1

CHAPTER 26

MULTIPLE CHOICE QUESTIONS

1. The IIA Code of Ethics is based on all but which of the following ethical
principles?
A. Integrity
B. Independence
C. Competency
D. Confidentiality

2. Which of the following is not one of the IIA’s Rules of Conduct?

A. Objectivity
B. Independence
C. Competency
D. Confidentiality

3. Financial auditing under the Yellow Book includes audits of

A. Fraud
B. Internal control
C. Financial statements of government units
D. All three of the above

4. When a state or local government agency receives federal financial assistance, it

is subject to the audit requirements of
A. The Yellow Book
B. The Single Audit Act
C. The OMB Circular A-133.
D. All three of the above

5. Which of the following is not one of the broad categories of operational audits?
A. Functional audits
B. Organizational audits
C. Single Audit Act audits
D. Special assignment audits

6. Which of the following groups would not be involved in an operational audit?

 2

A. CPA firms
B. Internal auditors
C. Government auditors
D. None of the above answers is correct; that is, all of the above would be
involved.

7. The IIA’s professional practice framework (including its code of ethics and
International Standards for the Professional Practice of Internal Auditing) is
commonly referred to as
A. The Blue Book
B. The Red Book
C. The Green Book
D. The Yellow Book

8. The professional organization which is responsible for providing guidance for

internal auditors is the
A. AICPA
B. IIA
C. SEC
D. IIIA

9. Which of the following is not one of the IIA’s “Attribute Standards?”

A. Independence and Objectivity
B. Proficiency and Due Professional Care
C. Quality Assurance and Improvement Program
D. All of the above are attribute standards

10. Which of the following is not one of the three phases in an operational audit?
A. Planning
B. Training and supervising employees
C. Evidence accumulation and evaluation
D. Reporting and follow-up

11. The Internal Auditing Standards Board issues:

A. Statements on Auditing Standards
B. Statements on Internal Auditing Standards
C. Both A and B
 3

D. Neither A nor B
12. The correct title of the Yellow Book is
A. Government Auditing Standards
B. IIA Practice Standards
C. Statement of Responsibilities of Internal Auditing
D. Statement of Standards on Accounting and Review Services

13. The Yellow Book recognizes that, because of the sensitivity of government
activities and their public accountability, in government audits the thresholds of
acceptable audit risk and tolerable misstatement compared to an audit of a
commercial enterprise may be
A. Equal
B. Lower
C. Higher
D. Indeterminable

14. The major difference between the Yellow Book and generally accepted auditing
standards is in the area of
A. General standards
B. Fieldwork standards
C. Reporting standards
D. Internal control standards

15. The Single Audit Act requires that an audit be conducted for recipients who
receive total federal financial assistance in any fiscal year of
A. $1,000,000 or more
B. $ 500,000 or more
C. $ 300,000 or more
D. $ 100,000 or more

16. An audit designed to evaluate the efficiency and effectiveness of an organization

or some part thereof would not come under the title of
A. Performance audit
B. Management audit
C. Operational audit
D. Compliance audit
 4

17. Which of the following is not one of the major differences between financial and
operational auditing?
A. The financial audit is oriented to the past, whereas an operational audit
concerns performance for the future
B. The financial audit report is distributed to many readers, whereas the
operational audit report goes to a few managers
C. Financial audits deal with the information on the financial statements,
whereas operational audits are concerned with the information in the
ledgers.
D. Financial audits are limited to matters that directly affect the financial
statements, whereas operational audits cover any aspect of efficiency and
effectiveness.

18. Before an operational audit for effectiveness can be performed, there must be
A. A financial audit by an independent auditor
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.

19. Which of the following statements regarding internal control evaluation and
testing is not correct?
A. The purpose of internal control evaluation for operational auditing is to
evaluate efficiency and effectiveness.
B. The purpose of internal control evaluation for financial auditing is to
determine the extent of tests of controls required.
C. The scope of internal control evaluation for financial audits is restricted to
matters affecting financial statement accuracy.
D. The scope of internal control evaluation for operational auditing concerns
any control affecting efficiency or effectiveness.

20. Which of the following statements regarding types of operational audits is false?
A. A functional audit has the advantage of permitting specialization by
auditors.
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.
 5

D. Special operational auditing assignments arise at the request of

management.

