Multiple-Choice Questions - CPA Diary



Chapter 26

Multiple-Choice Questions

|1. |The IIA Code of Ethics is based on all but which of the following ethical principles? |

|easy |a. Integrity. |

|b |b. Independence. |

| |c. Competency. |

| |d. Confidentiality. |

|2. |Statements on Internal Auditing Standards are issued by the: |

|easy |a. AICPA. |

|c |b. SEC. |

| |c. Internal Auditing Standards Boards. |

| |d. Auditing Standards Boards. |

|3. |Internal auditors are responsible to: |

|easy |a. the board of directors. |

|c |b. management. |

| |c. both a and b. |

| |d. neither a nor b. |

|4. |Which of the following is not a similarity between external and internal auditors? |

|easy |a. Both must be independent of the company. |

|a |b. Both must be competent. |

| |c. Both use similar methodologies in performing their work. |

| |d. Both consider risk and materiality in their work. |

|5. |External auditors consider internal auditors effective if they are: |

|easy |a. independent of the operating units being evaluated. |

|d |b. competent and well trained. |

| |c. have performed relevant audit tests of the internal controls and financial statements. |

| |d. all of the above. |

|6. |Auditing standards _______ external auditors to use the internal auditors for direct assistance on the audit. |

|easy |a. discourage |

|d |b. prohibit |

| |c. encourage |

| |d. permit |

|7. |The primary source of authoritative literature for doing government audits is the: |

|easy |a. Purple Book. |

|b |b. Yellow Book. |

| |c. Green Book. |

| |d. Red Book. |

|8. |When a state or local government agency receives federal financial assistance, it is subject to the audit |

|easy |requirements of: |

|c | |

|a | |Yellow Book | |Single Audit Act | |OMB Circular A-133 |

| |a. |Yes | |Yes | |No |

| |b. |No | |No | |Yes |

| |c. |Yes | |Yes | |Yes |

| |d. |Yes | |No | |No |

| | |

|9. |Which of the following is not one of the broad categories of operational audits? |

|easy |a. Functional audits. |

|c |b. Organizational audits. |

| |c. Single Audit Act audits. |

| |d. Special assignment audits. |

|10. |Which of the following groups could not be involved in an operational audit? |

|easy |a. CPA firms. |

|d |b. Internal auditors. |

| |c. Government auditors. |

| |d. None of the above answers is correct; that is, all of the above could be involved. |

|11. |The IIA’s professional practice framework (including its code of ethics and International Standards for the |

|easy |Professional Practice of Internal Auditing) is commonly referred to as the: |

|b |a. Blue Book. |

| |b. Red Book. |

| |c. Green Book. |

| |d. Yellow Book. |

|12. |The professional organization which is responsible for providing guidance for internal auditors is the: |

|easy |a. APA. |

|b |b. IIA. |

| |c. ABA. |

| |d. AIA. |

|13. |The financial auditing standards of the Yellow Book are ______ the 10 GAAS of the AICPA. |

|easy |a. the same as |

|d |b. quite different from |

| |c. incompatible with |

| |d. consistent with |

|14. |Which of the following is not one of the three phases in an operational audit? |

|easy |a. Planning. |

|b |b. Training and supervising employees. |

| |c. Evidence accumulation and evaluation. |

| |d. Reporting and follow-up. |

|15. |The correct title of the Yellow Book is: |

|medium |a. Government Auditing Standards. |

|a |b. IIA Practice Standards. |

| |c. Statement of Responsibilities of Internal Auditing. |

| |d. Statement of Standards on Accounting and Review Services. |

|16. |The Yellow Book recognizes that, because of the sensitivity of government activities and their public accountability,|

|medium |in government audits the thresholds of acceptable audit risk and tolerable misstatement compared to an audit of a |

|b |commercial enterprise may be: |

| |a. equal. |

| |b. lower. |

| |c. higher. |

| |d. indeterminable. |

|17. |The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal|

|medium |year of: |

|b |a. $1,000,000 or more. |

| |b. $500,000 or more. |

| |c. $300,000 or more. |

| |d. $100,000 or more. |

|18. |An audit conducted in accordance with the Yellow Book must include an audit report that states the audit was |

