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INTRODUCTION TO AUDITING
2. An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy of management's financial representation.
b. Guarantees that financial data are fairly presented.
c. Assures the readers of financial statements that any fraudulent activity has been corrected.
d. Lends credibility to the financial statements.
7. The overall objectives of the auditor in conducting an audit of financial statements are:
I. To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence
IV. To detect all misstatements, whether due to fraud or error
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, III and IV
8. Which of the following is not among the factors that result to limitations of audit?
a. Use of testing
b. Going concern problem of the assurance client
c. Human error
d. Evidence is basically persuasive rather than conclusive
10. The independent auditor of the past differs from the auditor of today in that the past auditor
was more concerned with the
a. Validity of the income statement.
b. Determination of fair presentation of financial statements.
c. Improvement of accounting system.
d. Detection of fraud or irregularities.
11. The criteria for evaluating quantitative information vary. For example, in the case of an
independent audit of financial statements by CPA firms, the criteria are usually the:
a. Philippine Standards on Auditing
b. Philippine Financial Reporting Standards
c. National Internal Revenue Code
d. Securities and Exchange Commission Regulations
12. An audit in accordance with PSAs is performed on the premise that management and, where
appropriate, those charged with governance have responsibilities that are fundamental to the
conduct of the audit. Which of the following is not one of those responsibilities?
a. To provide the auditor with all information, such as records and documentation, and
other matters that are relevant to the preparation and presentation of the financial
statements.
b. To provide unrestricted access to those within the entity from whom the auditor
determines it necessary to obtain audit evidence.
c. To comply with all relevant PSAs in the preparation and presentation of
the entity's financial statements.
d. To design, implement, and maintain internal control relevant to the preparation and
presentation of financial statements that are free from material misstate ment,
whether caused by fraud or error.
13. The auditor is required to maintain professional skepticism throughout the audit. Which of the
following statements concerning professional skepticism is false?
a. A belief that management and those charged with governance are honest
and have integrity relieves the auditor of the need to maintain
professional skepticism.
b. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
c. Professional skepticism is necessary to the critical assessment of audit evidence.
d. Professional skepticism is an attitude that includes questioning contradictory audit evidence
obtained.
15. The primary responsibility for the adequacy of disclosure in the financial statements rests with the:
a. Partner assigned to the audit engagement.
b. Management of the company.
c. Securities and Exchange Commission.
d. Auditor in charge of the field work.
16. Which of the following statements is correct concerning an auditor's responsibilities regarding
financial statements?
a. Making suggestions that are adopted about the form and content of an entity's financial
statements impairs an auditor's independence.
b. An auditor's responsibilities for audited financial statements are confined to
the expression of the auditor's opinion.
c. The fair presentation of audited financial statements in accordance with an
applicable financial reporting framework is an implicit part of the auditor's
responsibilities.
d. The auditor's report should provide an assurance as to the future viability of the entity.
17. The auditor's judgment concerning the overall fairness of presentation of financial position, results of
operation, and changes in cash flow is applied within the framework of
a. Generally accepted auditing standards which include the concept of materiality
b. Generally accepted accounting principles.
c. Philippine Financial Reporting Standards
d. Quality control
18. An independent audit is important to readers of financial statements because of the following except:
a. Lends credibility to the financial statements.
b. Objectively examines and reports on management's financial statements
c. Measures and communicates the financial data included in financial statements
d. Provide users with an unbiased opinion about the fairness of information reported in the
financial statements
19. The auditor's judgment concerning the overall fairness of presentation of financial
position, results of operation, and changes in cash flow is applied within the framework of
a. Generally accepted auditing standards which include the concept of materiality
b. Generally accepted accounting principles.
c. Philippine Financial Reporting Standards
d. Quality control
20. In financial statement audits, the audit should be conducted in accordance with
a. Philippine Accounting Standards / Philippine Financial Reporting Standards
b. Generally accepted auditing standards
c. Code of Ethics for CPAs in the Philippines
d. Philippine Standards on Auditing
21. Which of the following statements does not properly describe an element of the theoretical
framework of auditing?
a. An audit benefits the public.
b. The data to be audited are verifiable.
c. Auditor should maintain independence with respect to the audit client.
d. Remoteness of users.
