Professional Practice in Auditing Test Questions
Course Introduction
Professional Practice in Auditing is a comprehensive course designed to equip students with an in-depth understanding of audit processes, methodologies, and standards used in the professional environment. The course covers the theoretical foundations of auditing, ethical considerations, risk assessment, internal control evaluation, audit planning, and the execution and documentation of audit work. Students engage in case studies and practical applications to develop their analytical, problem-solving, and communication skills necessary for real-world audit assignments. Emphasis is placed on current trends, legal and regulatory frameworks, and the role of auditors in ensuring accountability, transparency, and integrity in financial reporting.
Recommended Textbook
Auditing and Assurance Services 17th edition by Alvin A. Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors.
Answer: The roles of all four types of auditors are similar in that they involve the accumulation and evaluation of evidence about information to ascertain and report on the degree of correspondence between the information and established criteria. The differences in their roles center around the information audited and the criteria used to evaluate that information. Independent auditors primarily audit companies' financial statements. GAO auditors' primary responsibility is to perform the audit function for Congress. IRS auditors are responsible for the enforcement of federal tax laws. Internal auditors primarily perform operational and compliance audits for their employing company.
Q2) Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence.
A)True
B)False
Answer: False
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Chapter 2: The CPA Profession
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Sample Questions
Q1) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor fulfills several performance responsibilities, including
A) complying with the AICPA Code of Professional Conduct.
B) issuing a written report on the financial statements.
C) determining and applying materiality levels.
D) having the appropriate competence to perform the audit.
Answer: C
Q2) Similar to the Financial Accounting Standards Board (FASB) Codification, the AICPA has codified the Statement of Auditing Standards.
A)True
B)False
Answer: True
Q3) Small local CPA Firms are allowed under Sarbanes-Oxley and the Securities and Exchange Commission a special exemption to perform audits of publicly-listed firms.
A)True
B)False
Answer: False
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4
Chapter 3: Audit Reports
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Sample Questions
Q1) When there is a lack of consistent application in accounting principles, A) the nature and impact of the change should be adequately disclosed.
B) the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change.
C) the materiality of the change is evaluated based on the current year effect of the change.
D) all of the above.
Answer: D
Q2) It is typically more difficult to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP.
A)True
B)False
Answer: True
Q3) Materiality is essential when an auditor considers his/her determination of the appropriate report for a given set of circumstances.
A)True
B)False
Answer: True
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5
Chapter 4: Professional Ethics
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Q1) Under the interpretations to the AICPA Code, independence is considered to be impaired if fees remain unpaid for professional services provided more than six months before the date of the current year's report.
A)True
B)False
Q2) An attest client threatens the member with not awarding future additional engagements to the firm if the firm does not agree with the client on a particular accounting matter. This is an example of which type of threat to compliance with which of the rules under the AICPA's Code of Professional Conduct?
A) management participation
B) self-interest
C) self-review
D) undue influence
Q3) Threats to compliance with the AICPA's Code of Professional Conduct fall into seven broad categories. List and explain three of these categories.
Q4) Explain why there is a special need for ethical conduct in the auditing profession.
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Chapter 5: Legal Liability
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Q1) Which of the following is a true statement regarding auditors' liability?
A) The level of care is easy to determine in a review or compilation.
B) Engagement letters will relieve the auditor of all liability.
C) An auditor will always be guilty of negligence if they fail to uncover fraud.
D) The most common source of lawsuits against CPAs is from clients.
Q2) Which of the auditor's defenses against client suits contends no implied or expressed contract?
A) lack of duty
B) non-negligent performance
C) contributory negligence
D) absence of causal connections
Q3) The same defenses available to auditors under common-law suits filed by third parties-nonnegligent performance, lack of duty, and absence of causal connection-are not available to auditors for lawsuits under the Securities Act of 1934.
A)True
B)False
Q4) Discuss the sanctions the Securities and Exchange Commission can impose on auditors.
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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Q1) Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?
A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.
B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.
C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets.
D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.
Q2) An audit objective focused on transactions in the sales journal is a balance-related audit objective.
A)True
B)False
Q3) Describe what analytical procedures and tests of details of balances are and give an example of each.
