An Advanced Auditing Practice Test!

40 Questions | Total Attempts: 2030

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An Advanced Auditing Practice Test!

An audit is carried out in firms to affirm that their books of accounts reflect a true and fair view of the position of the company and note incidences where fraud has taken place. Test out what you know about audits by taking up the audit test below, covering various terminologies and procedures.


Questions and Answers
  • 1. 
    • A. 

      A branch of accounting.

    • B. 

      A discipline that provides assurance regarding the results of accounting and other functional operations and data.

    • C. 

      A professional activity that measures and communicates financial and business data.

    • D. 

      A regulatory function that prevents the issuance of improper financial information.

  • 2. 
    • A. 

      Refers to an imbalance of information among stockholders in a company.

    • B. 

      Refers to an imbalance of information between the auditor and the management of the company.

    • C. 

      Refers to an imbalance of information between stockholders and the management of the company.

    • D. 

      Refers to an imbalance of information between the auditor and the stockholders of the company.

  • 3. 
    • A. 

      To give stockholders some assurance that any fraudulent activities will be detected.

    • B. 

      To identify a poorly designed internal control structure that may produce unreliable financial statements.

    • C. 

      To provide expertise to clients, which may not be totally knowledgeable of prevailing GAAP.

    • D. 

      To add credibility where appropriate, since the client may not be perceived as objective with respect to its own financial statements.

  • 4. 
    • A. 

      The buyer [or user] pays directly for this assurance in both situations.

    • B. 

      There are often information asymmetry and conflicts of interest.

    • C. 

      The cost of obtaining information is not relevant.

    • D. 

      Independence is not relevant in either situation.

  • 5. 
    • A. 

      Assurance services are more narrow in scope than audit services.

    • B. 

      Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.

    • C. 

      Assurance services are limited to economic events or actions, and audit services are not similarly limited.

    • D. 

      Audit services do not improve the quality of information as do assurance services.

  • 6. 
    • A. 

      Attestation is a subset of auditing that improves the quality of information for decision makers.

    • B. 

      Auditing is a subset of attestation and focuses on providing clients with advisory services and decision support.

    • C. 

      Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.

    • D. 

      Attestation is a subset of auditing that provides more assurance than does an audit engagement.

  • 7. 
    • A. 

      Materiality

    • B. 

      Audit risk

    • C. 

      Management assertions

    • D. 

      Reasonable assurance

  • 8. 
    • A. 

      May only be gathered from parties external to the client to be reliable.

    • B. 

      May only be gathered from the client to be reliable since the client is the most knowledgeable source of information.

    • C. 

      May only be gathered from computerized sources to avoid human error.

    • D. 

      Can be gathered from many sources and is not limited to the underlying accounting data.

  • 9. 
    • A. 

      Can be completely eliminated through appropriate sampling of transactions.

    • B. 

      Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated.

    • C. 

      Is what creates the demand for an audit.

    • D. 

      Is the risk that a company may hire an incompetent auditor.

  • 10. 
    • A. 

      A decrease in the materiality level.

    • B. 

      A decrease in the desired level of assurance.

    • C. 

      An assessment that the account being audited is high risk.

    • D. 

      An increase in the desired level of assurance.

  • 11. 
    Which of the following audit phases would generally be conducted before all of the others listed below?
    • A. 

      Auditing business processes and related accounts.

    • B. 

      Evaluation of audit evidence.

    • C. 

      Gaining an understanding of the client's industry.

    • D. 

      Consideration of internal control systems.

  • 12. 
    An auditor's evaluation of the reasonableness of a client's loan loss reserve would normally be made during which phase of the audit?
    • A. 

      Gaining an understanding of the client's industry.

    • B. 

      Client acceptance/pre-planning.

    • C. 

      Consideration of internal control systems.

    • D. 

      Auditing business processes and related accounts.

  • 13. 
    Gaining an understanding of the client and its environment includes all of the following areas except:
    • A. 

      Regulatory issues unique to the industry.

    • B. 

      The entity's application of accounting policies.

    • C. 

      The audit fee and timeline for completion of the work.

    • D. 

      The entity's business risks.

  • 14. 
    The most favorable type of audit report opinion for the client to receive is:
    • A. 

      Qualified.

    • B. 

      Unqualified.

    • C. 

      Full assurance.

    • D. 

      Exceptional.

  • 15. 
    • A. 

      Requires the memorization of formulas and patterns.

    • B. 

      Requires the knowledge of GAAP.

    • C. 

      Requires common sense and some creativity.

    • D. 

      Is required by law for all companies in the United States.

  • 16. 
    The Public Company Accounting Oversight Board [PCAOB] was established by:
    • A. 

      The American Institute of Certified Public Accountants [AICPA]

    • B. 

      The Securities & Exchange Commission

    • C. 

      An Act of Congress

    • D. 

      A Presidential executive order

  • 17. 
    • A. 

      Information technology

    • B. 

      Revenue [or sales]

    • C. 

      Financing

    • D. 

      Inventory management

  • 18. 
    Which of the following management assertions is generally of greatest importance in the audit of inventory?
    • A. 

      Existence

    • B. 

      Completeness

    • C. 

      Rights and Obligations

    • D. 

      Presentation and Disclosure

  • 19. 
    • A. 

      Financial Accounting Standards Board (FASB); PCAOB

    • B. 

      AICPA Auditing Standards Board (ASB); SEC

    • C. 

      AICPA Auditing Standards Board (ASB); PCAOB

    • D. 

      Financial Accounting Standards Board (FASB); SEC

  • 20. 
    • A. 

      Attain the proper balance of professional experience and formal education.

    • B. 

      Critically review the work performed and judgment exercised by those assisting in the audit.

    • C. 

