Internal Auditing Test Questions
Course Introduction
Internal Auditing focuses on the principles and practices of evaluating an organizations internal controls, risk management, and governance processes. The course covers the role of internal auditors, audit planning, evidence gathering, and reporting, as well as standards and ethical considerations established by the Institute of Internal Auditors (IIA). Students learn how to assess risks, identify control weaknesses, and recommend improvements to enhance organizational efficiency, compliance, and accountability through practical case studies and real-world scenarios.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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79 Verified Questions
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Sample Questions
Q1) Large businesses, especially, have the ability to reduce information risk. Which of the following is not a way for a large business to reduce information risk?
A) Paying higher interest rates on loans.
B) The user verifies the information they need by any possible means.
C) The user of information shares information risk with management.
D) Having an independent audit performed of the financial statements.
Answer: A
Q2) Which of the following is an accurate statement regarding assurance services?
A) Assurance services must be performed by a CPA.
B) An attestation service is not a type of assurance service.
C) Assurance services improve the quality of information for decision makers.
D) Assurance services can only be performed on financial data.
Answer: C
Q3) Which of the following is not a cause of information risk?
A) Society, today, is not as complex as it used to be.
B) Remoteness of information.
C) The volume and the complexity of data and exchange transactions.
D) The biases and the motives of the information provider.
Answer: A
Page 3
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Chapter 2: The CPA Profession
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Sample Questions
Q1) Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board.
A)True
B)False
Answer: False
Q2) ________ are referred to as U.S. generally accepted auditing standards (GAAS).
A) AICPA auditing standards
B) SEC auditing standards
C) PCAOB auditing standards
D) Sarbanes-Oxley standards
Answer: A
Q3) In 2017, the American Institute of CPAs joined with which of the following to form the Association of International Certified Public Accountants?
A) the Chartered Institute of Management Accountants
B) the Securities and Exchange Commission
C) the Public Accounting Oversight Board
D) the Japanese Institute of Certified Public Accountants
Answer: A
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Chapter 3: Audit Reports
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Sample Questions
Q1) Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but not consistency, and therefore do not require an explanatory paragraph in the audit report.
A)True
B)False
Answer: False
Q2) The highest level of materiality exists when A) users are likely to make incorrect decisions if they rely on the overall financial statements.
B) there has been a departure from GAAP.
C) amounts are material but do not overshadow the financial statements as a whole. D) a scope limitation has been imposed.
Answer: A
Q3) Client imposed restrictions on the audit always require 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) One of the main reasons people act unethically is that they choose to act selfishly.
A)True
B)False
Q2) Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same private company client if three criteria are met. Which of the following is not one of those criteria?
A) The client must accept full responsibility for the financial statements.
B) The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission.
C) The CPA must not assume the role of employee or of manager.
D) The CPA must follow applicable auditing standards.
Q3) Interpretations of the rules regarding independence allow an auditor to serve as
A) a director or officer of an audit client.
B) an underwriter for the sale of a client's securities.
C) a trustee of a client's pension fund.
D) an honorary director for a not-for-profit charitable or religious organization.
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Chapter 5: Legal Liability
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Sample Questions
Q1) Auditors do not face legal exposure related to their client's filings of Form 10-Q quarterly information or Form 8-K unusual events with the Securities and Exchange Commission like they do for annual report filings under the Securities Exchange Act of 1934.
A)True
B)False
Q2) Three approaches to the application of the foreseen users' concept are (1) the Credit Alliance approach, (2) the Restatement of Torts approach, and (3) the foreseeable user approach. Summarize each of these three approaches.
Q3) If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for
A) the penalties the client owes the IRS.
B) the penalties and interest the client owes.
C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged.
D) the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.
Q4) Distinguish between constructive fraud and fraud.
Q5) Distinguish between what is meant by business failure and audit failure.
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Chapter 6: Audit Responsibilities and Objectives
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Sample Questions
Q1) It is possible that an audit performed in accordance with generally accepted auditing standards may fail to detect a material misstatement in the financial statements.
A)True
B)False
Q2) As the impact from noncompliance is further removed from affecting the financial statements, the less likely the auditor is to become aware of or recognize noncompliance when auditing the financial statements.