Q4) List the four phases of a financial statement audit.
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8
Chapter 7: Audit Evidence
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Sample Questions
Q1) Which type of supporting schedule is designed to show the activity in a general ledger account during the entire period under audit?
A) trial balance
B) reconciliation of amounts
C) summary of procedures
D) analysis
Q2) State the three phases of the audit where analytical procedures can be performed and describe the specific procedures performed in each phase.
Q3) ________ is the auditor's examination of the client's documents and records to substantiate that the information is included in the financial statements.
A) Inspection
B) Recalculation
C) Observation
D) Verification
Q4) Why is the appropriateness of audit evidence obtained by the auditor important in forming an audit opinion?
Describe the qualities information should have to be considered appropriate by the auditor.
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Chapter 8: Audit Planning and Materiality
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Sample Questions
Q1) A related party transaction may be indicated when another company
A) subsidizes certain operating expenses of the company.
B) purchases its securities at their fair value.
C) loans to the company at market rates.
D) has had a distributor relationship with the company for 10 years.
Q2) A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.
Q3) Which of the following is the primary basis used to decide materiality for a profit-oriented entity?
A) net sales
B) net assets
C) net income before tax
D) all of the above
Q4) Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?
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Chapter 9: Assessing the Risk of Material Misstatement
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Q1) Which of the following is true regarding audit risk for segments?
A) Control risk must be assessed at the same level for all accounts.
B) Factors affecting inherent risk do not differ from account to account.
C) Acceptable audit risk is ordinarily assessed by the auditor during the substantive test of balances phase and is held constant for each major cycle and account.
D) In some cases, a lower acceptable audit risk may be more appropriate for one account than for others.
Q2) The application of professional skepticism consists of two primary components: a questioning mind and a critical assessment of the audit evidence obtained during the audit.
A)True
B)False
Q3) The statement that the auditor plans to accumulate evidence that there is only a 5 percent acceptable audit risk of failing to uncover misstatements exceeding performance materiality of $250,000 is a precise and meaningful statement.
A)True
B)False
Q4) Why do auditors use the audit risk model when planning an audit?
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Chapter 10: Fraud Auditing
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Sample Questions
Q1) Public Company Accounting Oversight Board auditing standards require the auditor of a public company to evaluate the effectiveness of the board of directors and the audit committee.
A)True
B)False
Q2) According to the Association of Certified Fraud Examiners (ACFE), the average company loses ________ percent of its revenues to fraud.
A) one
B) five C) ten
D) fifteen
Q3) Fraudulent financial reporting usually involves manipulation of amounts rather than disclosures.
A)True
B)False
Q4) Incentives and opportunities are two conditions that are generally present when financial statement fraud occurs.
A)True
B)False
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Chapter 11: Internal Control and Coso Framework
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Q1) Other countries around the world have passed similar legislation to the Sarbanes-Oxley Act regarding mandating management and auditor reporting on internal controls over financial reporting.
A)True
B)False
Q2) The effectiveness of automated controls depends solely on the competence of the personnel performing the controls.
A)True
B)False
Q3) The Sarbanes-Oxley Act requires either management of U.S. public companies or their auditors to report on the effectiveness of internal controls over financial reporting.
A)True
B)False
Q4) The audit committee of the board of directors must exercise oversight over the design and the performance of internal controls over financial reporting, as well as not delegating the responsibilities for these internal controls to management.
A)True
B)False
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Q1) 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
Q2) Controls that are applied throughout the accounting period must be tested both at an interim date and then again on the balance sheet date.
A)True
B)False
Q3) To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.
A)True
B)False
Q4) Key controls are not sufficient to achieve the transaction-related audit objectives. A)True
B)False
Q5) Discuss the advantages and benefits of using generalized audit software.
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Chapter 13: Overall Audit Strategy and Audit Program
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Q1) In order to promote audit efficiency, the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly?
A) substantive analytical procedures
B) risk assessment procedures
C) tests of controls
D) tests of details of balances
Q2) Tests of controls provide evidence about the likelihood for misstatements in a client's financial statements.
A)True
B)False
Q3) The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk.