|medium |performed in accordance with: |

|b |a. GAAS. |

| |b. GAGAS. |

| |c. GASA. |

| |d. SAS. |

|19. |An audit designed to evaluate the efficiency and effectiveness of an organization or some part of an organization |

|medium |would not be called a(n): |

|d |a. performance audit. |

| |b. management audit. |

| |c. operational audit. |

| |d. compliance audit. |

|20. |Which of the following is not one of the major differences between financial and operational auditing? |

|medium |a. The financial audit is oriented to the past, but an operational audit concerns performance for the future. |

|c |b. The financial audit report is distributed to many readers, but the operational audit report goes to a few |

| |managers. |

| |c. Financial audits deal with the information on the financial statements, but operational audits are concerned with |

| |the information in the ledgers. |

| |d. Financial audits are limited to matters that directly affect the financial statements, but operational audits |

| |cover any aspect of efficiency and effectiveness. |

|21. |Before an operational audit for effectiveness can be performed, there must be: |

|medium |a. a financial audit by an independent auditor. |

|d |b. a financial audit by an internal auditor. |

| |c. a review performed by either an independent or an internal auditor. |

| |d. specific criteria developed to define effectiveness. |

|22. |Auditors involved in planning, performing, or reporting on audits under GAGAS must complete ____ hours of continuing |

|medium |professional education in each two-year period. |

|d |a. 20 |

| |b. 40 |

| |c. 60 |

| |d. 80 |

|23. |Which of the following statements regarding types of operational audits is false? |

|medium |a. A functional audit has the advantage of permitting specialization by auditors. |

|b |b. An advantage of functional auditing is its ability to evaluate interrelated functions. |

| |c. The emphasis in an organizational audit is on how efficiently and effectively functions interact. |

| |d. Special operational auditing assignments arise at the request of management. |

|24. |The two most important qualities for an operational auditor are: |

|medium |a. personality and appearance. |

|b |b. independence and competence. |

| |c. competence and technical training. |

| |d. academic background and sufficient experience. |

|25. |Which of the following is not a difference between operational auditing and financial auditing? |

|medium |a. Both must be CPAs. |

|a |b. Operational audit reports are usually of a restricted distribution while financial audit reports are widely |

| |distributed. |

| |c. Operational audits often cover non-financial issues while financial audits do not. |

| |d. None of the above is a difference. |

|26. |A typical objective of an operational audit is to determine whether an entity’s: |

|medium |a. internal control is adequately operating as designed. |

|c |b. financial statements present fairly the results of operations. |

| |c. specific operating units are functioning efficiently and effectively. |

| |b. operational information is in accordance with generally accepted government auditing standards. |

|27. |Which of the following can affect the independence of operational auditors? |

|medium | |Responsibilities | |Reporting Structure |

|d |a. |Yes | |No |

| |b. |No | |No |

| |c. |No | |Yes |

| |d. |Yes | |Yes |

| | |

|28. |Which is not a purpose of an economy and efficiency audit? |

|challenging |a. Whether the entity is acquiring, protecting, and using resources economically and efficiently. |

|d |b. The causes of inefficiencies and uneconomical practices. |

| |c. Whether the entity has complied with laws and regulations concerning matters of economy and efficiency. |

| |d. Each of the above is a purpose. |

|29. |A(n) _________ audit emphasizes how efficiently and effectively functions interact. |

|challenging |a. operational |

|d |b. compliance |

| |c. financial |

| |d. organizational |

|30. |Which of the following is not a purpose of a program audit as performed by government auditors? |

|challenging |a. Determination of the extent to which the desired results established by the legislature are being achieved. |

|b |b. Determination of the causes of inefficiencies in sponsored programs. |

| |c. Determination of the effectiveness of organizations, programs and activities. |

| |d. Determination as to whether the entity has complied with laws and regulations applicable to the program. |

