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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