A)True
B)False
Q3) In order to mitigate anchoring, the auditor should consult with others, but not consider management bias.
A)True
B)False
Q4) It is not difficult for the auditor to quantify a measure of materiality while performing the audit.
A)True
B)False
Q5) List the four phases of a financial statement audit.
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Chapter 7: Audit Evidence
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Sample Questions
Q1) Confirmations are among the most expensive type of evidence to obtain.
A)True
B)False
Q2) Auditing standards require that records for audits of private companies be retained for a minimum of seven years.
A)True
B)False
Q3) Which of the following best describes one of the primary objectives of audit documentation?
A) defend against claims of a deficient audit
B) provide a basis for reviewing the work of subordinates
C) provide reasonable assurance that the audit was conducted in accordance with auditing standards
D) provide additional support of recorded amounts to the client
Q4) Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective.
A)True
B)False
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Chapter 8: Audit Planning and Materiality
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172 Verified Questions
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Sample Questions
Q1) A tour of the client's facilities provides the auditor an opportunity to A) meet key personnel.
B) observe operations.
C) assess physical safeguards over assets.
D) all of the above.
Q2) Client business risk is the risk that the entity fails to achieve its objectives or execute its strategies.
A)True
B)False
Q3) The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is A) they got lucky the landlord hasn't noticed the lack of payments.
B) the landlord has weak internal controls over billings.
C) a related party transaction in which a major shareholder owns the office tower.
D) Matthews Company is engaging in fraudulent activities.
Q4) What documents do auditors routinely obtain to aid in their understanding of a client's governance system?
Briefly discuss each of these documents.
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Chapter 9: Assessing the Risk of Material Misstatement
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Sample Questions
Q1) The auditor must perform substantive tests related to assertions deemed to have significant risks.
A)True
B)False
Q2) There is a direct relationship between acceptable audit risk and planned detection risk.
A)True
B)False
Q3) Name some examples where the auditor accepts some level of uncertainty in performing the audit function.
Q4) Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate.
II) is dependent on inherent risk and business risk.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q5) The auditing profession has established guidelines for setting inherent risk. A)True
B)False
11
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) Collusion and false documentation make detection of fraud by management a challenge.
A)True
B)False
Q2) Incentives and opportunities are two conditions that are generally present when financial statement fraud occurs.
A)True
B)False
Q3) Discuss the need for maintaining professional skepticism during an audit.
Q4) Most frauds are discovered by accident.
A)True
B)False
Q5) Auditing standards require that the auditor presume that there is a risk of fraud in revenue recognition.
A)True
B)False
Q6) What types of inquiry techniques might an auditor use when making inquiries of client personnel?
What are the uses of each technique?
Q7) List and briefly describe the three conditions for fraud.
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Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) Backup and contingency plans should also identify alternative hardware that can be used to process company data.
A)True
B)False
Q2) One of management's broad objectives in designing an effective internal control system is to help ensure that the organization follows laws and regulations impacting the organization.
A)True
B)False
Q3) The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.
A)True
B)False
Q4) LANs link equipment within a single or small cluster of buildings and are used within a company.
A)True
B)False
Q5) List the four underlying principles of risk assessment per the COSO framework.
Q6) Identify the six categories of general controls and give one example of each.
Page 13
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) Name three types of documents which auditors commonly use to obtain and to document their understanding in the audit working paper of the design of internal controls.
Q2) Which of the following is an accurate statement relating to the extent of procedures?
A) If an auditor wants a lower assessed control risk than the preliminary assessed control risk, the number of controls tested increases while the extent of the tests for each control decrease.
B) The extent of testing depends on the frequency of the operation of the controls.
C) All controls must be tested only at year-end.
D) The frequency of testing is the same for both manual and computer controls.
Q3) Flowcharts are harder to read and update than narratives. A)True
B)False
Q4) The two disadvantages of using questionnaires are their inability to provide an overview of the system and their inapplicability for some audits, especially smaller ones.
A)True
B)False
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) The auditor has determined that a key control in the audit of the sales and collection cycle is that recorded sales are supported by authorized shipping documents and approved customer orders. What typical test of controls should be used in this situation?
A) Examine a sample of duplicate sales invoices to determine that each one is supported by an authorized shipping document and approved customer order.
