant unusual transactions and critical estimates.
D)Neither significant unusual transactions, critical estimates, nor management's consultation with other accountants about significant accounting matters.
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Chapter 18: Reports on Audited Financial Statements
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Q1) A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:
A)read the financial statements of the current period.
B)read the financial statements of the past five years.
C)obtain a letter of representations from the current-year, successor auditor.
D)read the financial statements of the current period and obtain a letter of representation from the management of the entity and from the current-year, successor auditor.
Q2) When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?
A)When the independent auditor with sufficient appropriate evidence believes the financial statements are not prepared in accordance with GAAP.
B)When the auditor was unable to observe the taking of the physical inventory.
C)When the auditor is not independent.
D)When the auditor has performed insufficient auditing procedures to express an opinion.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Q1) Professionalism refers to the conduct, aims, or qualities that characterize a given profession.
A)True
B)False
Q2) Which of the following is allowable for a CPA?
A)A used car loan from a banking client where the client has a lien on the car.
B)An uncollateralized signature loan from a client.
C)Owning more than five percent of the outstanding shares of client stock in a retirement account.
D)The audit engagement partner (or partner equivalent)serves on the client's audit committee.
Q3) A CPA, while performing an audit, strives to achieve independence in appearance in order to:
A)reduce risk and liability.
B)meet the minimum requirements of the code of professional conduct.
C)become independent in fact.
D)maintain public confidence in and reliance on the profession.
Q4) Interpretations of Rules of Conduct are enforceable.
A)True
B)False
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Chapter 20: Legal Liability
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Q1) To prevail in a suit alleging negligence, a third party must prove that the auditor had a duty to the auditor's client to exercise due care.
A)True
B)False
Q2) Auditors can be held liable under two classes of law when sued by clients, investors, creditors, or the government. Identify and briefly explain both classes of law.
Q3) An auditor, using the same degree of due care as other members of the profession, fails to identify an inadequate allowance for bad debts. This occurrence is an example of:
A)negligence.
B)fraud.
C)an error in judgment.
D)constructive negligence.
Q4) This act increased legal protections available to whistleblowers.
A)Sarbanes-Oxley Act of 2002.
B)Securities Act of 1933.
C)Securities Act of 1934.
D)Securities Litigation Uniform Standards Act of 1998.
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22
Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Q1) Internal auditors fall into two primary categories-assurance services and consulting services. Briefly explain these two categories in relation to internal auditors.
Q2) Examples of attest engagements include examination, review, and agreed-upon procedures engagements.
A)True
B)False
Q3) IIA Standards include:
A)attribute standards.
B)performance standards.
C)interpretations.
D)both attribute standards and performance standards.
Q4) Accepting an engagement to compile a financial projection for a public company most likely would be inappropriate if the projection were to be distributed to:
A)a bank with which the entity is negotiating for a loan.
B)a labor union with which the entity is negotiating a contract.
C)the principal stockholder, to the exclusion of the other stockholders.
D)all stockholders of record as of the report date.
Q5) How has the advancement in technology led to the creation of the Trust Services?
Page 23
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