Sample Questions and Answers
Which of the following would be a reason for an auditor to issue an adverse opinion?
A) The financial statements are presented fairly in accordance with generally accepted accounting principles (GAAP).
B) The auditor believes that the financial statements contain material misstatements that are pervasive and not in accordance with GAAP.
C) The auditor is unable to obtain sufficient audit evidence.
D) There are no significant findings to report.
Answer: B
When an auditor evaluates a company’s internal controls, which of the following is the auditor most likely to examine?
A) The company’s future business strategy.
B) The company’s financial statements for the current fiscal year.
C) The system for reporting financial transactions, including checks and balances.
D) The company’s employee compensation structure.
Answer: C
An external auditor is most likely to perform substantive tests of transactions for:
A) Testing the control environment.
B) Verifying that financial statements comply with tax regulations.
C) Gathering evidence regarding the accuracy and completeness of financial statement balances.
D) Reviewing management’s decision-making process.
Answer: C
The purpose of an external audit is:
A) To prepare the company’s tax filings.
B) To ensure that the financial statements present a true and fair view in accordance with accounting standards.
C) To advise the company’s management on business strategy.
D) To monitor employee performance and compensation.
Answer: B
If an auditor believes that a company’s financial statements are not fairly presented, the auditor will issue a:
A) Disclaimer of opinion.
B) Unqualified opinion.
C) Qualified opinion.
D) Adverse opinion.
Answer: D
The “control environment” refers to:
A) The company’s policies for reporting transactions to the tax authorities.
B) The structure of internal controls used to monitor employee behavior.
C) The overall attitude, awareness, and actions of management and employees towards the company’s internal controls.
D) The technological tools used to prepare financial statements.
Answer: C
An audit engagement letter typically includes:
A) A detailed list of the company’s financial statements.
B) The auditor’s fees and terms of engagement.
C) A list of the company’s potential tax liabilities.
D) The internal controls assessed by the auditor.
Answer: B
An auditor is responsible for expressing an opinion on:
A) The company’s ability to continue as a going concern.
B) The company’s internal controls over financial reporting.
C) The operational efficiency of the company.
D) The company’s marketing and competitive strategies.
Answer: A
When a company’s financial statements contain a material misstatement and the auditor is unable to obtain sufficient evidence to correct it, the auditor should issue:
A) An unqualified opinion.
B) A qualified opinion.
C) A disclaimer of opinion.
D) An adverse opinion.
Answer: B
When testing the “existence” of assets, an auditor will most likely:
A) Confirm the value of assets with the company’s customers.
B) Verify the physical existence of assets, such as inventory or fixed assets.
C) Examine the company’s capital expenditure reports.
D) Evaluate the company’s future investment strategy.
Answer: B
Which of the following would an auditor most likely consider when assessing the risk of material misstatement due to fraud?
A) The company’s forecasted cash flow for the next fiscal year.
B) Management’s ability to accurately predict market trends.
C) The company’s internal policies and procedures for preventing fraudulent activities.
D) The company’s environmental impact and sustainability efforts.
Answer: C
An auditor’s report would most likely include which of the following regarding the scope of the audit?
A) The length of time spent performing the audit.
B) The audit procedures performed, including testing of internal controls and substantive tests.
C) The auditor’s personal view on the company’s business practices.
D) A detailed history of the company’s operations over the last year.
Answer: B
When assessing the valuation of a company’s inventory, an auditor would most likely:
A) Review the market price of inventory items in the current market.
B) Check the company’s records of income tax filings.
C) Verify the company’s internal controls regarding cash management.
D) Review employee compensation packages related to inventory management.
Answer: A
Which of the following is most likely to indicate a significant deficiency in a company’s internal controls?
A) The auditor observes no discrepancies in financial statements.
B) Management has taken corrective action on past audit recommendations.
C) The company has a large number of small control failures that aggregate into a material misstatement.
D) The company’s internal controls have been tested regularly by internal audit staff.
Answer: C
Which of the following best describes an external auditor’s approach to assessing the company’s financial statements?
A) The auditor verifies that every individual transaction is recorded and reported correctly.
B) The auditor reviews the company’s entire internal operations in detail.
C) The auditor performs tests and procedures to assess whether the financial statements are presented fairly in accordance with GAAP.
D) The auditor examines the company’s pricing strategy for its products.
Answer: C
Which of the following would be the most likely cause of an auditor issuing a disclaimer of opinion?
A) The company’s financial statements are in full compliance with all applicable accounting standards.
B) The auditor is unable to obtain sufficient appropriate audit evidence due to a restriction on the scope of the audit.
C) There is a minor disagreement between the auditor and management over a specific accounting treatment.
D) The company has demonstrated effective internal controls and complies with all relevant regulations.
Answer: B
The purpose of an auditor’s “going concern” evaluation is to:
A) Assess whether the company can continue operations for the foreseeable future.
B) Verify whether the company’s capital structure is appropriate.
C) Identify any tax liabilities the company may face in the coming year.
D) Examine the company’s environmental compliance status.
Answer: A
Which of the following is most likely to be a reason for an auditor to issue a “qualified opinion” on the financial statements?
A) There is a scope limitation that prevents the auditor from obtaining sufficient evidence about a material item.