B) Observe whether shipping documents are forwarded daily to billing and observe when they are billed.
C) Examine a sample of sales invoices and agree prices to the authorized computer price list.
D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and general ledgers.
Q2) Auditors can perform tests of controls separately from all other tests; therefore, it is inefficient to perform tests of controls, separately, from substantive tests of transactions. A)True
B)False
Q3) List each of the five types of audit tests.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) In planning the audit, an auditor takes three basic steps in determining the audit procedures to be performed for any business cycle or class of transactions in order to gather audit evidence concerning possible misstatement due to error or fraud. List those three basic steps below.
Q2) One of the most important aspects of billing is ensuring all shipments made are billed (completeness); inaccurate billing can always be corrected at a later date.
A)True
B)False
Q3) Which of the following is not a key control for sales and cash receipts?
A) active board of directors
B) adequate separation of duties
C) internal verification procedures
D) adequate documents and records
Q4) It is not important that the auditor evaluate and test a client' assertions early in the audit with regards to significant or unusual sales transactions, as long as the auditor evaluates and tests these assertions before the audit is completed.
A)True
B)False
Page 16
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) Audit sampling can be applied for reviewing sales transactions for large and/or unusual amounts, and also for observing whether the duties and responsibilities of the receivables clerk are separate from the handling of cash (a test of control).
A)True
B)False
Q2) There are 14 steps to attributes sampling, divided into three sections: plan the sample, select the sample and perform the audit procedures, and evaluate the results. Discuss the three steps that comprise the "evaluate the results" section.
Q3) As the auditor performs statistical procedures and finds material weaknesses in internal controls, it is important to communicate in writing to those at the audit client charged with governance.
A)True
B)False
Q4) Deviation rate and tolerable deviation are used instead of exception rate when referring to tests of controls.
A)True
B)False
Q5) List the two ways auditors can control sampling risk.
Page 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) The auditor can use audit data analytics to identify potential situations where sales returns are understated or the allowance for doubtful accounts is understated for specific customers.
A)True
B)False
Q2) Negative confirmations normally require a larger sample size than positive confirmations.
A)True
B)False
Q3) The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.
A)True
B)False
Q4) The most effective audit evidence gathered for accounts receivable is the A) detail tie-in of the records.
B) analysis of the allowance for doubtful accounts.
C) confirmation of accounts receivable.
D) examination of sales invoices.
Page 18
Q5) Describe how the auditor tests the accuracy objective for accounts receivable.
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) Which of the following is a correct statement?
A) When internal controls are effective, control risk can be reduced, and therefore the auditor will decrease the ARIA.
B) There is a direct relationship between ARIA and the required sample size.
C) A lower control risk requires a lower ARO in testing the controls.
D) ARO measures the auditor's desired assurance for an account balance.
Q2) Why do auditors find MUS appealing?
A) MUS increases the likelihood of selecting a balance of high and low dollar items.
B) MUS is easy to use in the audit environment.
C) MUS provides a nonstatistical, rather than a statistical, conclusion.
D) When misstatements are found, MUS rarely produces bounds in excess of materiality.
Q3) The purpose of stratification is to permit auditors to emphasize certain aspects of a population and deemphasize others.
A)True
B)False
Q4) How might auditors include negative balances when using monetary unit sampling to evaluate a population?
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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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Q1) The main focus taken by the auditor in verifying liability balances is on the discovery of I. understated liabilities. II) omitted liabilities.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all A) merchandise received. B) vendors' invoices.
C) canceled checks.
D) receiving reports.
Q3) The acquisition and payment cycle consists of one class of transactions. A)True B)False
Q4) Discuss the circumstances in which it is desirable to send confirmation requests to the client's vendors.
Q5) What are the three most important controls over cash disbursements? Page 20
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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) A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation, and accumulated depreciation is the
A) acquisitions schedule.
B) depreciation schedule.
C) fixed asset master file.
D) file of purchase requisitions.
Q2) Which of the following is a substantive analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off?
A) Compare depreciation expense divided by gross equipment cost with previous years.
B) Compare gross manufacturing cost divided by some measure of production with previous years.
C) Compare accumulated depreciation divided by gross equipment cost with previous years.
D) Compare annual repairs and maintenance accounts with previous years.
