Professional Ethics in Auditing Practice Questions
Course Introduction
This course provides an in-depth exploration of ethical principles and professional standards essential for auditors. It examines the role of ethical decision-making in the auditing process, the importance of integrity, objectivity, confidentiality, and professional behavior, and addresses challenges such as conflicts of interest and auditor independence. Through case studies and real-world scenarios, students learn how to identify ethical dilemmas, apply relevant codes of conduct, and understand the legal and regulatory framework guiding auditors' responsibilities to stakeholders. By the end of the course, students are equipped to approach their auditing practice with a strong ethical foundation and a commitment to upholding the credibility of the profession.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 8th Edition by William F. Messier
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Sample Questions
Q1) 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
Q2) Conflicts of interest often occur between absentee owners and managers.
A)True
B)False
Answer: True
Q3) Which of the following best describes the concept of audit risk?
A) The risk of the auditor being sued because of association with an audit client.
B) The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.
C) The overall risk that a material misstatement exists in the financial statements.
D) The risk that auditors use audit procedures that are inappropriate.
Answer: B
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) An "in-charge" auditor typically holds the rank of
A) Associate.
B) Senior.
C) Manager.
D) Partner.
Answer: B
Q2) The fourth PCAOB reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.The objective of the fourth standard is to prevent
A) An auditor from reporting on one basic financial statement and not the others.
B) An auditor from expressing different opinions on each of the basic financial statements.
C) Management from reducing its final responsibility for the basic financial statements.
D) Misinterpretations regarding the degree of responsibility the auditor is assuming.
Answer: D
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Chapter 3: Audit Planning,Types of Audit Tests,and Materiality
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Sample Questions
Q1) An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts.The auditor could most likely have been alerted to this fraud by
A) Scanning the general journal for unusual entries.
B) Performing a revenue cutoff test at year-end.
C) Tracing a sample of journal entries to the general ledger.
D) Examining documentary evidence of sales returns and allowances recorded after year-end.
Answer: A
Q2) An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if
A) The payments violated the client's policies regarding the prevention of illegal acts.
B) The client receives financial assistance from a federal government agency.
C) Documentation that is necessary to prove that the bribes were paid does not exist.
D) Management fails to take the appropriate remedial action.
Answer: D
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Page 5
Chapter 4: Risk Assessment
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Sample Questions
Q1) The auditor is most likely to presume that a high risk of a fraud exists if
A) The entity is a multinational company that does business in numerous foreign countries.
B) The entity does business with several related parties.
C) Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.
D) Inadequate employee training results in lengthy EDP exception reports each month.
Q2) You are the senior on an audit of Two Be Gone,a large public company.The company recently completed an acquisition of its fifth largest competitor.What risks might this present?
How will you,the auditor,respond to these risks (i.e.what actions should you take)?
Q3) Engagement risk can be eliminated by
A) Establishing policies for client acceptance and continuance.
B) Lowering audit risk.
C) Lowering materiality.
D) Engagement risk cannot be eliminated.
Q4) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
A) Quick assets divided by accounts payable.
B) Accounts receivable divided by inventory.
C) Interest payable divided by interest receivable.
D) Total debt divided by total assets.
Q2) Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.
A)True
B)False
Q3) All of the following are typically in the current file except:
A) Adjusting journal entries.
B) Copies of the audit report.
C) Chart of accounts.
D) Lead schedules.
Q4) Who is responsible for the financial statements? What does the term "assertions" mean?
Identify the assertion categories and the specific assertions for each category.
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) Internal control includes monitoring of controls.
A)True
B)False
Q2) What are four potential tools available to the auditor for documenting their understanding of a client's system of internal control?
Q3) As part of gaining an initial understanding of internal control,an auditor is required to do all of the following except:
A) Consider factors that affect the risk of material misstatement.
B) Ascertain whether internal control policies and procedures have been placed in operation.
C) Identify the types of potential misstatements that can occur.
D) Obtain knowledge about the operating effectiveness of the internal control.
Q4) An auditor is least likely to test the internal controls that provide for
A) Approval of the purchase and sale of marketable securities.
B) Classification of revenue and expense transactions by product line.
C) Segregation of the functions of recording disbursements and reconciling the bank account.
D) Comparison of receiving reports and vendors' invoices with purchase orders.
Q5) 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) In a public company,management's report on internal control must be signed by the members of the audit committee.
A)True
B)False
Q2) A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is
A) A material weakness.
B) A significant deficiency.