B) The financial statements are free from any material misstatements.
C) The financial statements do not follow Generally Accepted Auditing Standards (GAAS).
D) The company is not willing to provide access to its internal controls.
Answer: A
The concept of “audit risk” refers to the possibility that:
A) The auditor may not detect material misstatements in the financial statements.
B) The company will not comply with the applicable accounting standards.
C) The company’s financial statements will be rejected by the regulatory authorities.
D) The auditor’s opinion will be misinterpreted by users of the financial statements.
Answer: A
The term “sufficiency of audit evidence” refers to:
A) The quantity of audit evidence obtained to support the auditor’s conclusions.
B) The ability of the audit evidence to confirm the integrity of the company’s financial statements.
C) The sufficiency of financial records provided by the client.
D) The auditor’s evaluation of the company’s internal controls.
Answer: A
An auditor performs “substantive procedures” to:
A) Obtain evidence that financial statements are free from material misstatement.
B) Identify any weaknesses in the company’s internal control system.
C) Test the company’s tax compliance.
D) Assess the effectiveness of the company’s corporate governance.
Answer: A
Which of the following is a key objective of an external audit?
A) To determine the effectiveness of management’s decision-making processes.
B) To provide assurance that the financial statements are free of material misstatements.
C) To assist the company in preparing its tax filings.
D) To offer advice on the company’s business strategy.
Answer: B
The “materiality” of an item in financial statements refers to:
A) The cost of auditing the item.
B) Whether the item is likely to affect the economic decisions of users of the financial statements.
C) The size of the company that issued the financial statement.
D) The regulatory guidelines that must be followed for its disclosure.
Answer: B
An auditor will generally perform a “walkthrough” to:
A) Test the efficiency of the company’s supply chain.
B) Verify that the financial statements comply with tax regulations.
C) Understand and evaluate the company’s internal controls.
D) Calculate the company’s profitability ratios.
Answer: C
Which of the following would be most relevant to an auditor when assessing the risk of material misstatement in financial statements?
A) The company’s internal policies on employee benefits.
B) The company’s internal control environment and financial reporting procedures.
C) The company’s marketing and advertising expenses.
D) The company’s customer satisfaction surveys.
Answer: B
When auditors gather evidence by observing the client’s operations, this is an example of:
A) Inspection of records.
B) Inquiry of management.
C) Physical examination.
D) Recalculation of figures.
Answer: C
An external auditor is generally required to verify:
A) The company’s capital budgeting decisions.
B) The truthfulness of the company’s management statements.
C) The fair presentation of the company’s financial statements in accordance with the applicable accounting framework.
D) The company’s compensation packages for executives.
Answer: C
Which of the following would an auditor most likely do to evaluate the company’s compliance with financial reporting regulations?
A) Examine the company’s customer contracts.
B) Inspect the company’s internal controls over financial reporting.
C) Analyze the company’s profit margins.
D) Review the company’s employee training records.
Answer: B
The external auditor may choose to perform “analytical procedures” to:
A) Identify possible risks and areas that need further investigation.
B) Test the effectiveness of internal controls over financial reporting.
C) Ensure the accuracy of the company’s customer billing system.
D) Recalculate the tax liabilities of the company.
Answer: A
When an auditor expresses an opinion on the financial statements, the primary responsibility for the preparation and presentation of the financial statements lies with:
A) The board of directors.
B) The external auditor.
C) The company’s management.
D) The shareholders of the company.
Answer: C
The purpose of an external auditor’s “management letter” is to:
A) Report on the overall economic conditions of the company’s industry.
B) Provide feedback to management on deficiencies and weaknesses in internal controls.
C) Summarize the auditor’s evaluation of the company’s financial performance.
D) Outline the auditor’s opinion on the company’s tax compliance.
Answer: B
Which of the following best describes the “audit trail” that an external auditor follows?
A) The historical financial transactions and accounting entries that support the financial statements.
B) The legal processes related to the company’s incorporation and governance.
C) The policies and procedures followed by the company to ensure employee satisfaction.
D) The steps taken by auditors to verify customer satisfaction.
Answer: A
The “scope” of an audit engagement includes:
A) The specific procedures the auditor will perform to gather evidence for the audit.
B) The management team’s role in verifying the financial statements.
C) The auditor’s general advice on corporate governance.
D) The company’s marketing strategies and business plans.
Answer: A
A “subsequent event” in auditing refers to:
A) An event that occurs after the financial year-end but before the auditor’s report is issued, which may affect the financial statements.
B) A financial event that occurs after the auditor has issued their report.
C) A major change in the company’s capital structure after the audit has been completed.
D) A change in the company’s auditors during the financial year.
Answer: A
Which of the following is considered the auditor’s primary source of evidence when performing an external audit?
A) The company’s internal management reports.
B) The company’s audited financial statements.
C) The company’s internal control systems.
D) Third-party confirmations, such as bank and customer balances.
Answer: D
Which of the following best defines an “audit opinion”?
A) The conclusion reached by the auditor regarding the fairness of the financial statements based on the evidence gathered.
B) A statement regarding the efficiency of the company’s operational processes.
C) The auditor’s personal view on the management team’s effectiveness.
D) A recommendation for the company’s business strategy.
Answer: A
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