      Examine all available corroborating evidence supporting management's assertions.

    • D. 

      Design the audit to detect all instances of illegal acts.

  • 21. 
    • A. 

      The auditor must be without bias with respect to the client under audit.

    • B. 

      The auditor must adopt a critical attitude during the audit.

    • C. 

      The auditor's sole obligation is to third parties.

    • D. 

      The auditor may have a direct ownership interest in his client's business if it is not material.

  • 22. 
    • A. 

      The auditor should study and evaluate the client's internal control system and design the audit to provide reasonable assurance of detecting all errors and fraud.

    • B. 

      The auditor should consider the types of errors and fraud that could occur and determine whether the necessary internal controls are prescribed and are being followed.

    • C. 

      The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.

    • D. 

      The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and determine whether the necessary internal controls are prescribed and are being followed satisfactorily.

  • 23. 
    The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the:
    • A. 

      Senior management

    • B. 

      External auditors

    • C. 

      Internal audit department

    • D. 

      Shareholders

  • 24. 
    • A. 

      The examination a company's claims that its product is superior to that of a competitor on specific dimensions.

    • B. 

      The examination of a school district networked computer system.

    • C. 

      The examination of a company's adherence to government-mandated safety provisions.

    • D. 

      The examination of a company's financial statements.

  • 25. 
    Which of the following best describes the fiduciary relationship between management and the board of directors?
    • A. 

      Management reports to the board of directors.

    • B. 

      The board of directors reports to management.

    • C. 

      Neither group is accountable to the other.

    • D. 

      Both groups report directly to the shareholders.

  • 26. 
    • A. 

      Auditing standards issued by the AICPA and the PCAOB are considered minimum standards of performance for auditors.

    • B. 

      The AICPA sets auditing standards for use in audits of non-public entities.

    • C. 

      The PCAOB sets auditing standards for use in audits of publicly held companies.

    • D. 

      All of the above.

  • 27. 
    • A. 

      Audit about 80% of publicly traded companies in the US.

    • B. 

      Are national in their practices and have international affiliates.

    • C. 

      Are generally regional in their practices (such as the west coast).

    • D. 

      Are generally local in their practices (such as large metropolitan areas).

  • 28. 
    Which of the following organizations affect the environment that CPAs work in?
    • A. 

      AICPA.

    • B. 

      SEC.

    • C. 

      PCAOB.

    • D. 

      All of the above.

  • 29. 
    Which of the following primarily shapes the context in which auditing takes place?
    • A. 

      The American Institute of Certified Public Accountants [AICPA]

    • B. 

      The Securities & Exchange Commission

    • C. 

      The client company's business environment

    • D. 

      Legislation passed by Congress

  • 30. 
    • A. 

      A special audit related to management fraud.

    • B. 

      A financial statement audit and an audit of internal control over financial reporting.

    • C. 

      A financial statement audit and a special audit related to management fraud.

    • D. 

      A special audit related to management fraud and an audit of internal control over financial reporting.

  • 31. 
    • A. 

      Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.

    • B. 

      Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

    • C. 

      Financial statements are presented fairly, in all material respects, in conformity with GAAP.

    • D. 

      Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

  • 32. 
    • A. 

      Billings are made using the percentage-of-completion method of revenue recognition.

    • B. 

      The nature of the credit authorization process.

    • C. 

      Some invoices are normally billed prior to shipments [which occur at a later date].

    • D. 

      The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

  • 33. 
    The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist, when in fact a misstatement did occur, is known as:
    • A. 

      Audit risk.

    • B. 

      Detection risk.

    • C. 

      Inherent risk.

    • D. 

      Business risk.

  • 34. 
    • A. 

      It will likely increase risk of material misstatement.

    • B. 

      It will likely decrease risk of material misstatement.

    • C. 

      It will likely decrease detection risk.

    • D. 

      It will likely increase detection risk.

  • 35. 
    • A. 

      Misinterpretation by management of facts that existed when the financial statements were prepared.

    • B. 

      Misappropriation of assets for the benefit of management.

    • C. 

      Preparation of records by employees to cover a fraudulent scheme.

    • D. 

      Intentional omission of the recording of a transaction to benefit a third party.

  • 36. 
    Which of the following factors is least likely to represent an opportunity to commit fraud?
    • A. 

      The audit committee is ineffective.

    • B. 

      Poor internal controls over cash transactions

    • C. 

      The existence of highly complex transactions

    • D. 

      Operating losses make a hostile takeover imminent.

  • 37. 
    • A. 

      Inquiries of management and others.

    • B. 

      Compute the level of detection risk.

    • C. 

      Analytical procedures.

    • D. 

      Observation and inspections.

  • 38. 
    • A. 

      The documentation may include the use of questionnaires.

    • B. 

      Management's response to high risk areas identified by the auditor should be included in the documentation.

    • C. 

      The level of risk must be set quantitatively (i.e. inherent risk is 60%)

    • D. 

      All of the above are false.

  • 39. 
    The disclosure of fraud to parties other than the client's senior management and its audit committee ordinarily would be precluded by the auditor's ethical or legal obligations of confidentiality. However, the auditor has a duty to disclose the information to parties outside the entity in all of the following circumstances except:
    • A. 

      A court subpoena in conjunction with a fraud investigation.

    • B. 

      A successor auditor makes inquiries in determining whether to accept the client.

    • C. 

      A Wall Street analyst inquiry regarding future profit projections.

    • D. 

      To comply with legal or regulatory requirements.

  • 40. 
    • A. 

      Relates primarily to the audit fees involved.

    • B. 

      Generally involves less professional judgment for public companies.

    • C. 

      Is determined, in part, based on how financial statement users may be influenced in making decisions.

    • D. 

      Relates primarily to the quantity of audit procedures performed.