C) An insignificant deficiency.
D) A probable deficiency.
Q3) 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.
Q4) Based on PCAOB guidelines,the audit of ICFR and financial statements audit should be conduced as an "integrated audit."
A)True
B)False
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) Define Type I and Type II errors.
Q2) In attributes sampling,a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample?
A) Population size.
B) Tolerable deviation rate.
C) Expected population deviation rate.
D) Standard deviation.
Q3) Jones,CPA,believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%.In the review of client invoices,Jones should use
A) Discovery sampling.
B) Attributes sampling.
C) Stratified sampling.
D) Variables sampling.
Q4) Which of the following risks is related to efficiency of testing?
A) The risk of incorrect rejection.
B) Inherent risk.
C) The risk of incorrect acceptance.
D) None of the above.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) An auditor is performing substantive procedures of pricing and extension of perpetual inventory balances consisting of a large number of items.Past experience indicates numerous pricing and extension errors.Which of the following statistical sampling approaches is most appropriate?
A) Unstratified mean-per-unit.
B) Monetary-unit sampling.
C) Stop or go.
D) Difference projection.
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) The purpose of audit sampling is to draw inferences about the entire population from the results of a sample.
A)True
B)False
Q4) What is one advantage and one disadvantage of classical variables sampling?
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Q5) Describe two advantages and two disadvantages of monetary-use sampling (MUS).
Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) Identify whether the following tests are tests of controls,substantive analytical procedures,tests of details of transactions,or tests of details of account balances:
1)Select a sample of customer receivables and send positive confirmations to each customer.
2)Examine monthly bank reconciliations for the internal auditors' initials indicating internal verification and review of the reconciliation.
3)Select a sample of entries in the sales journal and trace each to the shipping documents.
4)Compute receivable turnover and compare with previous years.
5)For a sample of new customers,determine whether credit approval was properly administered and documented.
6)Compare the dates on a sample of sales invoices with the dates of shipment and the dates the transactions were recorded in the sales journal.
Q2) Revenue must be realized (or realizable)and earned to be recognized.
A)True
B)False
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) The accounts payable department receives the purchase order form to accomplish all of the following except to:
A) Compare invoice price to purchase order price.
B) Ensure that the purchase had been properly authorized.
C) Ensure that the goods had been received by the party requesting the goods.
D) Compare quantity ordered to quantity purchased.
Q2) Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable?
A) Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
B) Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices.
C) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
D) Confirming accounts payable balances with known suppliers who have zero balances.
Q3) Identify the primary functions in the purchases cycle and describe each function.
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Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) An effective system of internal control over the payroll function would include
A) Verification of agreement of job time tickets with employee clock card hours by a payroll department employee.
B) Reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.
C) Custody of rate authorization records by the supervisor of the payroll department.
D) Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resource department.
Q2) There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers.
A)True
B)False
Q3) Proper segregation of duties is critical for the human resource management process.
A)True
B)False
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Sample Questions
Q1) To gain assurance that all inventory items in a client's inventory listing schedule are valid,an auditor most likely would trace
A) Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule.
B) Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.
C) Items listed in the inventory listing schedule to inventory tags and the count sheets.
D) Items listed in receiving reports and vendors' invoices to the inventory listing schedule.
Q2) We know from cost accounting that there are three components that make up the standard costs for inventory.Explain how an auditor could test each of these components for a company that manufactures pillows.
Q3) Which of the following departments typically approves purchase requisitions?
A) Raw materials stores.
B) Cost accounting.
C) Inventory management.
D) IT.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Sample Questions
Q1) For each analytical procedure listed below,identify a potential misstatement in the property management accounts it could help find.
a.Compute the ratio of depreciation expense to the related property,plant,and equipment accounts and compare to prior years' ratios
b.Compare monthly or annual repairs and maintenance with previous years
c.Compute ratio of insurance expense to the related property,plant,and equipment accounts and compare to prior years' ratios
Q2) The cutoff assertion for prepaid insurance
A) Is never tested because amounts always are immaterial.
B) Is best tested as part of the testing of property and equipment purchasing.
C) Is best tested exclusively by sending confirmations to vendors.
D) Is best tested by recomputing the unexpired portion of insurance policies in effect.
Q3) Reviewing capital budgets and comparing the amounts spent with amounts budgeted is an example of a substantive analytical procedure for auditing prepaid accounts.
A)True
B)False
Page 16
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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) The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.
