Auditing MCQs with Answers
What is the primary responsibility of the auditor in an audit engagement.
a) To detect all instances of fraud and error in the financial statements
b) To provide an opinion on the financial statements’ accuracy and completeness
c) To assist the client in preparing the financial statements
d) To manage the entity’s internal controls over financial reporting
Answer: b) To provide an opinion on the financial statements’ accuracy and completeness
Which of the following is not an example of an audit procedure that tests internal control.
a) Observation of inventory counts
b) Inquiry of company personnel
c) Reperformance of control activities
d) Inspection of cancelled checks
Answer: d) Inspection of cancelled checks
What is the primary difference between a compliance audit and a financial statement audit.
a) A compliance audit focuses on whether the financial statements are fairly presented, while a financial statement audit focuses on whether the entity complied with laws and regulations.
b) A compliance audit focuses on whether the entity complied with laws and regulations, while a financial statement audit focuses on whether the financial statements are fairly presented.
c) A compliance audit is performed by internal auditors, while a financial statement audit is performed by external auditors.
d) A compliance audit is required by the Securities and Exchange Commission (SEC), while a financial statement audit is required by the Internal Revenue Service (IRS).
Answer: b) A compliance audit focuses on whether the entity complied with laws and regulations, while a financial statement audit focuses on whether the financial statements are fairly presented.
Which of the following is not an example of analytical procedures.
a) Comparing financial ratios to industry averages
b) Examining supporting documentation for transactions
c) Comparing current period financial information to prior period information
d) Investigating fluctuations or relationships that are inconsistent with expectations
Answer: b) Examining supporting documentation for transactions
What is the primary purpose of a management representation letter.
a) To confirm the accuracy of financial statement amounts
b) To provide the auditor with access to all necessary documentation
c) To provide evidence of the effectiveness of internal control
d) To confirm management’s responsibility for the financial statements
Answer: d) To confirm management’s responsibility for the financial statements
Which of the following is not a component of the audit risk model.
a) Inherent risk
b) Control risk
c) Detection risk
d) Financial risk
Answer: d) Financial risk
Which of the following is not a factor that can affect the auditor’s determination of materiality.
a) The nature of the item being audited
b) The entity’s size and industry
c) The entity’s profitability
d) The auditor’s personal preferences
Answer: d) The auditor’s personal preferences
Which of the following is not an example of a subsequent event that requires disclosure in the financial statements.
a) A material loss on an uncollectible account after the balance sheet date
b) A major business combination after the balance sheet date
c) A change in accounting principle after the balance sheet date
d) A significant sale of a long-term investment before the balance sheet date
Answer: d) A significant sale of a long-term investment before the balance sheet date
Which of the following is not a common type of audit opinion modification.
a) Qualified opinion
b) Unqualified opinion
c) Adverse opinion
d) Disclaimer of opinion
Answer: b) Unqualified opinion
What is the primary objective of substantive testing.
a) To test the effectiveness of internal control
b) To obtain reasonable assurance about the financial statements as a whole
c) To identify significant risks related to the financial statements
d) To evaluate the entity’s compliance with laws and regulations
Answer: b) To obtain reasonable assurance about the financial statements as a whole
Which of the following is not a limitation of internal control.
a) The possibility of management override
b) The cost of implementing and maintaining the system
c) The potential for human error or mistakes
d) The difficulty in obtaining sufficient evidence to support the effectiveness of the system
Answer: d) The difficulty in obtaining sufficient evidence to support the effectiveness of the system
Which of the following is not a type of audit evidence.
a) Physical observation
b) Documentation
c) Inquiry of management
d) Opinion of the external auditor
Answer: d) Opinion of the external auditor
Which of the following is not an example of an audit risk assessment procedure.
a) Inquiry of management and personnel
b) Review of prior period audit documentation
c) Observation of the entity’s operations
d) Confirmation with third parties
Answer: b) Review of prior period audit documentation
Which of the following is not an example of an audit objective.
