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ACCT 460 Principles of Auditing – FINAL EXAM Questions and complete solution 2025 Athabasca University
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Which of the following is the primary objective of an audit? a) To detect fraud b) To ensure financial statements comply with GAAP c) To express an opinion on the fairness of financial statements d) To prepare financial statements Answer: c) To express an opinion on the fairness of financial statements Which of the following is NOT a component of the audit risk model?
a) Inherent risk b) Control risk c) Materiality risk d) Detection risk Answer: c) Materiality risk What is the purpose of an engagement letter in an audit? a) To outline the auditor's fee structure b) To provide the client with audit findings c) To establish an understanding between the auditor and the client d) To replace the need for an audit report Answer: c) To establish an understanding between the auditor and the client Which of the following is a key characteristic of an independent auditor? a) Works as an internal auditor b) Has a financial interest in the client company c) Is objective and unbiased d) Prepares the company's financial statements Answer: c) Is objective and unbiased Which type of audit opinion is issued when financial statements are free of material misstatement? a) Adverse opinion b) Qualified opinion c) Disclaimer of opinion d) Unqualified (clean) opinion Answer: d) Unqualified (clean) opinion
a) The financial statements are completely free of misstatements b) There is a high level of assurance, but not absolute certainty c) Auditors provide absolute assurance that fraud does not exist d) The audit guarantees future financial success Answer: b) There is a high level of assurance, but not absolute certainty Which type of audit procedure is used to verify the physical existence of assets? a) Inspection b) Inquiry c) Recalculation d) Observation Answer: a) Inspection Which of the following factors would increase detection risk? a) Using larger sample sizes in testing b) Poor audit planning and execution c) Strong internal controls at the client d) A lower inherent risk assessment Answer: b) Poor audit planning and execution Which assertion is tested when auditors verify that all recorded transactions actually occurred? a) Completeness b) Existence or Occurrence c) Valuation d) Rights and Obligations Answer: b) Existence or Occurrence
True/False Questions Materiality refers to the impact of an omission or misstatement on the decision- making of financial statement users. True The auditor must maintain professional skepticism throughout the audit engagement. True The audit risk model states that audit risk is the product of inherent risk, control risk, and detection risk. True An auditor can issue an unqualified opinion even if they find material misstatements in the financial statements. False (An unqualified opinion is only issued when financial statements are free from material misstatements.) Analytical procedures are only used during the planning phase of an audit. False (They are also used during the substantive testing and final review phases.) Short Answer Questions What are the five components of internal control as defined by COSO? Control Environment Risk Assessment
compliance.Which of the following procedures would best help an auditor detect fraudulent transactions? a) Performing a bank confirmation b) Conducting analytical procedures to identify unusual trends c) Reviewing board meeting minutes d) Recalculating depreciation expense Answer: b) Conducting analytical procedures to identify unusual trends Which of the following best describes the auditor’s responsibility for detecting fraud? a) The auditor is responsible for detecting all instances of fraud b) The auditor is responsible for designing procedures to detect material fraud c) The auditor has no responsibility for fraud detection d) The auditor must report any fraud directly to shareholders Answer: b) The auditor is responsible for designing procedures to detect material fraud An auditor’s independence is most likely to be impaired if they: a) Perform bookkeeping services for the client while also conducting an audit b) Provide tax advisory services to a client c) Conduct an inventory count for the client d) Obtain written management representations Answer: a) Perform bookkeeping services for the client while also conducting an audit Which of the following factors increases inherent risk in an audit? a) Strong internal controls b) A history of frequent accounting errors c) A well-established management team
d) Low complexity in financial transactions Answer: b) A history of frequent accounting errors Which of the following statements about audit sampling is true? a) Auditors must examine every transaction to form an opinion b) Audit sampling can be used for both tests of controls and substantive tests c) Sampling only applies to financial statement audits, not operational audits d) Statistical sampling is required in every audit Answer: b) Audit sampling can be used for both tests of controls and substantive tests True/False Questions Auditors must obtain sufficient and appropriate audit evidence to support their opinion. True Internal control weaknesses have no effect on audit procedures. False (Weak internal controls may require auditors to perform more substantive testing.) An auditor issues a disclaimer of opinion when they lack sufficient audit evidence to form an opinion. True Fraud risk is always lower in companies with strong internal controls. False (Even strong internal controls cannot eliminate fraud risk entirely.)
Audit documentation (working papers) provides evidence of audit work performed, supports the auditor’s opinion, and helps with regulatory compliance. Explain the concept of professional skepticism in auditing. Professional skepticism is an auditor’s critical assessment of evidence, requiring questioning of assumptions and considering the possibility of fraud or misstatement.Which of the following is an example of an inherent risk factor? a) Poor internal controls b) A complex revenue recognition policy c) Ineffective audit procedures d) A well-established management team Answer: b) A complex revenue recognition policy Which of the following documents is typically used to confirm cash balances with a bank? a) Bank reconciliation b) Cash flow statement c) Bank confirmation letter d) Accounts receivable aging report Answer: c) Bank confirmation letter Which assertion is an auditor testing when verifying that liabilities are not understated? a) Existence b) Completeness c) Rights and obligations d) Valuation Answer: b) Completeness
What type of audit procedure is performed when an auditor recalculates depreciation expense? a) Analytical procedures b) Reperformance c) Inspection d) Inquiry Answer: b) Reperformance Which of the following statements is true regarding the Sarbanes-Oxley Act (SOX)? a) It only applies to private companies b) It requires auditors to certify financial statements c) It mandates that public companies establish internal control procedures d) It eliminated the need for external audits Answer: c) It mandates that public companies establish internal control procedures True/False Questions Audit evidence obtained directly by the auditor is more reliable than evidence obtained from the client. True Substantive procedures include tests of controls. False (Tests of controls evaluate internal controls, whereas substantive procedures test account balances and transactions.) The PCAOB oversees audits of private companies in the United States.