|31. |What distinguishes internal control evaluation and testing for financial and operational auditing? |

|challenging |a. Purpose of the work. |

|c |b. Scope of the work. |

| |c. Both a and b. |

| |d. Neither a nor b. |

|32. |Of the many hours of continuing professional education required every two years, how many must be in subjects related|

|challenging |to the government environment and government auditing for auditors involved in planning, performing and reporting on |

|c |audits under GAGAS? |

| |a. 8 hours |

| |b. 16 hours |

| |c. 24 hours |

| |d. 32 hours |

|33. |To be effective, an internal audit department must report to: |

|Challenging | |

|b | |Operating departments | |The accounting department |

| |a. |Yes | |Yes |

| |b. |No | |No |

| |c. |Yes | |No |

| |d. |No | |Yes |

| | | | | |

|34. |External financial statement auditors must obtain evidence regarding what attributes of an internal audit department |

|challenging |if the external auditors intend to rely on the internal auditor’s work? |

|d | |

| | |Independence from the Audit Committee | |Competence |

| |a. |Yes | |Yes |

| |b. |No | |No |

| |c. |Yes | |No |

| |d. |No | |Yes |

| | | | | |

Essay Questions

|35. |What organization establishes auditing standards for internal auditors and what are those standards commonly called? |

|easy | |

| |Answer: |

| |Auditing standards for internal auditors are established by the Internal Auditing Standards Board. They are commonly |

| |known as the “Red Book.” |

| | |

|36. |What are several similarities between internal and external auditors? |

|medium | |

| |Answer: |

| |Both must be competent as auditors and remain objective in performing their work and reporting their results. |

| |Both follow a similar methodology in performing their audits, including planning and performing tests of controls and|

| |substantive tests. |

| |Both consider risk and materiality in deciding the extent of their tests and evaluating results. However, their |

| |decisions about materiality and risks may differ, because external users may have different needs than management or |

| |the board. |

| | |

|37. |External auditors typically consider internal auditors effective if they meet three criteria. What are these |

|medium |criteria? |

| |Answer: |

| |External auditors typically consider internal auditors effective if they are: |

| |Independent of the operating units being evaluated |

| |Competent and well-trained |

| |Have performed relevant audit tests of the internal controls and financial statements |

| | |

|38. |How do the risk and materiality thresholds change in a government audit compared to a financial statement audit of a |

|medium |public company? |

| |Answer: |

| |The Yellow Book recognizes that in government audits the thresholds of acceptable audit risk and materiality may be |

| |lower than in an audit of a commercial enterprise. This is because of the sensitivity of government activities and |

| |their public accountability. |

| | |

|39. |Discuss each of the three phases of an operational audit. |

|medium | |

| |Answer: |

| |Planning. In the planning phase, the auditor must determine the scope of the engagement, staff the engagement, obtain|

| |background information about the organizational unit, understand internal control, and decide on the appropriate |

| |evidence to accumulate. |

| |Evidence accumulation and evaluation. In operational auditing, it is common to use documentation, client inquiry, and|

| |observation extensively, while confirmation and reperformance are used less extensively for most operational audits |

| |than for financial audits. |

| |Reporting and follow-up. The audit report is tailored to address the scope of the audit, findings, and |

| |recommendations and is typically sent only to management. When recommendations are made to management, follow-up is |

| |done to determine whether the recommended changes were made, and if not, why. |

| | |

|40. |The Institute of Internal Auditors has established Ethical Principles for its members. List each of the principles. |

|medium | |

| |Answer: |

| |The IIA’s ethical principles are: |

| |Integrity. |

| |Objectivity. |

| |Confidentiality. |

| |Competency. |

| | |

|41. |Define internal auditing. |

|medium | |

| |Answer: |

| | |

| |According to the IIA: “Internal auditing is an independent, objective assurance and consulting activity designed to |

| |add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a |

| |systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and |

| |governance processes.” |

| | |

|42. |Discuss three major differences between operational and financial auditing. |