a) Verify the existence of accounts receivable
b) Evaluate the adequacy of internal controls over financial reporting
c) Confirm the entity’s compliance with tax laws and regulations
d) Determine whether transactions are properly authorized
Answer: c) Confirm the entity’s compliance with tax laws and regulations
Which of the following is not a factor that can affect the auditor’s determination of control risk.
a) The nature of the control being tested
b) The design of the control activity
c) The effectiveness of the control activity
d) The auditor’s personal preferences
Answer: d) The auditor’s personal preferences
Which of the following is not an example of an inherent risk factor.
a) The complexity of the entity’s transactions
b) The entity’s financial condition
c) The presence of related party transactions
d) The effectiveness of the entity’s internal controls
Answer: d) The effectiveness of the entity’s internal controls
Which of the following is not an example of a financial statement assertion.
a) Completeness
b) Existence
c) Valuation
d) Adequacy
Answer: d) Adequacy
Which of the following is not an example of an audit procedure for accounts receivable.
a) Confirming accounts receivable balances with customers
b) Testing the accuracy of the accounts receivable aging schedule
c) Analyzing sales revenue and the related accounts receivable balances
d) Testing the valuation of accounts receivable using a mathematical model
Answer: d) Testing the valuation of accounts receivable using a mathematical model
Which of the following is not an example of an auditor’s report on financial statements.
a) Unqualified opinion
b) Adverse opinion
c) Qualified opinion
d) Disclaimer of opinion
Answer: d) Disclaimer of opinion
Which of the following is not an example of a fraud risk factor.
a) Pressure or incentives to commit fraud
b) Opportunity to commit fraud
c) Rationalization or justification for committing fraud
d) Inadequate financial reporting software
Answer: d) Inadequate financial reporting software
What is the objective of the engagement letter between the auditor and the client.
a) To establish the terms of the audit engagement
b) To establish the client’s financial reporting policies
c) To establish the client’s internal control policies
d) To establish the client’s corporate governance policies
Answer: a) To establish the terms of the audit engagement
Which of the following is not an example of an assertion related to expenses.
a) Existence or occurrence
b) Completeness
c) Rights and obligations
d) Valuation or allocation
Answer: c) Rights and obligations
Which of the following is an example of a risk associated with fraud in financial reporting.
a) Increased competition in the industry
b) Management override of internal controls
c) Changes in accounting standards
d) Decreased profitability
Answer: b) Management override of internal controls
Which of the following is an example of a procedure that may be used to obtain audit evidence.
a) Sampling
b) Materiality assessment
c) Control risk assessment
d) Analyzing the entity’s financial statements
Answer: a) Sampling
What is the objective of a review engagement.
a) To provide an opinion on the financial statements
b) To provide assurance on the effectiveness of the entity’s internal control
c) To detect material misstatements in the financial statements
d) To provide limited assurance on the financial statements
Answer: d) To provide limited assurance on the financial statements
What is the objective of analytical procedures in an audit.
a) To provide an opinion on the financial statements
b) To provide assurance on the effectiveness of the entity’s internal control
c) To detect material misstatements in the financial statements
d) To identify areas of the financial statements that may require additional audit procedures
Answer: d) To identify areas of the financial statements that may require additional audit procedures
Which of the following is not an example of a type of audit evidence.
a) Confirmations
b) Documents
c) Observation
d) Opinions
Answer: d) Opinions
Which of the following is not an example of a threat to auditor independence.
a) Financial interest in the audited entity
b) Employment with the audited entity
c) Family relationships with management of the audited entity
d) Competing with the audited entity in the same industry
Answer: d) Competing with the audited entity in the same industry
Which of the following is an example of a test of details.
a) Analyzing ratios and trends
b) Testing the effectiveness of internal controls
c) Confirming accounts receivable balances
d) Assessing the reasonableness of estimates
Answer: c) Confirming accounts receivable balances
Which of the following is an example of an analytical procedure for revenue.
