CHAPTER 1: AUDIT IN GENERAL

Question 1

1. Broadly defined, the subject matter of any audit consists of
   A. Financial Statements
   B. Economic Data
   C. Assertions
   D. Operating Data

Answer 1

C. Assertions

Question 2

2. 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. PFRS
   B. Philippine Standards on Auditing
   C. National Internal Revenue Code
   D. Regulations of the Securities and Exchange Commission

Answer 2

A. PFRS

Question 2

3. An audit of financial statements is conducted to determine if the
   A. Organization is operating efficiently and effectively
   B. Auditee is following specific procedures or rules set down by some higher authority
   C. Overall financial statements are stated in accordance with the applicable financial
   reporting framework.
   D. Client’s internal control is functioning as intended.

Answer 2

C. Overall financial statements are stated in accordance with the applicable financial
reporting framework.

Question 3

6. 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 Statements Audit

Answer 3

C. Operational Audit

Question 4

4. An audit involves ascertaining the degree of correspondence between assertions and
   established criteria’s. In the case of an audit of financial statements, which of the following
   would not be a valid criterion?
   A. International Accounting Standards
   B. Philippine Financial Reporting Standards
   C. Philippine Standards on Auditing
   D. Philippine Accounting Standards

Answer 4

C. Philippine Standards on Auditing

Question 4

5. Most of the independent auditor’s work in formulating an opinion on financial statements
   consists of
   A. Studying and evaluating internal control
   B. Obtaining and examining evidential matter
   C. Examining cash transactions
   D. Comparing recorded accountability with assets

Answer 4

B. Obtaining and examining evidential matter

Question 5

8. Which of the following types of audit uses laws and regulations as criteria?
   A. Operational Audit
   B. Financial Statements Audit
   C. Compliance Audit
   D. Performance Audit

Answer 5

C. Compliance Audit

Question 5

7. In financial statement audits, the audit process should be conducted in accordance with
   A. The audit program
   B. PSA
   C. PAS
   D. PFRS

Answer 5

B. PSA

Question 6

9. Which of the following best describes the operational audit?
   A. It requires constant review by internal auditors of administrative controls as they relate to operations.
   B. It concentrates on implementing financial and accounting control in a newly organized
   company.
   C. It attempts and is designed to verify the fair presentation of company’s results of
   operations.
   D. It concentrates on seeking out aspects of operations in which waste would be reduced
   by the introduction of controls.

Answer 6

D. It concentrates on seeking out aspects of operations in which waste would be reduced
by the introduction of controls.

Question 7

10.A typical objective of an operational audit is to determine whether an entity’s
A. Internal control structure is adequately operating as designed
B. Operational information is in accordance with GAAP
C. Specific operating units are functioning efficiently and effectively
D. Financial statements present fairly the results of operations.

Answer 7

C. Specific operating units are functioning efficiently and effectively

Question 8

11. 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. Financial Statements.

Answer 8

B. Audit report.

Question 9

12. 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

Answer 9

D. External Auditing

Question 10

13. Independent auditing can best be described as a
    A. Professional activity that measures and communicates financial accounting data
    B. Subset of Accounting
    C. Professional activity that attests to the fair presentation of financial statements
    D. Regulatory activity that prevents the issuance of improper financial information

Answer 10

C. Professional activity that attests to the fair presentation of financial statements

Question 11

16. Which of the following statements is NOT a distinction between independent auditors and internal auditors?
    A. Independent auditors represent third party users external to the auditee entity, whereas
    internal auditors report directly to management.
    B. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity.
    C. Internal auditors are employees of the auditee; where as independent auditors are
    independent contractors.
    D. The internal auditor’s span of coverage goes beyond financial auditing to encompass
    operational and performance auditing.
    Financial Statement Audit

Answer 11

B. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity.

Question 11

14. The overall objective of internal auditing is to
    A. Attest to the efficiency with which resources are employed
    B. Ascertain that controls are costs justified
    C. Provide assurance that financial data have been accurately recorded.
    D. Assist members of the organization in the effective discharge of their responsibilities.

Answer 11

D. Assist members of the organization in the effective discharge of their responsibilities.

Question 11

18. An audit of the financial statements of KIA Corporation is being conducted by an external auditor. The external auditor is expected to
    A. Express an opinion as to the fairness of KIA’s financial statements.
    B. Express an opinion as top the attractiveness of KIA for investment purposes.
    C. Certify the correctness of KIA’s financial statements
    D. Examine all evidence supporting KIA’s financial statements.

