Sample Questions and Answers
Which of the following is the primary objective when performing an audit of internal control over financial reporting?
To express an opinion on the fairness of the financial statements.
B. To assess the design and operating effectiveness of controls.
C. To confirm the accuracy of balances in the financial statements.
D. To perform tests of detailed transactions within the financial statements.
Answer: B
The auditor is performing a test of controls related to the approval of credit sales. Which of the following best supports the existence of a control over credit sales?
Review of a sample of approved credit sales transactions.
B. Recalculation of the sales discounts offered to customers.
C. Examination of year-end accounts receivable balances.
D. Confirmation of accounts receivable with customers.
Answer: A
The audit risk model involves assessing inherent risk, control risk, and detection risk. Which of the following factors would most likely lead to an increase in detection risk?
A highly effective system of internal controls.
B. A decrease in the audit sample size.
C. An increase in the inherent risk associated with the client.
D. A decrease in the overall risk of material misstatement.
Answer: B
When assessing audit risk, the auditor’s primary concern is:
The risk that material misstatements will be overlooked during the audit.
B. The risk that the financial statements are materially misstated due to fraud.
C. The risk that the auditor will fail to detect misstatements.
D. The likelihood that internal controls will fail to detect fraud.
Answer: A
Which of the following would most likely be a substantive audit procedure to test for unrecorded liabilities?
Reviewing the subsequent period’s cash payments.
B. Sending confirmations to the client’s major vendors.
C. Recalculating the aging of accounts payable.
D. Verifying the accuracy of sales transactions.
Answer: A
The purpose of testing a client’s internal control over cash disbursements is to:
Confirm that all cash payments were authorized.
B. Ensure that cash transactions are accurately recorded in the financial statements.
C. Detect fraud in the disbursement process.
D. Verify that the client’s cash balance is materially correct.
Answer: B
Which of the following is an example of a substantive test of transactions?
Verifying the authorization of invoices.
B. Reviewing the general ledger for any material discrepancies.
C. Inspecting supporting documents for sales transactions.
D. Evaluating the design and implementation of internal controls.
Answer: C
When auditing long-term debt, the auditor is most likely to:
Examine the loan agreement for terms and covenants.
B. Confirm all outstanding debt balances with external parties.
C. Recalculate the interest expense and compare it with the general ledger.
D. All of the above.
Answer: D
In which of the following circumstances would the auditor likely modify the audit opinion?
The financial statements are free from material misstatement.
B. The auditor concludes that the financial statements are materially misstated.
C. The auditor encounters no material weaknesses in internal control.
D. The auditor does not identify any related-party transactions.
Answer: B
When the auditor uses sampling to test controls, which of the following is a primary consideration?
Whether the control has been tested in prior audits.
B. The effectiveness of management’s oversight of controls.
C. The risk of control failure and the desired level of assurance.
D. The materiality of the accounts being tested.
Answer: C
During an audit, the auditor is concerned with detecting fraud. Which of the following is the most effective procedure for detecting fraud?
Sending confirmations to customers.
B. Reviewing the cash disbursement records.
C. Tracing transactions through the accounting system.
D. Applying analytical procedures to financial statement ratios.
Answer: D
When an auditor evaluates the adequacy of the provision for doubtful accounts, the auditor should:
Rely exclusively on the client’s past experience.
B. Review the client’s analysis of past due accounts and aging schedule.
C. Disregard the aging schedule and focus on the overall financial position.
D. Recalculate the allowance based on management’s past estimates.
Answer: B
Which of the following best describes an auditor’s responsibility when evaluating a company’s going concern assumption?
The auditor must make a decision on the company’s ability to continue operations.
B. The auditor must evaluate whether there is substantial doubt about the company’s ability to continue as a going concern.
C. The auditor must ensure that the company is able to meet all of its future obligations.
D. The auditor must recommend to management if they should continue operations.
Answer: B
An auditor tests for fraud in the revenue recognition process by:
Examining internal control over revenue recording.