21. When CPA firms do an audit of historical financial statements, part of the audit
usually consists of identifying operational problems and making
recommendations that may benefit the audit client. The recommendations can be
made orally but they are typically made by use of a
A. Letter of representation
B. Engagement letter
C. Management letter
D. Client letter

22. The two most important qualities for an operational auditor are
A. Personality and appearance
B. Independence and competence
C. Competence and technical training
D. Academic background and sufficient experience

23. Which of the following is not one of the IIA’s “Performance Standards?”
A. Engagement planning
B. Communicating results
C. Proficiency and due professional care
D. Monitoring progress

24. The seven types of evidence are equally applicable for operational and financial
auditing. The two that are used less extensively in operational auditing are
A. Documentation and client inquiry
B. Observation and physical examination
C. Confirmation and reperformance
D. Analytical tests and client inquiry.

25. A typical objective of an operational audit is to determine whether an entity’s

A. Internal control is adequately operating as designed
B. Financial statements present fairly the results of operations
C. Specific operating units are functioning efficiently and effectively.
 6

D. Operational information is in accordance with generally accepted

government auditing standards.

26. Which of the following is not a purpose of a program audit as performed by

government auditors?
A. Determination of the extent to which the desired results established by the
legislature are being achieved.
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.

27. The Yellow Book requires that auditors responsible for significant portions of
the audit attend, in the two-year period to the audit, at least
A. 8 hours of government audit education
B. 16 hours of government audit education
C. 24 hours of government audit education
D. 32 hours of government audit education

28. The Yellow Book does not define and set standards for
A. Program audits
B. Performance audits
C. Agreed-upon procedures audits
D. Economy and efficiency audits

29. There are several sources that the operational auditor can utilize in developing
specific evaluation criteria. An area that would not be such a source is
A. Generally accepted accounting principles
B. Benchmarking, such as the data of comparable entities.
C. Historical performance, such as results from prior periods.
D. Discussion and agreement between the management of the entity to be
audited, the operational auditor, and the entity or persons to whom the
findings will be reported.
 7

ESSAY QUESTIONS

30. Discuss each of the three phases of an operational audit.

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.

31. The Institute of Internal Auditors has established Ethical Principles for its
members. List each of the principles.
ANSWER:
The IIA’s ethical principles are:
 Integrity
 Objectivity
 Confidentiality
 Competency

32. Discuss three major differences between operational and financial auditing.
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.
 8

 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.

33. Discuss the primary purpose of the auditor’s evaluation of internal control in (1)
an external audit of historical financial statements for a nonpublic entity, and (2)
an operational audit.
ANSWER:
(1) The primary purpose of internal control evaluation for financial auditing is
to determine the extent of substantive audit testing required. (2) The
purpose of internal control evaluation in an operational audit is to evaluate
efficiency and effectiveness of internal control and make recommendations
to management.

34. Discuss each of the three broad categories (types) of operational audits.
ANSWER:
 Functional. A functional audit deals with auditing one or more functions 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.

35. Operational auditing is the review of an organization for efficiency and

effectiveness. Discuss what is meant by the terms (1) “effectiveness” and (2)
“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.
 9

36. Discuss the purposes of program audits conducted under the auspices of the US
General Accounting Office.
ANSWER:
A program audit has three primary. These are:
 Determination of the extent to which the desired results established by the
legislature are being achieved.
 Determination of the effectiveness organizations, program and activities.
 Determination as to whether the entity has complied with laws and
regulations applicable to the program.

37. The Institute of Internal Auditors has established four “Attribute Standards” for
its members. Briefly described these four standards.
ANSWER:
THE IIA’s “Attribute Standards” are as follows:
 Purpose, Authority, and Responsibility – The purpose, authority, and
responsibility of the internal audit activity should be formally defined in a
charter, consistent with the Standards, and approved by the board.
 Independence and Objectivity – The internal audit activity should be
independent, and internal auditors should be objective in performing their
work.
 Proficiency and Due Professional Care – Engagements should be
performed with proficiency and due professional care.
 Quality Assurance and Improvement Program – The chief audit
executive should develop and maintain a quality assurance and
improvement program that covers all aspects of the internal audit activity
and continuously monitors its effectiveness. The program should be
designed to help the internal auditing activity add value and improve the
organization’s operations and to provide assurance that the internal audit
activity is in conformity with Standards and Code of Ethics.