|medium | |

| |Answer: |

| |Purpose of the audit. Financial auditing emphasizes whether historical information was correctly recorded, whereas |

| |operational auditing emphasizes effectiveness and efficiency. |

| |Distribution of the reports. For financial auditing, the report typically goes to many users of financial statements,|

| |such as stockholders and bankers, whereas operational audit reports are intended primarily for management. |

| |Inclusion of nonfinancial areas in operational auditing. Operational audits cover any aspect of efficiency and |

| |effectiveness in an organization, whereas financial audits are limited to matters that directly affect the fairness |

| |of financial statement presentations. |

| | |

|43. |Discuss each of the three broad categories (types) of operational audits. |

|medium | |

| |Answer: |

| |Functional. A functional audit deals with auditing one or more functions (e.g., purchasing) in an organization. |

| |Organizational. An organizational audit deals with an entire organizational unit, such as a department, branch, or |

| |subsidiary. |

| |Special assignments. Special assignments audits arise at the request of management when there is a need to |

| |investigate a particular area, such as investigating the possibility of fraud in a division, or determining the cause|

| |of an ineffective EDP system. |

| | |

|44. |Operational auditing is the review of an organization for efficiency and effectiveness. Discuss what is meant by the |

|medium |terms “effectiveness” and “efficiency.” |

| |Answer: |

| |Effectiveness refers to the degree to which the organization’s objectives and goals are accomplished. |

| |Efficiency refers to the degree to which costs are reduced without reducing effectiveness. |

| | |

|45. |Audit tests as required by the Single Audit Act must meet several specific objectives. One objective is to determine |

|challenging |“whether the amounts reported as expenditures were for allowable services.” Identify three other specific objectives.|

| |Answer: |

| |Whether the records show that those who received services or benefits were eligible to receive them. |

| |Whether matching requirements, levels of effort, and earmarking limitations were met. |

| |Whether federal financial reports and claims for advances and reimbursements contain information that is supported by|

| |the books and records from which the basic financial statements have been prepared. |

| |Whether amounts claimed or used for matching were determined in accordance with OMB Circular A-87 and OMB Circular |

| |A-102. |

| | |

|46. |The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the |

|challenging |AICPA. There are, however, important additions/modifications in the Yellow Book. For example, the Yellow Book |

| |recognizes that materiality and risk are lower due to the nature of the government enterprise. Discuss the other |

| |additions/modifications. |

| |Answer: |

| |Quality control. Auditors of government entities must have an appropriate system of internal quality control and |

| |participate in an external quality control review program. |

| |Compliance auditing. The audit should be designed to provide reasonable assurance of detecting material misstatements|

| |resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect |

| |on the financial statements. |

| |Reporting. The report on financial statements must describe the scope of the auditors’ testing of compliance with |

| |laws and regulations and internal controls and present the results of those tests, or refer to a separate report |

| |containing that information. |

|47. |In addition to an opinion on whether the financial statements are in accordance with GAAP, identify four other |

|challenging |reports required by the OMB Circular A-133. |

| |Answer: |

| |The following reports are required: |

| |An opinion as to whether the schedule of federal awards is presented fairly in all material respects in relation to |

| |the financial statements as a whole. |

| |A report on internal control related to the financial statements and major programs. |

| |A report on compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance |

| |with which could have a material effect on the financial statements. This report can be combined with the report on |

| |internal control. |

| |A schedule of findings and questioned costs. |

| | |

Other Objective Answer Format Questions

|48. |Match seven of the terms (a-o) with the descriptions/definitions provided below (1-7): |

|medium | |

| |a. Compliance audit |

| |b. Economy and efficiency audit |

| |c. Effectiveness |

| |d. Efficiency |

| |e. Functional audit |

| |f. Government Auditing Standards |

| |g. Government audit |

| |h. Institute of Internal Auditors |

| |i. Operational auditing |

| |j. Organizational audit |

| |k. Program audit |

| |l. Single Audit Act |

| |m. Special assignment |

| |n. IIA Practice Standards |

| |o. Statements on Internal Auditing Standards |

| | |

|f | 1. The official title of the Yellow Book. |

|m | 2. A management request for an operational audit for a specific purpose, such as investigating the possibility of |