a) Analyzing the entity’s sales returns and allowances
b) Confirming accounts receivable balances
c) Testing the accuracy of the revenue calculation
d) Analyzing the entity’s gross profit margin
Answer: d) Analyzing the entity’s gross profit margin
Which of the following is not an example of a management assertion related to cash and cash equivalents.
a) Completeness
b) Valuation or allocation
c) Existence or occurrence
d) Accuracy of the entity’s estimates
Answer: d) Accuracy of the entity’s estimates
Which of the following is an example of a control activity for accounts payable.
a) Authorization and approval procedures for payments
b) Segregation of duties for recording transactions
c) Physical control over checks and other payment instruments
d) Analyzing the entity’s accounts payable aging report
Answer: a) Authorization and approval procedures for payments
Which of the following is an example of a substantive procedure for long-term debt.
a) Testing the accuracy of the interest expense calculation
b) Analyzing the entity’s borrowing capacity
c) Confirming the balances with lenders
d) Testing the effectiveness of the entity’s internal controls over long-term debt
Answer: c) Confirming the balances with lenders
Which of the following is not an example of a control objective for payroll and personnel expenses.
a) Completeness
b) Accuracy
c) Authorization
d) Valuation
Answer: d) Valuation
Which of the following is an example of a control activity for inventory.
a) Reconciling inventory counts to the general ledger
b) Reviewing purchase orders for accuracy
c) Analyzing the entity’s inventory turnover ratio
d) Assessing the reasonableness of inventory estimates
Answer: a) Reconciling inventory counts to the general ledger
Which of the following is not an example of a test of controls.
a) Inquiry of personnel
b) Inspection of documents
c) Confirmation of balances
d) Observation of activities
Answer: c) Confirmation of balances
Which of the following is an example of a substantive procedure for fixed assets.
a) Analyzing the entity’s depreciation expense
b) Testing the effectiveness of the entity’s internal controls over fixed assets
c) Confirming fixed asset balances with third parties
d) Reviewing the entity’s fixed asset policy
Answer: c) Confirming fixed asset balances with third parties
Which of the following is an example of a control objective for accounts payable.
a) Existence or occurrence
b) Completeness
c) Authorization
d) Valuation
Answer: b) Completeness
Which of the following is an example of a control objective for revenue.
a) Existence or occurrence
b) Completeness
c) Authorization
d) Valuation
Answer: a) Existence or occurrence
Which of the following is not a limitation of the audit process.
a) The use of estimates in financial statements
b) The possibility of fraud and error
c) The inherent limitations of internal controls
d) The requirement to follow generally accepted accounting principles (GAAP)
Answer: d) The requirement to follow generally accepted accounting principles (GAAP)
Which of the following is not an example of a substantive procedure for payroll and personnel expenses.
a) Analyzing payroll tax liabilities
b) Confirming the balances with lenders
c) Testing the accuracy of payroll calculations
d) Analyzing the entity’s payroll expense as a percentage of revenue
Answer: b) Confirming the balances with lenders
Which of the following is an example of a substantive procedure for accounts payable.
a) Analyzing the entity’s accounts payable turnover ratio
b) Testing the effectiveness of the entity’s internal controls over accounts payable
c) Confirming accounts payable balances with third parties
d) Reviewing the entity’s accounts payable policy
Answer: c) Confirming accounts payable balances with third parties
Which of the following is an example of a substantive procedure for accounts receivable.
a) Analyzing the entity’s bad debt expense
b) Testing the effectiveness of the entity’s internal controls over accounts receivable
c) Confirming accounts receivable balances with third parties
d) Reviewing the entity’s credit policy
Answer: c) Confirming accounts receivable balances with third parties
Which of the following is an example of a control activity for cash disbursements.
a) Analyzing the entity’s cash balances
b) Segregating duties for handling cash
c) Reviewing vendor invoices for accuracy
d) Analyzing the entity’s cash flow statement
Answer: b) Segregating duties for handling cash
Which of the following is an example of a substantive procedure for expenses.
