AUDITING THEORY

AT.02- Introduction to Audit of

Historical Financial Information

MULTIPLE CHOICE
Definition of Auditing
1. Auditing is a systematic process that includes all of the following except:
a. Systematic process
b. Assertions about economic actions and events
c. Objectively obtaining and evaluating assurance
d. Degree of correspondence between assertions and GAAP

2. The definition of auditing includes both a(an)

a. Documentation process and an evaluation process.
b. Evaluation process and a reporting process.
c. Investigative process and a reporting process.
d. Documentation process and a reporting process.

Demand for Auditing

3. Auditing is important in a free market society because
a. The public requires CPAs functioning as divisions of regulatory bodies
b. Auditors detect all errors and fraud made by company employees
c. It provides reliable information based upon which to judge economic performance
d. The auditor is an amiable insurance policy for investors

4. An independent audit is important to readers of financial statements because it

a. Provides a measure of management's stewardship function.
b. Measures and communicates the financial data included in financial statements.
c. Objectively examines and reports on management's financial statements.
d. Reports on the accuracy of information in the financial statements.

5. Which one of the following is a potential problem with management's communication of financial information that
causes third parties to desire the independent auditor's assessment of the financial statement presentation?
a. Complexity of transactions affecting the financial statements
b. Lack of criteria on which to base information
c. Remoteness of the user from the organization
d. A and C

Types of Audit
6. The objective of an operational audit is to
a. Evaluate whether laws have been broken by management
b. Evaluate fairness of presentation of financial statements
c. Evaluate compliances with company rules and regulations
d. Evaluate the effectiveness and efficiency with which resources are employed

7. What is the criteria used in an operational audit?

a. GAAP
b. Effectiveness and efficiency
c. Rules and regulations
d. Company policies

8. 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.

9. A primary purpose of an operational audit is to provide

a. A means of assurance that internal accounting controls are functioning as planned.
b. The results of internal examination of financial and accounting matters to a company’s top level management.
c. A measure of management performance in meeting organizational goals.
d. Aid to the independent auditor, who is conducting the examination of the financial statements.

10. The main objective of operations auditing is

a. To verify fulfillment of plans and sound business requirements.
b. To evaluate the integrity of accounting information.
c. To measure and evaluate the effectiveness of controls.
d. To produce results as desired or directed.

11. Which type of auditor would typically perform an operational audit?

a. External auditor
b. Internal auditor
 c. Governmental auditor
d. Both B and C

12. Usually, an operational audit is performed

a. By independent external auditors.
b. By a team consisting of an equal number of external and internal auditors.
c. Only when an operating division is experiencing declines in productivity or profitability.
d. By internal auditors at the request of top management or the board of directors.

13. This is an independent appraisal activity established within an entity as a service to the entity:
a. Internal audit function
b. Independent auditing
c. Government auditing
d. Compliance audit function

14. Internal auditors may perform all of the following types of audits except
a. Operational audits
b. Compliance audits
c. Computer system audits
d. All of the above may be performed by internal auditors

15. Internal auditing relates to an

a. Audit which is performed by professional practitioner as an independent contractor
b. Audit which is incidentally concerned with the detection and prevention of fraud
c. Audit wherein the auditor should be independent of management both in fact and in mental attitude
d. Audit which serves the needs of management

16. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most
likely should report to the
a. Financial vice-president.
b. Corporate controller.
c. Those charged with governance.
d. Corporate stockholders.

17. For an internal auditor to render impartial and unbiased judgments, he or she must be independent of the entity's
a. Stockholders.
b. Personnel and operating activities (line functions of the organization).
c. Independent (external) auditors.
d. Board of directors.

18. Government auditing often extends beyond expressing an opinion on the fairness of the financial presentation and
includes audits of efficiency, effectiveness and
a. Internal control
b. Efficiency
c. Accuracy
d. Compliance

19. An “integrated audit” includes an audit of

a. The company’s internal controls
b. The company’s financial statements
c. The company’s compliance with its rules and policies
d. Both A and B

20. Which type of auditor may perform a financial statement audit?

a. External auditor
b. Internal auditor
c. Governmental auditor
d. Both A and C

21. Which of the following is true?

a. External auditors may perform operational audits and internal auditors may perform financial audits.
b. The criteria for any audit (an operational audit or a financial audit) are GAAP.
c. Both external and internal auditors can provide management advice to the company.
d. A financial audit is designed to determine if the company is acquiring resources at the lowest cost.

22. Which of the following statements comparing external auditing to internal auditing is true?
a. Both produce reports addressed to the company’s management and board of directors.
b. They have the same concern with the company’s day-to-day operations.
c. They have different scopes of work.
d. They are paid in the same way.

