Introduction to Auditing - Exam Practice (100
questions)
KU Leuven - Introduction to Auditing - 100 exam-style questions with model answers
Answers are shown in red beneath each question.
Multiple-choice questions are labelled A-D; some ask for the INCORRECT statement, some for the
CORRECT/best answer - read each stem carefully.
Cover the red answers and attempt each question first.
Part A — Multiple-choice questions (identify the requested statement)
1. [Multiple choice] Each statement concerns the economics of auditing. Which statement is
INCORRECT?
A) An audit can be defined as the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and established
criteria.
B) Audit quality is commonly defined as the joint probability that the auditor both detects and
reports a material misstatement, and therefore requires both competence and independence.
C) Auditing reduces information risk, i.e. the risk that the information used by decision-makers is
materially inaccurate.
D) An auditing service is often called a credence good because its quality is easy to verify in
advance but impossible to judge after consumption.
Answer: D. A credence good is the opposite: its quality is difficult to observe in advance AND can
be ascertained only upon (and often not even after) consumption, which is exactly why auditor
reputation matters. The other three statements are correct.
2. [Multiple choice] Which statement about audit assurance and audit errors is INCORRECT?
A) Auditors provide reasonable assurance, meaning a high but not absolute level of assurance
that the financial statements are free from material misstatement.
B) Because auditors guarantee the accuracy of the financial statements, no audit risk remains
once an unqualified opinion is issued.
C) The β-risk (Type II error) is the risk that the auditor issues an unqualified opinion while the
financial statements are in fact materially misstated.
D) The α-risk (Type I error) is the risk that the auditor concludes the statements are not free from
material misstatement while in fact they are free from material misstatement.
, Answer: B. Auditors never guarantee accuracy; they give reasonable (not absolute) assurance, so
some audit risk always remains. the other three statements correctly state assurance and the two
error types.
3. [Multiple choice] Which statement about the demand for auditing is INCORRECT?
A) Information demand explains audit as a way to reduce information asymmetry and the adverse-
selection ('lemons') problem in capital markets.
B) Voluntary audit demand exists only because the law forces companies above a size threshold
to be audited.
C) Agency demand views the audit as a monitoring device that reduces agency costs between
owners and managers.
D) Insurance (deep-pocket) demand reflects that auditors' liability lets users shift part of a loss to a
party with deeper pockets.
Answer: B. That statement confuses mandatory demand with voluntary demand: voluntary
demand exists precisely where there is no legal obligation (information, agency, insurance
motives). the other three statements correctly describe the three voluntary-demand theories.
4. [Multiple choice] Which statement about the audit market is INCORRECT?
A) The market for audits of large entities is highly concentrated and is best described as an
oligopoly.
B) Research shows audit firms compete exclusively through a cost-leadership strategy and never
through differentiation.
C) The collapse of Arthur Andersen following the Enron scandal reduced the largest firms from the
Big 5 to the Big 4.
D) Empirical evidence indicates that auditors with a higher reputation can charge fee premiums.
Answer: B. Two research streams exist: one argues firms compete through differentiation
(quality), the other through cost leadership; it is not exclusively cost leadership. the other three
statements are correct.
5. [Multiple choice] Which statement about audit regulation is INCORRECT?
A) Audit regulation is partly justified by market failure arising from information asymmetry, lack of
competition and externalities.
B) Ex-ante audit-demand regulation makes an audit mandatory, e.g. for EU companies above a
size threshold.
, C) Ex-ante product-quality regulation includes independence rules such as mandatory rotation and
restrictions on non-audit services.
D) Ex-post product-quality regulation sets the quality of the audit before it is performed, e.g.
through the ISA standards.
Answer: D. Setting quality before the fact (ISAs, independence rules) is ex-ante product-quality
regulation; ex-post regulation disciplines quality after the fact through litigation and liability. the
other three statements are correct.
6. [Multiple choice] Which statement about the Sarbanes-Oxley Act (US, 2002) is INCORRECT?
A) It created the PCAOB, an oversight body independent of the audit profession that registers,
inspects and sets standards for auditors of SEC registrants.
B) It requires mandatory rotation of the audit firm every five years for all listed companies.
C) It requires listed companies to have an independent audit committee including at least one
financial expert.
D) It introduced the integrated audit, in which the auditor reports on the financial statements and
on internal control over financial reporting.
Answer: B. SOX requires rotation of the audit partner every five years, not rotation of the firm;
mandatory firm rotation is an EU feature. the other three statements are correct.
7. [Multiple choice] Which statement about the EU Audit Reform 2014 is INCORRECT?
A) It abolished public oversight of the profession and returned full self-regulation to the audit
institutes.
B) For public-interest entities, fees for permitted non-audit services are capped at 70% of the audit
fee.
C) It expanded the audit report, notably by introducing Key Audit Matters.