22. The auditor is required to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to fraud or error. In all cases when
reasonable assurance cannot be obtained, the auditor's report should contain a/an:
a. Unmodified opinion
b. Qualified or disclaimer of opinion
c. Qualified or adverse opinion
d. Disclaimer of opinion
23. The benefits of an operational audit generally include all of the following except:
a. Decreased costs.
b. Increased revenue
c. Increased reliability of the financial statements.
d. Increased productivity.
24. The auditor is required to comply with all PSAs relevant to the audit of an entity's financial
statements. A PSA is relevant to the audit when:
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
a. I only
b. II only
c. Either I or II
d. Both I and II
25. One of the conditions that give rise to a demand for an external audit of financial
statements is expertise. Which of the following best describes the meaning of expertise
as used in this context?
a. Auditors usually rely on the work of an expert as a basis for evaluating some
assertions embodied in the financial statements.
b. Users usually lack the necessary expertise to verify the reliability of the
financial information.
c. As experts, auditors are expected to detect all material misstatements in the financial statements.
d. The readers of the financial statements must possess the necessary expertise to
be able to understand the financial statements.
26. Which of the following statements does not properly describe a limitation of an audit?
a. Many audit conclusions are made on the basis of examining a sample of evidence.
b. Fatigue and human weaknesses can cause auditors to overlook pertinent evidence.
c. Many financial statement assertions cannot be audited.
d. The work, under taken by the auditor is permeated by judgment.
27. An audit designed to evaluate the efficiency and effectiveness of an organization or some
or part thereof would not come under the title of
a. Performance audit.
b. Compliance audit.
c. Management audit.
d. Operational audit.
28. Inherent limitations in an audit stem from the following factors except
a. Incompetence of the auditor.
b. Most audit evidence is persuasive rather than conclusive.
c. Internal control limitation.
d. Use of testing.
30. Which of the following represents the highest to lowest level of assurance provided by
auditors in the performance of the engagement?
a. An audit; a compilation; a review.
b. An audit; a review; a compilation.
c. A review; an audit; a compilation.
d. A compilation; a review; an audit.
31. The statement that the reviewer "is not aware of any material modification that should be
made to the financial statements in order for them to be in conformity with GAAP" is
known as:
a. Reasonable assurance.
b. Positive assurance.
c. Negative assurance.
d. Negligent performance.
32. Which of the following is a major difference between a review and an audit of the financial statements?
a. The level of knowledge of professional standards needed to perform the procedures.
b. The type of accounting used -reviews are typically on
non-GAAP accounting, while audits are based upon
GAAP accounting.
c. The scope of the procedures performed and the assurance provided.
d. The type of company involved in reviews may only be publicly-held.
34. In an assurance engagement, this refers to the information obtained by the practitioner in
arriving at the conclusions on which the conclusion is based.
a. Generally accepted auditing standards
b. Assertions
c. Evidence
d. Criteria
35. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then the information is
a. Significant.
b. Material.
c. Relevant.
d. Pervasive.
36. In performing a financial statement audit, which of the following would an auditor least likely consider?
a. Compliance with GAAP.
b. Quality of managements' business decisions.
c. Internal control.
d. Fairness of the financial statement amounts.
38. Which of the following is not an assurance that the auditors give to the parties who rely on
the financial statements?
a. Auditors know how the amounts and disclosures in the financial statements were produced.
b. Auditors give assurance that the financial statements are accurate.
c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion.
d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion,
as to whether the financial statements taken as a whole are fairly presented in conformity
with GAAP.