Why do auditors use analytical procedures during an audit? To identify unusual trends, detect potential misstatements, and assess financial statement consistency over time. What factors influence the auditor’s assessment of control risk? The effectiveness of internal controls, the history of control failures, and management’s attitude toward internal control compliance. Scenario-Based Questions Scenario: During an audit, you notice that a company’s revenue has increased by 50% from the previous year, but there is no significant increase in sales volume. What would be your next step? Perform analytical procedures to investigate whether the revenue recognition policy has changed or if there are fraudulent transactions. Scenario: You are auditing inventory for a retail company, and management refuses to allow you to perform a physical inventory count. What should you do? Consider issuing a disclaimer of opinion due to a lack of sufficient audit evidence. Scenario: A company’s internal controls over cash receipts appear weak, and past audits have detected cash misappropriations. What should you do? Increase substantive testing of cash transactions and consider implementing extended audit procedures. Scenario: An auditor discovers an error in revenue recognition that has a material impact on the financial statements. What type of audit opinion should be issued?
A qualified or adverse opinion, depending on the pervasiveness of the misstatement. Scenario: A client’s financial statements are fairly stated, but the company has significant going concern issues. What audit opinion should be issued? An unqualified opinion with an emphasis-of-matter paragraph discussing the going concern issue.Which of the following is NOT a component of audit risk? a) Detection risk b) Control risk c) Compliance risk d) Inherent risk Answer: c) Compliance risk What is the primary objective of performing substantive analytical procedures? a) To evaluate the effectiveness of internal controls b) To confirm balances with external parties c) To identify unusual transactions or trends that may indicate material misstatements d) To test the mathematical accuracy of accounting records Answer: c) To identify unusual transactions or trends that may indicate material misstatements Which of the following factors would most likely lead an auditor to assess a higher level of inherent risk? a) The client has strong internal controls b) The company operates in a stable industry c) The company’s financial statements involve significant estimates and judgments d) The company has a history of unqualified audit opinions
The auditor’s report should always state that the financial statements are the responsibility of the auditor. False (The financial statements are the responsibility of management, while the auditor provides an opinion on them.) A company’s CEO is responsible for selecting the external auditor. False (The audit committee of the board of directors selects the external auditor.) Materiality thresholds are the same for all audits. False (Materiality thresholds vary depending on the size and nature of the entity.) Short Answer Questions What is an engagement risk in auditing? Engagement risk is the risk that an auditor will suffer damage to their reputation or legal exposure due to their association with a particular client. List three examples of external audit evidence. Bank confirmations, supplier invoices, and third-party valuation reports. Why do auditors use sampling instead of testing every transaction? Auditors use sampling because testing every transaction is impractical and inefficient, and a well-designed sample provides sufficient audit assurance. What is the purpose of an audit completion checklist?
An audit completion checklist ensures that all necessary audit procedures have been performed before issuing the audit opinion. Describe the difference between vouching and tracing in auditing. Vouching starts from recorded transactions and traces them back to supporting documents to verify occurrence. Tracing starts from source documents and follows them to financial statements to test completeness. Scenario-Based Questions Scenario: You are auditing a company and notice that their accounts payable balance has decreased significantly, but purchases remain steady. What audit procedure should you perform? Examine supplier invoices and payments to ensure all liabilities are recorded and there is no understatement of accounts payable. Scenario: An auditor finds that a company changed its revenue recognition policy without proper disclosure. What type of audit opinion should be issued? A qualified or adverse opinion, depending on the materiality of the misstatement. Scenario: A company has a large inventory balance, but its physical inventory count shows discrepancies. What should the auditor do? Perform additional inventory testing, reconcile differences, and investigate potential fraud or control weaknesses. Scenario: During an audit, you identify that management has overridden internal controls. What should you do?
b) Increase reliance on internal controls c) Perform additional substantive testing d) Issue a disclaimer of opinion Answer: c) Perform additional substantive testing Which of the following best describes audit risk? a) The risk that financial statements are misstated and the auditor does not detect it b) The risk that a client will commit fraud c) The risk that an auditor will be sued by shareholders d) The risk that financial statements contain immaterial misstatements Answer: a) The risk that financial statements are misstated and the auditor does not detect it Which of the following is an example of a test of controls? a) Recalculating depreciation expense b) Confirming accounts receivable balances c) Observing the client’s procedures for processing sales transactions d) Performing ratio analysis on financial statements Answer: c) Observing the client’s procedures for processing sales transactions True/False Questions An auditor must obtain sufficient appropriate evidence to support their opinion. True If an auditor finds immaterial misstatements, they must issue a qualified opinion. False (Immaterial misstatements do not affect the audit opinion.)
The audit committee is responsible for hiring and overseeing the external auditor. True An auditor should report all fraud, regardless of materiality, to shareholders. False (Fraud should be reported to management and, if material, to the audit committee.) Auditors must always perform surprise audits. False (Surprise audits are not always required but may be useful in detecting fraud.) Short Answer Questions What is detection risk in auditing? Detection risk is the risk that the auditor’s procedures fail to detect a material misstatement in the financial statements. What is the purpose of an audit engagement letter? It defines the scope of the audit, responsibilities of the auditor and client, and terms of engagement. Why is independence important for auditors? Independence ensures objectivity and credibility in the audit process, reducing bias and conflicts of interest. What are the two types of fraud auditors should be concerned with? Fraudulent financial reporting and misappropriation of assets.