A)True
B)False
Q4) Inherent risk can be extended to individual balance-related audit objectives.
A)True
B)False
Q5) 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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Q1) When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account, that employee may be suspected of
A) kiting.
B) lapping.
C) floating.
D) shorting.
Q2) Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?
A) granting of credit
B) shipment of goods
C) determination of discounts
D) selling of goods for cash
Q3) If a design test of controls for sales is, for example, testing internal controls are working to electronically indicate approval for customer orders after they have been approved for credit, the test of control is to examine the customer order for proper approval.
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) When choosing the appropriate acceptable risk of overreliance, the auditor needs to
A) rely on his/her professional judgment.
B) err on the side of conservatism.
C) consult the professional standards.
D) follow SEC guidelines.
Q2) The sampling unit is the physical unit that corresponds to the random numbers the auditor generates.
A)True
B)False
Q3) Which of the following is an accurate statement regarding sampling?
A) A 95 percent confidence level provides a 5 percent sampling risk.
B) The auditor can perform the audit tests only after the sample items are selected.
C) The purpose of planning the sample is to make sure that the audit tests are performed in a manner that provides the desired sampling risk and minimizes the likelihood of nonsampling errors.
D) All of the above are accurate statements.
Q4) List the two ways auditors can control sampling risk.
Q5) Discuss what is meant by "sampling risk" and "nonsampling risk."
Page 17
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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Q1) After the auditor is satisfied with the allowance for uncollectible accounts, it is easy to verify bad debt expense.
A)True
B)False
Q2) The auditor has a balance-related audit objective to determine that accounts receivable are appropriately aggregated, and related financial statement disclosures are relevant and understandable. Which of the following audit procedures would the auditor not perform in connection with this audit objective?
A) Trace receivables from related parties on the aged trial balance to proper disclosure in the footnotes to the financial statements.
B) Read footnote disclosures made by management related to accounts receivable.
C) Evaluate footnote disclosures made by management for related party receivables.
D) Use audit software to foot and cross-foot the aged accounts receivable trial balance.
Q3) Assuming the client's internal controls are effective, describe how the auditor can verify proper cutoff of sales transactions.
Q4) 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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Q1) ARIA measures the auditor's desired assurance for an account balance.
A)True
B)False
Q2) An auditor using nonstatistical sampling cannot formally measure sampling error.
A)True
B)False
Q3) In stratified sampling, a maximum of four stratum can be used.
A)True
B)False
Q4) The auditor uses monetary unit sampling to select a sample of expense items for testing from a population of expenses. Subsequent to selecting this sample of expense items, the client identifies additional expenses not included in the population and included in the audited financial statements. The auditor in this situation must include these additional expenses as part of the population subject to the sampling and select a revised sample of expense items for testing.
A)True
B)False
Q5) Consider the steps in sampling for tests of details and for tests of controls. Explain the differences in applying sampling to these two types of tests.
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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) A company purchasing goods from a vendor on a FOB origin basis must record the liability when the goods are received at the company's receiving dock.
A)True
B)False
Q2) A document received from the vendor indicating such things as the description and quantity of goods and services received, price including freight, cash discount terms, and date of billing is called the voucher.
A)True
B)False
Q3) The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Q4) Discuss the key internal controls that should be present in the receiving goods and services function in the acquisitions and payment cycle.
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Chapter 19: Completing the Tests in the Acquisition and Payment Cycle:
Verification of Selected Accounts
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Q1) The primary accounting record for manufacturing equipment and other fixed assets is the
A) depreciation ledger.
B) fixed asset master file.
C) asset inventory.
D) equipment roster.
Q2) Which of the following expenses is not typically evaluated as part of the audit of the acquisition and payment cycle?
A) depreciation expense
B) insurance expense
C) estimated liability for warranties
D) property tax expense
Q3) For auditors, there is a significant amount of objectivity management must follow under generally accepted accounting principles in preparing the analysis required for goodwill impairment testing.
A)True
B)False
Q4) Discuss the key internal controls for prepaid insurance that affect the auditor's extent of testing of the prepaid insurance account.