23. Which of the following types of audits are most similar?

a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
 d. Internal audits and independent financial statement audits.

Independent FSs Audit

24. An audit of financial statements is a non-assurance engagement. The auditor is engaged for purposes of expressing
an opinion designed to enhance the degree of confidence of intended users in the financial statements.

In conducting the audit so as to achieve its objective, the overall objective of the independent auditor is to obtain
reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to report on the financial statements in accordance with the auditor’s findings.
a. True, True c. False, True
b. False, False d. True, False

25. In order to obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the audit opinion. Reasonable assurance is obtained when the auditor
has thereby reduced audit risk to an acceptably low level.

The objective of an audit cannot be fulfilled unless the auditor achieves the overall objective of the auditor. In all
cases when the overall objective of the auditor cannot be achieved, the PSAs require that the auditor modifies the
auditor’s opinion accordingly or withdraws from the engagement.
a. True, False c. False, False
b. False, True d. True, True

26. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal controls.

27. The auditor shall plan and perform an audit with an attitude of professional skepticism recognizing that circumstances
may exist that cause the financial statements to be materially misstated.

The auditor shall not represent compliance with PSAs unless the auditor has complied with majority of the PSAs
relevant to the audit.
a. True, True c. False, True
b. False, False d. True, False

28. Which of the following is least likely an application of maintaining an attitude of professional skepticism?
a. The auditor does not consider representations from management as substitute for obtaining sufficient appropriate
audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
b. In planning and performing an audit, the auditor assumes that management is dishonest.
c. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents or
management representations.
d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence

29. As it relates to an audit, materiality is

a. Not taken into consideration
b. Related only to the sufficiency of procedures performed
c. Based upon audit fees
d. Determined based upon the importance to a user of the financial statements

30. Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
a. An auditor’s responsibilities for audited financial statements are not confined to the expression of the auditor’s
opinion.
b. Making suggestions that are adopted about the form and content of an entity’s financial statements impairs an
auditor’s independence.
c. An auditor may draft an entity’s financial statements based information from management’s accounting system.
d. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor’s
responsibilities.

31. The auditor’s opinion

a. Guarantees the credibility of the financial statements.
b. Is an assurance as to the future viability of the entity.
c. Is not an assurance as to the efficiency with which management has conducted the affairs of the entity.
d. Certifies the correctness of the financial statements.

32. The independent auditor lends credibility to client financial statements by

a. Stating in the auditor’s management letter that the examination was made in accordance with generally accepted
auditing standards
b. Maintaining a clear-cut distinction between management’s representation and the auditor’s representations
c. Attaching an auditor’s opinion to the client’s financial statements
d. Testifying under oath about client financial information

33. The independent auditor’s responsibility in a regular audit is to express an opinion on the financial statements. The
auditor’s opinion:
a. Helps the company adopt sound accounting policies.
 b. Assists the company in maintaining an adequate and effective system of accounts.
c. Helps establish the credibility of the financial statements.
d. Helps management safeguard the company assets.

34. Third-party users of the audit report expect the auditor to do all of the following except:
a. To evaluate measurements and disclosures made by management
b. To provide a biased evaluation of the financial statements
c. To determine whether financial statements are presented in accordance with GAAP
d. To gather sufficient evidence to support their opinion

35. The following are the general principles governing an audit of FS Audit, except
a. Independence c. Confidentiality
b. Professionalism d. Professional behavior

36. An audit is conducted on the premise that management and, where appropriate, those charged with governance,
have acknowledged and understand that they have responsibilities that are fundamental to the conduct of an audit in
accordance with PSAs. Which of the following is not one of those responsibilities?
a. To provide the auditor unrestricted access to persons within the entity from which the auditor determines it
necessary to obtain audit evidence
b. The preparation and presentation of financial statements in accordance with the pronouncements issued by AASC
c. The establishment and maintenance of internal control relevant to the preparation and presentation of financial
statements that are free from material misstatement, whether due to fraud or error
d. To provide complete information to the auditor.

37. Management of a company is responsible for

a. Hiring the auditor
b. Preparing the financial statements
c. The audit workpapers
d. Independence and obtaining evidence

38. Absolute assurance is generally not attainable as a result of such factors as:
a. b. c. d.
The use of testing Yes Yes Yes No
The inherent limitations of
internal control Yes Yes Yes Yes
The use of judgment Yes No Yes No
Most audit evidence are
persuasive rather than
conclusive No Yes Yes Yes

39. Users of the audit report can reasonably expect the audited financial statements to be
a. Include complete information and contain all financial disclosures
b. Presented fairly according to the substance of GAAP
c. Free from all errors
d. All of the above

40. Results of the financial statement audit are communicated to users through a(n)
a. Financial statement
b. Written management assertion
c. Audit report
d. none of the above