a) Analyzing the entity’s expense accounts by department
b) Testing the effectiveness of the entity’s internal controls over expenses
c) Confirming the balances with lenders
d) Reviewing the entity’s expense policy
Answer: a) Analyzing the entity’s expense accounts by department
Which of the following is an example of a control objective for inventory.
a) Existence or occurrence
b) Completeness
c) Authorization
d) Valuation
Answer: d) Valuation
Which of the following is not an assertion for financial statements.
a) Completeness
b) Accuracy
c) Timeliness
d) Valuation
Answer: c) Timeliness
Which of the following is an example of a control objective for expenses.
a) Existence or occurrence
b) Completeness
c) Authorization
d) Valuation
Answer: b) Completeness
Which of the following is an example of a substantive procedure for revenue.
a) Analyzing the entity’s inventory turnover ratio
b) Testing the effectiveness of the entity’s internal controls over revenue
c) Confirming revenue balances with third parties
d) Reviewing the entity’s revenue recognition policy
Answer: c) Confirming revenue balances with third parties
Which of the following is an example of a control activity for accounts receivable.
a) Reviewing the entity’s credit policy
b) Reconciling accounts receivable to the general ledger
c) Segregating duties for handling cash receipts
d) Analyzing the entity’s bad debt expense
Answer: c) Segregating duties for handling cash receipts
Which of the following is an example of a substantive procedure for inventory.
a) Analyzing the entity’s inventory turnover ratio
b) Testing the effectiveness of the entity’s internal controls over inventory
c) Confirming inventory balances with third parties
d) Reviewing the entity’s inventory policy
Answer: c) Confirming inventory balances with third parties
Which of the following is not an example of a substantive procedure for cash.
a) Testing the effectiveness of the entity’s internal controls over cash
b) Confirming cash balances with third parties
c) Analyzing the entity’s cash flow statement
d) Reviewing the entity’s cash handling policies
Answer: d) Reviewing the entity’s cash handling policies
Which of the following is an example of a control objective for fixed assets.
a) Existence or occurrence
b) Completeness
c) Authorization
d) Valuation
Answer: a) Existence or occurrence
Which of the following is not an inherent limitation of an audit.
a) Sampling risk
b) Management bias
c) Fraudulent financial reporting
d) Material misstatement due to collusion
Answer: c) Fraudulent financial reporting
Which of the following best describes the concept of materiality in auditing.
a) The level of accuracy required for financial statements to be reliable
b) The amount of financial statement misstatement that would likely influence a reasonable user’s decision-making
c) The assessment of the effectiveness of internal controls over financial reporting
d) The evaluation of the entity’s risk of fraud
Answer: b) The amount of financial statement misstatement that would likely influence a reasonable user’s decision-making
What is the primary purpose of an engagement letter in an audit.
a) To establish an understanding of the scope of the audit and the responsibilities of the auditor and client
b) To identify potential risks and material misstatements in the financial statements
c) To document the auditor’s assessment of internal controls over financial reporting
d) To provide a list of recommended adjustments to the financial statements
Answer: a) To establish an understanding of the scope of the audit and the responsibilities of the auditor and client
What is the purpose of the audit opinion in an audit report.
a) To provide recommendations for improving the entity’s internal controls
b) To summarize the auditor’s findings and conclusions
c) To provide a list of recommended adjustments to the financial statements
d) To provide a guarantee of the financial statements’ accuracy
Answer: b) To summarize the auditor’s findings and conclusions
Which of the following is an example of a test of controls in an audit.
a) Confirming accounts receivable balances with third parties
b) Analyzing the entity’s inventory turnover ratio
c) Observing the entity’s physical inventory count
d) Reviewing the entity’s financial statements for accuracy
Answer: c) Observing the entity’s physical inventory count
Which of the following is an example of an analytical procedure in auditing.
a) Confirming accounts payable balances with third parties
b) Testing the effectiveness of the entity’s internal controls over cash receipts
c) Analyzing changes in the entity’s key financial ratios over time
d) Reviewing the entity’s accounting policies and procedures
Answer: c) Analyzing changes in the entity’s key financial ratios over time
Which of the following is an example of a fraud risk factor in an audit.