Q3) When auditing disposals of property, plant, and equipment, the search for unrecorded disposals is essential. State the four audit procedures frequently used for verifying disposals.
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) Discuss each of the following primary documents and records used in the personnel and employment function in the payroll and personnel cycle: human resource records, deduction authorization form, and the rate authorization form.
Q2) For good internal control, the payroll function should be independent of the human resources department.
A)True
B)False
Q3) In most accounting systems, accruals for salaries and wages are recorded by adjusting entries at the end of the period for any earned-but-unpaid labor related costs.
A)True
B)False
Q4) Which of the following is a substantive test of transactions?
A) Review personnel policies.
B) Account for a sequence of payroll checks.
C) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
D) Examine printouts of transactions rejected by the computer as having invalid employee IDs.
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?
A) Observe the condition of inventory during the client's physical count.
B) Compare the condition of inventory from the previous year's count to the current year.
C) Compare inventory turnover from the previous year's inventory to the current year's inventory.
D) Reconcile the inventory counts to the cost accounting records.
Q2) Internal controls over cost accounting records are very similar among companies.
A)True
B)False
Q3) Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned.
Q4) The auditor is concerned with four aspects of cost accounting, including A) documents and records for transferring inventory.
B) perpetual inventory master files.
C) unit cost records.
D) all of the above.
Q5) 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) To determine if notes payable is included in the proper period, the auditor should
A) trace the cash received from the issuance to the accounting records.
B) examine duplicate copies of notes to determine whether the notes were dated on or before the balance sheet date.
C) examine duplicate copies of notes for principal and interest rates.
D) trace the individual notes payable to the master file.
Q2) If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock
A) surrendered and canceled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) sold at a price above par during the year.
Q3) Accounts including preferred stock, additional paid-in capital, and treasury stock are not included in the capital acquisition and repayment cycle.
A)True
B)False
Q4) Discuss the four key controls over notes payable.
Page 25
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) Which of the following cycles does not affect cash in bank?
A) capital acquisitions cycle
B) inventory and warehousing
C) payroll and personnel cycle
D) acquisitions and disbursements
Q2) The bank reconciliation control is enhanced when a qualified employee reviews the monthly reconciliation as soon as possible after its completion.
A)True
B)False
Q3) Analytical procedures may be used to assess the year-end balances for financial instruments.
A)True
B)False
Q4) The auditor is generally concerned about the realizable value and the rights to cash.
A)True
B)False
Q5) Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank statement in the audit of cash.
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Chapter 24: Completing the Audit
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Sample Questions
Q1) The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time
A) beginning with the balance sheet date and ending with the date of the auditor's report.
B) beginning with the start of the fiscal year under audit and ending with the balance sheet date.
C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report.
D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.
Q2) Distinguish between contingent liabilities and commitments.
Q3) As part of phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation and disclosure-related objectives.
A)True
B)False
Q4) State the three purposes of the management representation letter.
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Chapter 25: Other Assurance Services
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Q1) A nonaudit engagement in which the accountant undertakes to present, in the form of financial statements, information that is the representation of management, without undertaking to express any assurance on the statements is called a review engagement.
A)True
B)False
Q2) Which of the following is not an element of the examination of prospective financial statements?
A) evaluating the preparation of the prospective financial statements
B) understanding internal controls
C) evaluating the support underlying the assumptions
D) issuing an examination report
Q3) Statements on Standards for Accounting and Review Services (SSARS) govern the CPA's association with unaudited financial statements of nonpublic companies.
A)True
B)False
Q4) Discuss the six Statements on Standards for Accounting and Review Services (SSARS) requirements that must be met when an accountant is performing a compilation of financial statements.
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Chapter 26: Internal and Governmental Financial Auditing and Operational Auditing
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Sample Questions
Q1) The primary source of authoritative literature for doing government audits is the A) Purple Book.
B) Yellow Book.
C) Green Book.
D) Red Book.
Q2) The American Institute of Certified Public Accountants (AICPA) has established a highly regarded certification program resulting in the designation of Certified Internal Auditor (CIA).
A)True
B)False
Q3) An audit designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements would be called a(n)
A) performance audit.
B) management audit.
C) operational audit.
D) compliance audit.
Q4) List the three purposes of a program audit.
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