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Q1) To minimize the opportunity for fraud, unclaimed salary checks should be A) redeposited.
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department.
Q2) An impress payroll account is a separate payroll bank account in which a large cash balance is maintained.
A)True
B)False
Q3) There are several key internal controls over the payment of payroll function that should be present. For example, the payroll should be distributed by someone who is not involved in the other payroll functions. Discuss other key internal controls over the payment of payroll function as it relates to the physical control over assets and records.
Q4) In most accounting systems, payroll expenses are charged when the employees are actually paid rather than when the labor costs are actually incurred.
A)True
B)False
Q5) How do auditors commonly verify sales commission expense?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Q1) The audit of the inventory and warehousing cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.
Q2) To ensure proper segregation of duties, who should maintain the perpetual inventory master files?
A) production personnel
B) inventory storeroom personnel
C) inventory receiving personnel
D) accounting department personnel
Q3) When auditors observe the client counting inventory, the auditor should take special care in three areas with regards to selection of inventory items. What action should be taken in these areas?
Q4) The audit of cost accounting begins with the internal transfer of assets from raw materials to work-in-process to A) manufacturing overhead.
B) finished goods inventory.
C) the perpetual inventory master files.
D) retail sales.
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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Q1) The record of the outstanding shares at any given time is maintained in the A) corporate directory.
B) stock certificate books.
C) schedule of stock owners.
D) shareholders' capital stock master file.
Q2) When there are not numerous transactions involving notes payable during the year, the normal starting point for the audit of notes payable is
A) a schedule of notes payable and accrued interest prepared by the audit team.
B) a schedule of notes payable and accrued interest obtained from the client.
C) a schedule of only those notes with unpaid balances at the end of the year prepared by the client.
D) the notes payable account in the general ledger.
Q3) The three most important balance-related audit objectives for notes payable are existence, realizable value, and accuracy.
A)True
B)False
Q4) Notes payable are generally for a period of sixty days or less.
A)True
B)False
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Chapter 23: Audit of Cash and Financial Instruments
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Q1) The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both banks is referred to as kiting.
A)True
B)False
Q2) Cash is the only account included in every cycle except inventory and warehousing.
A)True B)False
Q3) The majority of financial instruments are valued at the lower of cost or market.
A)True
B)False
Q4) A proof of cash is effective at identifying which of the following misstatements?
A) checks written for an improper amount
B) checks issued to invalid vendors
C) fraudulent checks
D) checks recorded in the books for an amount different from that on the check
Q5) Explain the purpose of testing the client's bank reconciliation, and discuss the major audit procedures involved.
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Chapter 24: Completing the Audit
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Q1) 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
Q2) An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n)
A) commitment.
B) unasserted claim.
C) pending litigation.
D) subsequent event.
Q3) The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner.
A)True
B)False
Q4) What are the three required conditions for a contingent liability to exist?
Q5) Describe some audit procedures commonly used to search for contingent liabilities.
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Chapter 25: Other Assurance Services
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Q1) Two of the types of services provided in connection with the Statements on Standards for Accounting and Review Services are
A) audit and examination services.
B) compilation and review services.
C) examination and review services.
D) management advisory services and compilations.
Q2) You are preparing to issue a report on the compilation of financial statements for a nonpublic company. Prior to issuing the report you should
A) read the financial statements to determine if they are free from obvious material errors.
B) perform analytical procedures to determine if they are free from material misstatements.
C) perform tests of balances on selected accounts to determine if they are free from material misstatements.
D) perform limited control tests to determine if there are any material misstatements.
Q3) Define forecast and projection.
Q4) Briefly describe each of the five Trust Services Categories.
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Chapter 26: Internal and Governmental Financial Auditing and Operational Auditing
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Q1) federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies
A)compliance audit
B)economy and efficiency audit
C)effectiveness
D)efficiency
E)functional audit
F)Government Auditing Standards
G)government audit
H)Institute of Internal Auditors
I)operational auditing
J)organizational audit
K)program audit
L)Single Audit Act
M)special assignment
N)IIA Practice Standards
Q2) Operational audits are often categorized as functional, organizational, or special assignments.
A)True
B)False
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