38. Discuss two differences between the Yellow Book reporting requirements and
those of generally accepted auditing standards issued by the AICPA.
ANSWER:
Yellow Book standards require the following:
 The report must state that the audit was done in accordance with generally
accepted government auditing standards.
 10

 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.

39. Audit tests as required by the Single Audit Act must meet several specific
objectives. One objective is to determine “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 earnmarking
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 the cost principles and administrative requirements in
relevant OMB circulars.

40. The auditing standards of the Yellow Book are consistent with the ten generally
accepted auditing standards of the AICPA. There are, however, five important
additions/modifications in the Yellow Book. Discuss these five
additions/modifications.
ANSWER:
 Materiality and significance. The Yellow Book recognizes that in
government audits the thresholds of acceptable audit risk and tolerable
misstatement may be lower than in an audit of a commercial enterprise.
 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
 11

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.
 Audit files. The Yellow Book indicates that audit files should contain
sufficient information to enable an auditor reviewer with no previous
connection to the audit to ascertain from the audit files evidence that
supports the auditors’ significant conclusions and judgments.

41. In addition to an opinion on whether the financial statements are in accordance

with GAAP, identify four other 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, where noncompliance 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. A report on compliance with
laws and regulations identifying all findings of noncompliance and
questioned costs.

OTHER OBJECTIVE ANSWER FORMAT QUESTIONS

42. Match five of the terms (A-O) with the descriptions/definitions provided below
(1-5):
A. Compliance audit
B. Economy and efficiency audit
C. Effectiveness
D. Efficiency
E. Functional audit
 12

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.

43. If internal auditors are effective, then the external auditor is justified in reducing
the assessed level of control risk.
A. True
B. False

44. Current professional auditing standards prohibit external auditors from using
internal auditors for direct assistance on external audits.
A. True
B. False

45. The objectives of internal auditors are considerably broader than the objectives
of external auditors.
A. True
 13

B. False

46. For financial auditing, the audit report typically goes to many users of financial
statements, whereas operational audit reports are intended primarily for
management.
A. True
B. False

47. Independence is one of the IIA’s ethical principles

A. True
B. False

48. Effectiveness refers to the degree to which costs are reduced without reducing
efficiency.
A. True
B. False

49. Efficiency refers to the degree to which costs are reduced without reducing
effectiveness.
A. True
B. False

50. Effectiveness is concerned with whether defined goals are achieved, whereas
efficiency is concerned with whether the goals are achieved with a minimum use
of resources.
A. True
B. False

51. Operational audits may be performed by internal auditors and government

auditors, but not by external auditors.
A. True
B. False

52. Benchmarking is one source of evaluation criteria for completing an operational

audit.
A. True
B. False
 14

53. The IIA’S professional framework is published in a text commonly known as

the “Blue Book.”
A. True
B. False

54. The two most important qualities for an internal auditor to possess are
independence and competence.
A. True
B. False

55. Program audits are primarily focused on inefficient uses of federal funds in
sponsored programs.
A. True
B. False

56. The formal name of the Yellow Book is Government Auditing Standards
A. True
B. False

57. Professional guidelines for performing internal audits for companies are not as
well-defined as for external audits.
A. True
B. False

58. Generally accepted auditing standards permit identifying, in the audit report,
material internal control weaknesses, whereas the Yellow Book requires it.
A. True
B. False

59. To help them remain independent of the operations they audit, internal auditors
should report directly to the controller
A. True
B. False

60. The Yellow Book permits considerable freedom on the form of the audit report
for performance audits.
 15

A. True
B. False

61. The Internal Auditing Standards Board issues Statements on Internal Auditing
Standards.
A. True
B. False

62. Operational audits are often categorized as functional, organizational, or special

assignments.
A. True
B. False

63. Internal auditors should have the authority to require implementation of

suggestions for improvement.
A. True
B. False

64. The “Red Book” specifies all auditing standards issued by the US General
Accounting Office.
A. True
B. False

65. One disadvantage of functional auditing is the failure to evaluate interrelated

functions.
A. True
B. False

66. External auditors often reduce their level of planned detection risk when internal
auditors are competent and independent in the conduct of their work.
A. True
B. False

67. Internal auditors should have the authority to correct any deficiencies found in
the entity’s operations.
A. True
B. False
16