B. Reviewing the client’s internal audit workpapers.
C. Investigating any unusual transactions or discrepancies.
D. Sending confirmations to all customers regarding outstanding balances.
Answer: C
In which of the following circumstances would an auditor issue a disclaimer of opinion?
The auditor is unable to gather sufficient appropriate audit evidence.
B. There are material misstatements in the financial statements, but they are not pervasive.
C. The client refuses to allow the auditor to perform the required procedures.
D. The financial statements are presented fairly in accordance with GAAP.
Answer: A
When planning an audit, an auditor should:
Consider both the internal control system and substantive procedures.
B. Focus solely on substantive procedures for effectiveness.
C. Perform a risk assessment based on external economic factors alone.
D. Rely on the client’s internal audit to assess risk.
Answer: A
The auditor plans to confirm a sample of accounts receivable balances as part of the audit. Which of the following audit procedures will most likely be performed first?
Review of customer order forms and shipping documents.
B. Evaluation of the reasonableness of the client’s allowance for doubtful accounts.
C. Sending confirmations to a sample of the client’s customers.
D. Reviewing year-end cutoff procedures for accounts receivable.
Answer: C
An auditor’s responsibility for detecting fraud includes:
Identifying all instances of fraud and reporting them to the regulatory authorities.
B. Evaluating the likelihood of fraud in specific areas and performing procedures accordingly.
C. Issuing a separate fraud report if any fraud is detected.
D. Testing for fraud only if management requests such procedures.
Answer: B
Which of the following is most likely to indicate a material weakness in internal control?
The internal control environment is well-designed and comprehensive.
B. There is evidence of unauthorized transactions being processed.
C. The control activities are reviewed and updated annually.
D. The internal control system effectively prevents misstatements.
Answer: B
In assessing the risk of material misstatement during an audit, the auditor would most likely:
Rely on internal control reports from the client’s internal audit team.
B. Focus only on areas where there is a known risk of fraud.
C. Consider both qualitative and quantitative factors related to the financial statements.
D. Ignore the auditor’s prior year’s assessments and perform new tests.
Answer: C
Which of the following is the best indicator of the risk of material misstatement for an auditor?
Control environment
B. Financial performance trends
C. Internal control structure
D. Prior audit adjustments
Answer: B
Which of the following audit procedures would best help an auditor to detect management fraud?
Review of year-end journal entries for unusual transactions.
B. Confirmation of inventory with suppliers.
C. Recalculation of tax liabilities for the year.
D. Examination of the client’s budget variances.
Answer: A
In an audit of a client’s financial statements, which of the following best describes the purpose of an engagement letter?
To outline the scope and terms of the audit engagement.
B. To establish the amount of audit fees due to the auditor.
C. To provide the auditor with information about the client’s operations.
D. To communicate the auditor’s opinion to the client.
Answer: A
During an audit, the auditor evaluates the design and implementation of internal controls over financial reporting. The auditor’s primary concern should be:
Whether controls are properly documented.
B. Whether the controls are operating effectively to prevent misstatements.
C. Whether controls are supported by management’s representations.
D. Whether the controls meet industry standards.
Answer: B
An auditor decides to perform an audit of a client’s accounts payable. Which of the following procedures would be the most effective in detecting unrecorded liabilities?
Sending confirmations to suppliers of accounts payable.
B. Reviewing subsequent cash disbursements.
C. Verifying the accuracy of accounts payable balances.
D. Observing inventory count procedures.
Answer: B
Which of the following is most likely to be considered a “substantive procedure” in an audit?
Test of internal controls.
B. Recalculation of depreciation expense.
C. Evaluation of the effectiveness of management’s policies.
D. Observation of inventory procedures.
Answer: B
An auditor is testing a sample of sales transactions for a client. Which of the following best supports the existence of valid sales transactions?
The client has properly recorded the sales in the general ledger.