39. The term that describes the role of persons entrusted with the supervision, control and
direction of an entity is
a. Management.
b. Administration.
c. Governance.
d. Government.
40. An audit involves ascertaining the degree of correspondence between assertions and
established criteria. In the case of an audit, of financial statements, which of the following
would not be a valid criterion?
41. Which of the following statements about independent financial statement audit is correct?
a. The audit of financial statements relieves management of its responsibilities for die
financial statements.
b. The auditor's opinion is not an assurance as to the future viability of the entity
as well as the effectiveness and efficiency with which management has
conducted the affairs of the entity.
c. An audit is designed to provide limited assurance that the financial statements taken as a
whole are free from material misstatement.
d. The procedures required to conduct an audit in accordance with PSAs should be
determined by the client who engaged the services of the auditor.
43. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter.
b. Audit report.
c. Management letter.
d. Audited financial statements.
44. The auditor's judgment concerning the overall fairness of presentation of financial position,
results of operation, and changes in cash flow is applied within the framework of
a. Quality control
b. Generally accepted auditing standards which include the concept of materiality
c. The auditor's evaluation of the audited company's internal control.
d. Generally accepted accounting principles.
46. The need for independent audits of financial statements can be attributed to all of the
following conditions except:
a. Validity
b. Remoteness
c. Consequence
d. Complexity of subject matter
47. The underlying conditions that create demand by users for reliable information include the
following except:
a. Transactions that are numerous and complex.
b. Users separated from accounting records by distance and time.
c. Financial decisions that are important to investors and users.
d. Decisions are not time-sensitive.
48. Why does a company choose to have an independent auditor report on its financial statements?
a. Independent auditors will always detect management fraud.
b. The company preparing the statements may have a vested interest in reporting
certain results.
c. Independent auditors guarantee the accuracy of the financial statements.
d. An independent audit is designed to search for deficiencies in the company's internal controls.
49. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Information can have substantial economic consequences for a decision maker.
b. Expertise is often required for information preparation and verification.
c. Users can directly assess the quality of information.
d. Conflict between an information preparer and a user can result in biased information.
52. In financial statement audits, the audit process should be conducted in accordance with
a. Philippine Accounting Standards
b. The audit program
c. Philippine Standards on Auditing
d. Philippine Financial Reporting Standards
53. Which of the following is not one of the general principles governing the audit of financial statements?
a. The auditor should obtain sufficient appropriate evidence primarily through
inquiry and analytical procedures to be able to draw reasonable conclusions.
b. The auditor should plan and perform the audit with an attitude of professional skepticism.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.
54. Which of the following statements does not properly describe an element of the theoretical
framework of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between managers who prepare data and auditors who
examine the data.
c. Auditors act on behalf of management.
d. An audit benefits the public.
55. Which of the following criteria is unique to the independent auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. Independence.
56. Auditing is based on the assumption that financial data are verifiable. Data are verifiable when
two or more qualified individuals,
a. Working together, can prove, beyond doubt, the accuracy of the data.
b. Working independently, can prove, beyond reasonable doubt, the truthfulness of the data.
c. Working independently, each reach essentially similar conclusions.
d. Working together, can agree upon the accuracy of the data.
57. The level of assurance provided by a professional accountant on an audit report is:
a. Low
b. Reasonable
c. Moderate
d. None
61. Which of the following terms does not belong to the group
a. Financial audit
b. Internal audit
c. External audit
d. Independent audit
63. Which of the following types of auditing is performed most commonly by CPA's on a contractual basis?
a. Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing
64. Which of the following types of audits is performed to determine whether an entity's financial
statements are fairly stated in conformity with generally accepted accounting principles?
a. Operational audit
b. Financial statement audit
c. Compliance audit
d. Performance audit
65. Which of the following has the primary responsibility for the fairness of the representations
made in the financial statements?
a. Client's management
b. Audit committee
c. Independent auditor
d. Board of Accountancy
66. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The auditor's responsibility on fair presentation of financial statements is limited
only up to the date of the audit report.
b. The auditor's responsibility is confined to the expression of opinion on the
financial statements audited.
c. The responsibility over the financial statements rests with the management and the
auditor assumes responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his qualified opinion but not for any other type of opinion.