a) A highly automated financial reporting system
b) A well-documented and well-communicated code of conduct
c) A complex regulatory environment
d) A history of accounting irregularities or fraud
Answer: d) A history of accounting irregularities or fraud
Which of the following is an example of a control deficiency in an audit.
a) An error in the financial statements due to a misunderstanding of accounting principles
b) An unintentional mistake in the calculation of accounts payable balances
c) A lack of segregation of duties in the accounts payable process
d) A disagreement between the auditor and management about the entity’s accounting policies
Answer: c) A lack of segregation of duties in the accounts payable process
Which of the following best describes the term “professional skepticism” in auditing.
a) A state of mind that includes a questioning mind and a critical assessment of audit evidence
b) The auditor’s willingness to be influenced by the client’s management
c) The auditor’s confidence in the entity’s internal controls over financial reporting
d) The auditor’s expectation that the financial statements are free from material misstatement
Answer: a) A state of mind that includes a questioning mind and a critical assessment of audit evidence
Which of the following is not a general standard of auditing.
a) Adequate technical training and proficiency
b) Independence in mental attitude
c) Due professional care
d) Compliance with the Generally Accepted Accounting Principles (GAAP)
Answer: d) Compliance with the Generally Accepted Accounting Principles (GAAP)
Which of the following is an example of a financial statement assertion.
a) Existence or occurrence
b) Materiality
c) Independence
d) Professional skepticism
Answer: a) Existence or occurrence
What is the purpose of substantive procedures in an audit.
a) To evaluate the effectiveness of the entity’s internal controls over financial reporting
b) To identify potential risks and material misstatements in the financial statements
c) To provide assurance that the financial statements are free from material misstatement
d) To document the auditor’s assessment of internal controls over financial reporting
Answer: c) To provide assurance that the financial statements are free from material misstatement
Which of the following is an example of an audit risk.
a) The risk of material misstatement in the financial statements
b) The risk that the auditor will not detect all material misstatements in the financial statements
c) The risk that the auditor will not be able to rely on the entity’s internal controls over financial reporting
d) The risk that the auditor will not be independent in mental attitude
Answer: b) The risk that the auditor will not detect all material misstatements in the financial statements
Which of the following is an example of a risk assessment procedure in an audit.
a) Performing analytical procedures to identify unexpected relationships in the financial data
b) Testing the effectiveness of the entity’s internal controls over cash receipts
c) Performing substantive procedures to test account balances and transactions
d) Documenting the auditor’s assessment of internal controls over financial reporting
Answer: a) Performing analytical procedures to identify unexpected relationships in the financial data
Which of the following is an example of a test of details procedure in an audit.
a) Testing the effectiveness of the entity’s internal controls over financial reporting
b) Performing analytical procedures to identify unexpected relationships in the financial data
c) Reviewing the entity’s accounting policies and procedures
d) Confirming accounts payable balances with third parties
Answer: d) Confirming accounts payable balances with third parties
Which of the following is an example of a detection risk in an audit.
a) The risk that the entity’s internal controls over financial reporting are not effective
b) The risk that the auditor will not be able to rely on the entity’s internal controls over financial reporting
c) The risk that the auditor will not detect a material misstatement in the financial statements
d) The risk that the auditor will not be independent in mental attitude
Answer: c) The risk that the auditor will not detect a material misstatement in the financial statements
Which of the following is an example of an analytical procedure in an audit.
a) Confirming accounts payable balances with third parties
b) Testing the effectiveness of the entity’s internal controls over financial reporting
c) Performing substantive procedures to test account balances and transactions
d) Comparing current year financial data to prior year financial data
Answer: d) Comparing current year financial data to prior year financial data
Which of the following is an example of a substantive test in an audit.