D) It introduced mandatory audit-firm rotation for public-interest entities.
Answer: A. The reform strengthened public oversight by bodies outside the profession (with
inspections at least every three years for PIE auditors); it did not abolish oversight. the other three
statements are correct.
8. [Multiple choice] Which statement about Belgian audit regulation is INCORRECT?
A) In Belgium the statutory-auditor (commissaris) mandate is a monopoly of registered auditors
who are members of the IBR/IRE.
, B) There is mandatory external rotation for public-interest entities every nine years, extendable to
18 years after a public tendering process.
C) Audit documentation must be retained for ten years in Belgium, longer than the five-year
minimum in the ISAs.
D) A company must appoint a statutory auditor only if it exceeds all three of the size criteria
(employees, turnover and total assets) simultaneously.
Answer: D. A statutory audit is required when at least two of the three criteria are exceeded (50
employees; €9,000,000 turnover; €4,500,000 total assets), not all three. the other three statements
are correct.
9. [Multiple choice] Which statement about non-audit services and independence is INCORRECT?
A) Selling non-audit services to an audit client strengthens the auditor's independence because it
deepens the auditor's knowledge of the client.
B) In the EU certain HR-recruitment services are forbidden non-audit services for the incumbent
auditor of a public-interest entity.
C) The Belgian 'one-to-one rule' historically meant the auditor and its network could not earn more
in non-audit-service fees than in audit fees from the same client.
D) Belgium imposes a two-year cooling-off period before an auditor can take an executive position
at a former audit client.
Answer: A. Selling non-audit services creates a financial incentive that threatens independence;
this is exactly why such services are restricted. the other three statements are correct.
10. [Multiple choice] Which of the following is the CORRECT statement about the Belgian size
thresholds for a mandatory statutory audit?
A) More than 100 employees, turnover above €15,000,000 and total assets above €10,000,000,
all required together.
B) Only listed companies, regardless of size, must appoint a statutory auditor.
C) At least two of: 50 employees on average, turnover (excl. VAT) of €9,000,000, and total assets
of €4,500,000.
D) At least two of: 250 employees, turnover of €40,000,000 and total assets of €20,000,000.
Answer: C. Belgium requires a statutory auditor when at least two of the three thresholds are
exceeded: 50 employees, €9.0m turnover, €4.5m total assets. The other options state incorrect
figures or scope.
11. [Multiple choice] Which statement about the audit process and audit objectives is INCORRECT?
questions)
KU Leuven - Introduction to Auditing - 100 exam-style questions with model answers
Answers are shown in red beneath each question.
Multiple-choice questions are labelled A-D; some ask for the INCORRECT statement, some for the
CORRECT/best answer - read each stem carefully.
Cover the red answers and attempt each question first.
Part A — Multiple-choice questions (identify the requested statement)
1. [Multiple choice] Each statement concerns the economics of auditing. Which statement is
INCORRECT?
A) An audit can be defined as the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and established
criteria.
B) Audit quality is commonly defined as the joint probability that the auditor both detects and
reports a material misstatement, and therefore requires both competence and independence.
C) Auditing reduces information risk, i.e. the risk that the information used by decision-makers is
materially inaccurate.
D) An auditing service is often called a credence good because its quality is easy to verify in
advance but impossible to judge after consumption.
Answer: D. A credence good is the opposite: its quality is difficult to observe in advance AND can
be ascertained only upon (and often not even after) consumption, which is exactly why auditor
reputation matters. The other three statements are correct.
2. [Multiple choice] Which statement about audit assurance and audit errors is INCORRECT?
A) Auditors provide reasonable assurance, meaning a high but not absolute level of assurance
that the financial statements are free from material misstatement.
B) Because auditors guarantee the accuracy of the financial statements, no audit risk remains
once an unqualified opinion is issued.
C) The β-risk (Type II error) is the risk that the auditor issues an unqualified opinion while the
financial statements are in fact materially misstated.
D) The α-risk (Type I error) is the risk that the auditor concludes the statements are not free from
material misstatement while in fact they are free from material misstatement.
, Answer: B. Auditors never guarantee accuracy; they give reasonable (not absolute) assurance, so
some audit risk always remains. the other three statements correctly state assurance and the two
error types.
3. [Multiple choice] Which statement about the demand for auditing is INCORRECT?
A) Information demand explains audit as a way to reduce information asymmetry and the adverse-
selection ('lemons') problem in capital markets.
B) Voluntary audit demand exists only because the law forces companies above a size threshold
to be audited.
C) Agency demand views the audit as a monitoring device that reduces agency costs between
owners and managers.
D) Insurance (deep-pocket) demand reflects that auditors' liability lets users shift part of a loss to a
party with deeper pockets.