68. By providing high level of assurance on audit reports on financial statements, the auditor
a. Guarantees the fair presentation of the financial statements.
b. Confirms the accuracy of the financial statements.
c. Enhances the credibility of the financial statements.
d. Assures the readers that fraudulent activities of employees have been detected.
69. Most of the independent auditor's work in formulating an opinion on financial statements
consists of
70. Audits of financial statements include an expression of a conclusion about which of the
following financial statement characteristics?
a. Governance.
b. Reliability.
c. Relevance.
d. Timeliness.
72. There are four conditions that give rise to the need for independent audits of financial
statements. One of these conditions is consequence. In this context, consequence means that
the:
a. Users of the statements may not fully understand the consequences of their actions.
b. Auditor must anticipate all possible consequences of the report issued.
c. Impact of using different accounting methods may not be fully understood by the users of
the statements.
d. Financial statements are used for important decisions.
73. One of the conditions that give rise to a demand for an external audit of financial statements
is expertise. Which of the following best describes the meaning of expertise as used in this
context?
a. Auditors usually rely on the work of an expert as a basis for evaluating some assertions
embodied in the financial statements.
b. The readers of the financial statements must possess the necessary expertise to be able
to understand the financial statements.
c. Users usually lack the necessary expertise to verify the reliability of the financial
information.
d. As experts, auditors are expected to detect all material misstatements in the financial statements.
75. The assumption underlying an audit of financial statements is that they will be used by
a. The regulatory agencies to verify information that is relevant to their supervisory functions.
b. The board of directors as basis of declaring cash dividends.
c. The general public in making investment decisions.
d. Different groups for different purposes.
76. Which of the following statements does not properly describe a limitation of an audit?
a. Many audit conclusions are made on the basis of examining a sample of evidence.
b. The work, under taken by the auditor is permeated by judgment.
c. Fatigue and human weaknesses can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.
80. As used in auditing, which of the following statements best describes "assertions”?
a. Assertions are the auditor's findings to be communicated in his audit report.
b. Assertions are found only in the notes to the financial statements.
c. Assertions are the representations of management as to the reliability of the information system.
d. Assertions are the representations of management as to the fairness of
presentation of the financial statements.
83. Auditing is based on the assumption that financial data and statements are
a. Verifiable
b. In conformity with the identified applicable financial reporting framework
c. Presented fairly
d. Consistently applied
84. Independent auditors of financial statements perform audits that reduce and control
a. Business risk faced by investors
b. Information risk faced by investors
c. Complexity of financial statements
d. Timeliness of financial statements
85. Which of the following is an incorrect statement relating to the theoretical framework of auditing?
a. Effective internal control structure reduces the probability of fraud or irregularities in an
organization.
b. Application of generally accepted accounting principles results in a fair
presentation of financial statements.
c. When examining financial data for the purpose of expressing an independent opinion
thereon, the auditor acts exclusively in the capacity of an auditor.
d. In collecting evidence, auditors should maintain an attitude of trust about
their clients' assertions.
89. Which of the following best describes the primary purpose of audit procedures?
a. To detect errors or fraud
b. To comply with generally accepted auditing standards
c. To gather sufficient, appropriate evidence
d. To verify the accuracy of account balances
90. Which of the following engagements is covered by the Framework for Assurance Engagements?
a. Consulting engagements
b. Preparation of tax returns
c. Agreed-upon procedures
d. Independent financial statements audit
91. 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 obtained.
