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
easy the audit.
d a. discourage
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.

Arens/Elder/Beasley 
8. When a state or local government agency receives federal financial assistance, it is subject to
easy the audit 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
easy Standards for the 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
easy is the:
b a. APA.
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

Arens/Elder/Beasley 
medium public accountability, in government audits the thresholds of acceptable audit risk and tolerable
b misstatement compared to an audit of a 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
medium funds in any fiscal 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
medium the audit was 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
medium of an organization 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
medium auditing?
c a. The financial audit is oriented to the past, but an operational audit concerns performance
for the future.
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
medium ____ hours of continuing 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.

Arens/Elder/Beasley 
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
d efficiently.
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
challenging auditors?
b 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.

Arens/Elder/Beasley 
 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
challenging auditing?
c a. Purpose of the work.
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
challenging must be in subjects related to the government environment and government auditing for auditors
c involved in planning, performing and reporting on 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
challenging internal audit department 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

Matching Type
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

Arens/Elder/Beasley 
 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.

1. Independence is a fundamental ethical principle for internal auditors.

easy a. True
b b. False

2. Current professional auditing standards prohibit external auditors from using internal auditors
easy for direct assistance on external audits.
b a. True
b. False

3. Current professional auditing standards require external auditors to use internal auditors for
easy direct assistance on external audits.
b a. True
b. False

4. The objectives of internal auditors are considerably broader than the objectives of external
easy auditors.
a a. True
b. False

5. For financial auditing, the audit report typically goes to many users of financial statements,
easy whereas operational audit reports are intended primarily for management.
a a. True
b. False

6. Integrity is one of the IIA’s ethical principles.

easy a. True
a b. False

7. Operational audits are primarily geared toward compliance.

easy a. True
b b. False

8. Effectiveness refers to the degree to which costs are reduced without reducing efficiency.
easy a. True

Arens/Elder/Beasley 
b b. False

9. Efficiency refers to the degree to which costs are reduced without reducing effectiveness.
easy a. True
a b. False

10. Internal auditing standards are included in the Yellow Book.

easy a. True
b b. False

11. Government auditing standards are included in the Yellow Book.

easy a. True
a b. False

12. Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is
easy concerned with whether the goals are achieved with a minimum use of resources.
a a. True
b. False

13. Operational audits may be performed by internal auditors and government auditors, but not by
easy external auditors.
b a. True
b. False
14. Benchmarking is one source of evaluation criteria for completing an operational audit.
easy a. True
a b. False

15. The two most important qualities for an internal auditor to possess are independence and
easy competence.
a a. True
b. False

16. Program audits are primarily focused on inefficient uses of federal funds in sponsored
easy programs.
b a. True
b. False

17. The formal name of the Yellow Book is Government Auditing Standards.
easy a. True
a b. False

18. Professional guidelines for performing internal audits for companies are not as well-defined as
medium for external audits.
a a. True
b. False

19. To help them remain independent of the operations they audit, internal auditors should report
medium directly to the controller.
b a. True
b. False

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

medium a. True
a b. False

21. The Internal Auditing Standards Board issues Statements on Internal Auditing Standards.

Arens/Elder/Beasley 
medium a. True
a b. False

22. Operational audits are often categorized as functional, organizational, or special assignments.
medium a. True
a b. False

23. Internal auditors should have the authority to require implementation of suggestions for
medium improvement.
b a. True
b. False

24. The “Red Book” specifies all auditing standards issued by the U.S. General Accounting Office.
medium a. True
b b. False

25. One disadvantage of functional auditing is the failure to evaluate interrelated functions.
challenging a. True
a b. False

Arens/Elder/Beasley