Answer: B. That statement confuses mandatory demand with voluntary demand: voluntary
demand exists precisely where there is no legal obligation (information, agency, insurance
motives). the other three statements correctly describe the three voluntary-demand theories.
4. [Multiple choice] Which statement about the audit market is INCORRECT?
A) The market for audits of large entities is highly concentrated and is best described as an
oligopoly.
B) Research shows audit firms compete exclusively through a cost-leadership strategy and never
through differentiation.
C) The collapse of Arthur Andersen following the Enron scandal reduced the largest firms from the
Big 5 to the Big 4.
D) Empirical evidence indicates that auditors with a higher reputation can charge fee premiums.
Answer: B. Two research streams exist: one argues firms compete through differentiation
(quality), the other through cost leadership; it is not exclusively cost leadership. the other three
statements are correct.
5. [Multiple choice] Which statement about audit regulation is INCORRECT?
A) Audit regulation is partly justified by market failure arising from information asymmetry, lack of
competition and externalities.
B) Ex-ante audit-demand regulation makes an audit mandatory, e.g. for EU companies above a
size threshold.
, C) Ex-ante product-quality regulation includes independence rules such as mandatory rotation and
restrictions on non-audit services.
D) Ex-post product-quality regulation sets the quality of the audit before it is performed, e.g.
through the ISA standards.
Answer: D. Setting quality before the fact (ISAs, independence rules) is ex-ante product-quality
regulation; ex-post regulation disciplines quality after the fact through litigation and liability. the
other three statements are correct.
6. [Multiple choice] Which statement about the Sarbanes-Oxley Act (US, 2002) is INCORRECT?
A) It created the PCAOB, an oversight body independent of the audit profession that registers,
inspects and sets standards for auditors of SEC registrants.
B) It requires mandatory rotation of the audit firm every five years for all listed companies.
C) It requires listed companies to have an independent audit committee including at least one
financial expert.
D) It introduced the integrated audit, in which the auditor reports on the financial statements and
on internal control over financial reporting.
Answer: B. SOX requires rotation of the audit partner every five years, not rotation of the firm;
mandatory firm rotation is an EU feature. the other three statements are correct.
7. [Multiple choice] Which statement about the EU Audit Reform 2014 is INCORRECT?
A) It abolished public oversight of the profession and returned full self-regulation to the audit
institutes.
B) For public-interest entities, fees for permitted non-audit services are capped at 70% of the audit
fee.
C) It expanded the audit report, notably by introducing Key Audit Matters.
D) It introduced mandatory audit-firm rotation for public-interest entities.
Answer: A. The reform strengthened public oversight by bodies outside the profession (with
inspections at least every three years for PIE auditors); it did not abolish oversight. the other three
statements are correct.
8. [Multiple choice] Which statement about Belgian audit regulation is INCORRECT?
A) In Belgium the statutory-auditor (commissaris) mandate is a monopoly of registered auditors
who are members of the IBR/IRE.
, B) There is mandatory external rotation for public-interest entities every nine years, extendable to
18 years after a public tendering process.
C) Audit documentation must be retained for ten years in Belgium, longer than the five-year
minimum in the ISAs.
D) A company must appoint a statutory auditor only if it exceeds all three of the size criteria
(employees, turnover and total assets) simultaneously.
Answer: D. A statutory audit is required when at least two of the three criteria are exceeded (50
employees; €9,000,000 turnover; €4,500,000 total assets), not all three. the other three statements
are correct.
9. [Multiple choice] Which statement about non-audit services and independence is INCORRECT?
A) Selling non-audit services to an audit client strengthens the auditor's independence because it
deepens the auditor's knowledge of the client.
B) In the EU certain HR-recruitment services are forbidden non-audit services for the incumbent
auditor of a public-interest entity.
C) The Belgian 'one-to-one rule' historically meant the auditor and its network could not earn more
in non-audit-service fees than in audit fees from the same client.
D) Belgium imposes a two-year cooling-off period before an auditor can take an executive position
at a former audit client.
Answer: A. Selling non-audit services creates a financial incentive that threatens independence;
this is exactly why such services are restricted. the other three statements are correct.
10. [Multiple choice] Which of the following is the CORRECT statement about the Belgian size
thresholds for a mandatory statutory audit?
A) More than 100 employees, turnover above €15,000,000 and total assets above €10,000,000,
all required together.
B) Only listed companies, regardless of size, must appoint a statutory auditor.
C) At least two of: 50 employees on average, turnover (excl. VAT) of €9,000,000, and total assets
of €4,500,000.
D) At least two of: 250 employees, turnover of €40,000,000 and total assets of €20,000,000.
Answer: C. Belgium requires a statutory auditor when at least two of the three thresholds are
exceeded: 50 employees, €9.0m turnover, €4.5m total assets. The other options state incorrect
figures or scope.
11. [Multiple choice] Which statement about the audit process and audit objectives is INCORRECT?