93. Which of the following types of audits would be intended to determine whether a
governmental entity is following sound procurement practices?
a. Program audit
b. Compliance audit
c. Financial statement audit
d. Operational audit
94. In government auditing, the three elements of expanded scope auditing are
a. Pre-audit, post-audit, internal audit.
b. Goal analysis, audits of operations, audit of systems.
c. Financial and compliance, economy and efficiency, program results.
d. National government audit, local government audit, corporation audit.
99. An audit which is undertaken in order to determine whether the auditee is following specific
procedures or rules set down by some higher authority is classified as a(n)
a. Audit of financial statements.
b. Compliance audit.
c. Operational audit.
d. Production audit.
101. Which of the following types of audit uses laws and regulations as its criteria?
a. Operational audit
b. Financial statement audit
c. Compliance audit
d. Performance audit
102. An audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity's operating activities in relation to specified objectives is a(n):
a. External audit
b. Compliance audit
c. Operational audit
d. Financial statement audit
103. A operational audit is primarily oriented toward
a. Future improvements to accomplish management’s goals.
b. Past protection provided by existing internal control.
c. Operational information is in accordance with generally accepted accounting principles.
d. Financial statements are fairly presented.
105. Operational audit differs in many ways from an audit of financial statements. Which of the
following is the best example of one of these differences?
a. The usual audit of the financial statement covers four basic statements, whereas
operational audit is usually limited either the statement of financial position or the
income statement.
b. Operational audit do not necessarily result in the preparation of a report.
c. The operational audit deals with pre-tax income.
d. The boundaries of an operational audit are often drawn from an organization
chart and are not limited to a single accounting period.
106. Which of the following best describes the scope of internal auditing as it has developed to date?
a. Internal auditing has evolved to verifying the existence of assets and reviewing
the means of safeguarding assets.
b. Internal auditing has evolved to more of an operational orientation from
a strictly financial orientation.
c. Internal auditing involves appraising the economy and efficiency with which resources are employed.
d. Internal auditing involves evaluating compliance with policies, plans,
procedures, laws, and regulations.
108. Which of the following is considered a primary reason for creating an internal audit department?
a. To safeguard resources entrusted to the organization.
b. To evaluate and improve the effectiveness of control processes.
c. To ensure the accuracy, reliability, and timeliness of financial and operating
data used in management's decision making.
d. To relieve management of the responsibility for establishing effective controls.
111. Internal auditors review the adequacy of the company's internal control system primarily to
a. Help determine the nature, timing, and extent of tests necessary to achieve audit objectives.
b. Determine whether the internal control system ensures that financial statements are fairly
presented.
Determine whether the internal control system provides
c. reasonable assurance that the
company's objectives and goals are met efficiently and economically.
d. Ensure that material weaknesses in the system of internal control are corrected.
112. Internal auditors should review the means of physically safeguarding assets from losses arising from
a. Procedures that are not cost justified.
b. Exposure to the elements.
c. Underusage of physical facilities.
d. Misapplication of accounting principles.
116. Operational audits generally have been conducted by internal and COA auditors, but
may be performed by certified public accountants. A primary purpose of an operational
audit is to provide:
a. A measure of management performance in meeting organizational goals.
b. The results of internal examinations of financial and accounting matters to a company's
top-level management.
c. Aid to the independent-auditor, who is conducting the examination of the financial statements.
d. A means of assurance that internal accounting controls are functioning as planned.
117. Governmental auditing often extends beyond examinations leading to the expression of
opinion on the fairness of financial presentation and includes audits of efficiency, economy,
effectiveness, and also:
a. Accuracy
b. Evaluation
c. Compliance
d. Internal control
118. What is the responsibility of an auditor who is engaged to audit the financial
statements of a government entity?
a. Assess control risk with respect to each component of internal control.
b. Assume responsibility for assuring that the entity complies with applicable laws and regulations.
c. Obtain an understanding of the possible financial statement effects of laws
and regulations having direct and material effects on amounts reported.
d. Design the audit to provide reasonable assurance that the statements are free
of material misstatements resulting from illegal acts having direct or indirect
effects.