A)True
B)False
Q2) During an examination of a public company,the auditor should obtain written confirmation regarding bond transactions from the
A) Bond broker.
B) Client's attorney.
C) Internal auditors.
D) Trustee.
Q3) The repurchase of stock includes the reacquisition of stock (treasury stock),but not the retirement of stock.
A)True
B)False
Q4) The occurrence assertion is being tested when the auditor vouches stock repurchases to the canceled stock certificates.
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 imprest cash account is
A) Used for investing in marketable securities.
B) The principal cash account for an entity.
C) One that contains a stipulated amount of money and is used for limited purposes.
D) The principal checking account for a branch of an entity.
Q2) Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks?
A) Review the composition of authenticated deposit slips.
B) Review subsequent bank statements received directly from the banks.
C) Prepare a schedule of bank transfers.
D) Prepare year-end bank reconciliations.
Q3) In a manufacturing company,which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?
A) Confirmation from the broker.
B) Inspection and count of stocks and bonds.
C) Vouching all changes during the year to brokers' advices and statements.
D) Examination of canceled checks issued in payment of securities purchased.
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) An auditor's client has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due.The client refuses to seek a waiver from the bond trustee.Request for immediate payment is not considered likely.Under these circumstances,the auditor must
A) Require classification of bonds payable as a current liability.
B) Contact the bond trustee directly.
C) Disclose the situation in the auditor's report.
D) Obtain an opinion from the company's attorney as to the likelihood of the trustee's enforcement of the requirement.
Q2) State the two primary purposes of the client letter of representation.
Q3) An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against a client except the:
A) Period in which the underlying cause for legal action occurred.
B) Probability of an unfavorable outcome.
C) Jurisdiction in which the matter will be resolved.
D) Existence of a situation indicating an uncertainty as to the possible loss.
Q4) What information is typically requested in a legal letter to a client's attorney?
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time.If the entity's financial statements adequately disclose its financial difficulties,the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s)
A) "Reasonable period of time, not to exceed one year" and "going concern."
B) "Reasonable period of time, not to exceed one year" but not "going concern."
C) "Going concern" but not "reasonable period of time, not to exceed one year."
D) Neither "going concern" nor "reasonable period of time, not to exceed one year."
Q2) Which of the following parties is responsible for the fairness of the representations made in financial statements?
A) Client's management.
B) Independent auditor.
C) Audit committee.
D) AICPA.
Q3) Discuss the conditions that prohibit the auditor from issuing an unqualified/unmodified opinion and the types of reports that the auditor may issue for a financial statement audit.
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Chapter 19: Professional Conduct,Independence,and Quality Control
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Sample Questions
Q1) A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria.This policy is evidence of the firm's adherence to which of the following prescribed standards?
A) Professional ethics.
B) Supervision and review.
C) Accounting and review services.
D) Quality control.
Q2) If a CPA owns an insurance policy issued by an attest client,independence would be considered impaired,even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.
A)True
B)False
Q3) In auditing a privately held entity,an auditor must follow the professional standards established by all of the following except:
A) The AICPA's Auditing Standards Board.
B) The Professional Code of Conduct.
C) The Independence Standards Board.
D) The PCAOB.
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Chapter 20: Legal Liability
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Sample Questions
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) Why are plaintiffs motivated to bring actions under RICO?
A) It pertains exclusively to auditors' actions.
B) It guarantees that cases will be heard in state courts.
C) It provides for treble damages.
D) It holds auditors to standards that exceed reasonable assurance.
Q3) Common law
A) Requires that the CPA guarantee their work.
B) Requires that the auditor performs work with due care.
C) Requires that the auditor performs work with due diligence.
D) Does not recognize the concept of constructive fraud.
Q4) An auditor can be guilty under federal statutory law if s/he was reckless in performance of her/his professional duties.
A)True
B)False
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Sample Questions
Q1) A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain
A) A statement of limitations on the use of the report.
B) An opinion about whether management's assertion is fairly stated.
C) Negative assurance that control risk has not been assessed.
D) An acknowledgement of responsibility for the sufficiency of the procedures.
Q2) Attestation standards provide guidance for performing assurance services with respect to several types of engagements,including prospective financial statements.
A)True
B)False
Q3) For an auditor to examine management's assertions about the effectiveness of internal control in an attestation engagement,three conditions are necessary.Briefly explain them.
Q4) Trust Service principles cover
A) Hardware design.
B) Confidentiality.
C) Software design.
D) Physical protection of computer systems.
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