a) Analyzing the entity’s key financial ratios over time
b) Testing the effectiveness of the entity’s internal controls over cash receipts
c) Confirming accounts receivable balances with third parties
d) Documenting the auditor’s assessment of internal controls over financial reporting
Answer: c) Confirming accounts receivable balances with third parties
Which of the following is an example of an audit procedure that could be used to test the valuation assertion.a) Testing the effectiveness of the entity’s internal controls over financial reporting
b) Comparing current year financial data to prior year financial data
c) Confirming accounts payable balances with third parties
d) Examining the entity’s inventory valuation methods
Answer: d) Examining the entity’s inventory valuation methods
Which of the following is an example of an audit evidence that is more reliable
a) Documentary evidence obtained from an independent source outside the entity
b) Oral representations obtained from the entity’s management
c) The entity’s accounting records
d) The auditor’s own internal records
Answer: a) Documentary evidence obtained from an independent source outside the entity
Which of the following is an example of an analytical procedure in an audit.
a) Confirming accounts payable balances with third parties
b) Testing the effectiveness of the entity’s internal controls over financial reporting
c) Comparing current year financial data to prior year financial data
d) Analyzing the entity’s key financial ratios over time
Answer: d) Analyzing the entity’s key financial ratios over time
Which of the following is an example of a substantive test of transactions in an audit.
a) Observing the entity’s inventory counting procedures
b) Testing the effectiveness of the entity’s internal controls over financial reporting
c) Reconciling bank statements to the entity’s accounting records
d) Examining supporting documentation for recorded transactions
Answer: d) Examining supporting documentation for recorded transactions
Which of the following is an example of a control activity in an entity’s internal control over financial reporting.
a) Segregating the duties of employees who handle cash receipts and cash disbursements
b) Confirming accounts payable balances with third parties
c) Reviewing the entity’s accounting policies and procedures
d) Performing substantive procedures to test account balances and transactions
Answer: a) Segregating the duties of employees who handle cash receipts and cash disbursements
Which of the following is an example of an inherent limitation of an audit.
a) The need for the auditor to rely on the entity’s internal controls over financial reporting
b) The need for the auditor to obtain sufficient and appropriate audit evidence
c) The need for the auditor to maintain an attitude of professional skepticism
d) The need for the auditor to have adequate knowledge of the entity’s industry
Answer: a) The need for the auditor to rely on the entity’s internal controls over financial reporting
Which of the following is an example of a misstatement of financial statements due to fraud.
a) Recording a transaction in the wrong accounting period
b) Misinterpreting accounting guidance
c) Recording a liability at an incorrect amount
d) Recording fictitious revenue
Answer: d) Recording fictitious revenue
Which of the following is an example of a substantive analytical procedure in an audit.
a) Confirming accounts payable balances with third parties
b) Testing the effectiveness of the entity’s internal controls over financial reporting
c) Comparing current year financial data to industry averages
d) Reviewing the entity’s accounting policies and procedures
Answer: c) Comparing current year financial data to industry averages
Which of the following is an example of a sampling risk in an audit.
a) The risk that the auditor will not detect a material misstatement in the financial statements
b) The risk that the sample of transactions tested is not representative of the population as a whole
c) The risk that the auditor will not be able to rely on the entity’s internal controls over financial reporting
d) The risk that the auditor will not be independent in mental attitude
Answer: b) The risk that the sample of transactions tested is not representative of the population as a whole
Which of the following is an audit procedure for testing the completeness assertion.
a) Analyzing the entity’s key financial ratios over time
b) Confirming accounts payable balances with third parties
c) Performing substantive procedures to test account balances and transactions
d) Reviewing the entity’s accounting policies and procedures
Answer: c) Performing substantive procedures to test account balances and transactions
Which of the following is an internal control over financial reporting.
a) Reviewing the entity’s accounting policies and procedures
b) Performing substantive procedures to test account balances and transactions
c) Segregating the duties of employees who handle cash receipts and cash disbursements
d) Confirming accounts payable balances with third parties
Answer: c) Segregating the duties of employees who handle cash receipts and cash disbursements
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