| |fraud in a division or making recommendations for reducing the cost of a manufactured product. |

|b | 3. A government audit to determine whether an entity is acquiring, protecting, and using its resources |

| |economically and efficiently and whether the entity has complied with laws and regulations concerning such matters. |

|c | 4. The degree to which the organization’s objectives are accomplished. |

|i | 5. The review of an organization for efficiency and effectiveness. |

|l | 6. Federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all |

| |federal funding agencies. |

|o | 7. Statements issued by the Internal Auditing Standards Board of the IIA to provide authoritative interpretation |

| |of the IIA Practice Standards. |

|49. |Independence is a fundamental ethical principle for internal auditors. |

|easy |a. True |

|b |b. False |

|50. |Current professional auditing standards prohibit external auditors from using internal auditors for direct assistance|

|easy |on external audits. |

|b |a. True |

| |b. False |

|51. |Current professional auditing standards require external auditors to use internal auditors for direct assistance on |

|easy |external audits. |

|b |a. True |

| |b. False |

|52. |The objectives of internal auditors are considerably broader than the objectives of external auditors. |

|easy |True |

|a |False |

|53. |For financial auditing, the audit report typically goes to many users of financial statements, whereas operational |

|easy |audit reports are intended primarily for management. |

|a |a. True |

| |b. False |

|54. |Integrity is one of the IIA’s ethical principles. |

|easy |a. True |

|a |b. False |

|55. |Operational audits are primarily geared toward compliance. |

|easy |a. True |

|b |b. False |

|56. |Effectiveness refers to the degree to which costs are reduced without reducing efficiency. |

|easy |a. True |

|b |b. False |

|57. |Efficiency refers to the degree to which costs are reduced without reducing effectiveness. |

|easy |a. True |

|a |b. False |

|58. |Internal auditing standards are included in the Yellow Book. |

|easy |a. True |

|b |b. False |

|59. |Government auditing standards are included in the Yellow Book. |

|easy |a. True |

|a |b. False |

|60. |Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is concerned with whether the |

|easy |goals are achieved with a minimum use of resources. |

|a |a. True |

| |b. False |

|61. |Operational audits may be performed by internal auditors and government auditors, but not by external auditors. |

|easy |a. True |

|b |b. False |

|62. |Benchmarking is one source of evaluation criteria for completing an operational audit. |

|easy |a. True |

|a |b. False |

|63. |The two most important qualities for an internal auditor to possess are independence and competence. |

|easy |a. True |

|a |b. False |

|64. |Program audits are primarily focused on inefficient uses of federal funds in sponsored programs. |

|easy |a. True |

|b |b. False |

|65. |The formal name of the Yellow Book is Government Auditing Standards. |

|easy |a. True |

|a |b. False |

|66. |Professional guidelines for performing internal audits for companies are not as well-defined as for external audits. |

|medium |a. True |

|a |b. False |

|67. |To help them remain independent of the operations they audit, internal auditors should report directly to the |

|medium |controller. |

|b |a. True |

| |b. False |

|68. |An operational auditor may use “engineered standards” as evaluation criteria. |

|medium |a. True |

|a |b. False |

|69. |The Internal Auditing Standards Board issues Statements on Internal Auditing Standards. |

|medium |a. True |

|a |b. False |

|70. |Operational audits are often categorized as functional, organizational, or special assignments. |

|medium |a. True |

|a |b. False |

|71. |Internal auditors should have the authority to require implementation of suggestions for improvement. |

|medium |a. True |

|b |b. False |

|72. |The “Red Book” specifies all auditing standards issued by the U.S. General Accounting Office. |

|medium |a. True |

|b |b. False |

|73. |One disadvantage of functional auditing is the failure to evaluate interrelated functions. |

|challenging |a. True |

|a |b. False |

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