B. The client has prepared a sales order for each transaction.
C. A bill of lading and shipping documents are available for each sale.
D. The sales transactions are reviewed by the client’s internal audit team.
Answer: C
In which of the following situations would an auditor most likely need to perform additional procedures?
The client has a long history of timely reporting.
B. The client’s financial statements are unaudited for the prior year.
C. The client has made significant changes to its internal control procedures.
D. The client has provided all requested documentation for the audit.
Answer: C
The auditor’s primary concern in the audit of long-term debt is to:
Confirm the debt balance with the client’s creditors.
B. Examine the loan agreements for compliance with covenants.
C. Recalculate the interest expense for accuracy.
D. Evaluate the adequacy of the client’s debt disclosure.
Answer: B
An auditor is performing a risk assessment for a new client. Which of the following factors is the auditor most likely to consider when evaluating inherent risk?
The client’s internal control structure.
B. The complexity of the client’s operations and financial reporting.
C. The client’s history of audit adjustments.
D. The auditor’s previous experience with the client.
Answer: B
Which of the following is the most likely explanation for an auditor issuing a qualified opinion in an audit report?
The client has provided sufficient evidence to support their assertions.
B. There are material misstatements in the financial statements, but they are not pervasive.
C. The auditor was unable to obtain sufficient evidence due to circumstances beyond the client’s control.
D. The client’s financial statements are free from any material misstatements.
Answer: C
The auditor is conducting a walkthrough of the internal control process. The primary purpose of this procedure is to:
Identify control weaknesses that could lead to a material misstatement.
B. Document all internal controls in the control environment.
C. Evaluate the effectiveness of the client’s controls in practice.
D. Examine the auditor’s independence with respect to the client.
Answer: C
Which of the following is most likely to require an auditor to modify the audit opinion?
A client fails to present a complete set of financial statements.
B. A client does not provide access to the external legal counsel’s work papers.
C. A client’s internal control processes were not operating effectively during the period.
D. A client refuses to provide requested audit evidence.
Answer: D
When testing for the presence of fraud, auditors focus on:
The fairness of financial statements.
B. The accuracy of the general ledger.
C. The possibility of financial misstatements due to fraud.
D. The client’s internal control system.
Answer: C
An auditor determines that a company has a complex IT system that could have a significant impact on financial reporting. In this case, the auditor should:
Evaluate the IT system’s design and effectiveness.
B. Rely solely on the client’s representation about the effectiveness of IT controls.
C. Confirm with the IT department the details of the system’s configuration.
D. Not consider the IT system in the audit process.
Answer: A
A significant deficiency in internal controls is defined as:
A material weakness in internal control over financial reporting.
B. A control issue that has been remediated in the current year.
C. A deficiency that is less severe than a material weakness but still important.
D. An issue that does not affect the financial statements.
Answer: C
Which of the following would most likely be an auditor’s concern when auditing accounts receivable?
The allowance for doubtful accounts is too low relative to the balance.
B. The client has not prepared an aged trial balance.
C. Sales transactions have been properly recorded and authorized.
D. The client has properly accounted for uncollectible debts.
Answer: A
When a client refuses to provide access to certain records or information that are relevant to the audit, the auditor:
Should issue a qualified opinion.
B. Should ignore the refusal and proceed with the audit.
C. Must report the situation to the Securities and Exchange Commission (SEC).
D. Should withdraw from the audit and issue a disclaimer of opinion.
Answer: D
When planning an audit, the auditor is required to:
Consider the client’s financial statements only.
B. Determine materiality and assess the risk of material misstatement.
C. Perform all audit procedures early in the engagement.
D. Test the internal controls without considering the client’s operations.
Answer: B
An auditor discovers that a client’s financial statements are materially misstated due to a misapplication of accounting principles. The auditor should:
Perform additional substantive testing procedures to detect other misstatements.
B. Correct the misstatements and issue an unqualified opinion.
C. Modify the audit opinion based on the material misstatement.
D. Report the misapplication of principles to the SEC immediately.
Answer: C
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