Answer 11

A. Express an opinion as to the fairness of KIA’s financial statements.

Question 12

15.Internal auditing is an independent appraisal function established within an organization to examine and evaluate its activities. To that end, internal auditng provides assistance to
A. External auditors
B. Stockholders
C. Management and the BODs
D. Government

Answer 12

C. Management and the BODs

Question 13

17. 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

Answer 13

A. Client’s Management

Question 14

19. Which of the following statements about independent financial statement audits correct?
    A. The audit of financial statements relieve3s management of its responsibilities for the
    financial statements.
    B. An audit is designed to provide limited assurance that the financial statements taken as a whole are free from material misstatement.
    C. The procedures required to conduct an audit in accordance with PSAs should be
    determined by the client who engaged the services of the auditor.
    D. 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.

Answer 14

D. 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.

Question 14

20. The primary purpose of an independent financial statement audit is to
    A. Provide a basis for assessing managements’ performance
    B. Comply with government regulatory requirements
    C. Assure management that the financial statements are unbiased and free from material error
    D. Provide users with an unbiased opinion about the fairness of information reported in the financial statements

Answer 14

D. Provide users with an unbiased opinion about the fairness of information reported in the financial statements

Question 15

21. By providing high level of assurance on audit reports on financial statements, the auditor
    A. Guarantees the fair presentation of the financial statements, the auditor
    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.

Answer 15

C. Enhances the credibility of the financial statements.

Question 15

24.Professional scepticism requires than an auditor assume that management is
A. Honest, in the absence of fraud risk behaviours
B. Dishonest until completion of audit tests.
C. Neither honest nor dishonest
D. Offering reasonable assurance of honesty.

Answer 15

C. Neither honest nor dishonest

Question 16

22. The reason an independent auditor gathers evidence is to
    A. Form an opinion on the financial statements
    B. Detect fraud
    C. Evaluate Management
    D. Assures the readers that fraudulent activities of employees have been detected.

Answer 16

A. Form an opinion on the financial statements

Question 17

23. An attitude that includes questioning mind and a crucial assessment of audit evidence is
    referred to as
    A. Due professional care.
    B. Professional scepticism.
    C. Reasonable assurance.
    D. Supervision.

Answer 17

B. Professional scepticism.

Question 18

25. Jack has been retained as auditor of EVC Company. The functions of Jack’s opinion on financial statements of EVC Company is to A. Improve financial decisions of company management B. Lend credibility to management’s representations C. Detect fraud and abuse in management operations D. Serve requirements of BIR, SEC or Central Bank.

Answer 18

B. Lend credibility to management’s representations

Question 19

26. The level of assurance provided when an auditor issues an audit report is: A. Low B. Reasonable C. Moderate D. None

Answer 19

B. Reasonable

Question 20

27. Which of the following is not one of the limitations of an audit? A. The use of testing B. Limitations imposed by the client C. Human error D. Nature of evidence that the auditor obtains

Answer 20

B. Limitations imposed by the client

Question 21

28. 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. Some evidence supporting peso representation in the financial statements must be obtained by oral or written representation of management. C. Fatigue can cause auditors to overlook pertinent evidence. D. Many financial statement assertions cannot be audited

Answer 21

D. Many financial statement assertions cannot be audited

Question 21

29. Which of the following is one of the limitations of an audit? A. The possibility that management may prevent the auditor from performing the necessary audit procedures. B. The likelihood that the auditor may not be able to detect material misstatements in the financial statements because the auditor is engaged only after the client’s year end. C. The fact that most audit evidence is persuasive rather than conclusive in nature. D. The risk that the auditor may not possess the training and proficiency required by the engagement.

Answer 21

C. The fact that most audit evidence is persuasive rather than conclusive in nature.

Question 22

30. The independent audit is important to readers of financial statement because it A. Determines the future steward ship of the management of the company whose financial statements are audited. B. Measures and communicates financial and business data involved in financial statements. C. Involves the objective examination of and reporting on management prepared statements. D. Reports on the accuracy of all information in the financial statements.

Answer 22

C. Involves the objective examination of and reporting on management prepared statements.

Question 23

32. Which of the following is not one of the general principles governing the audit of financial statements? A. The auditor should plan and perform the audit with an attitude of professional scepticism. B. The auditor should obtain sufficient approriate evidence primarily through inquiry and analytical procedures to be able to draw reasonable conclusions. C. The auditor should conduct the audit in accordance with PSA. D. The auditor should comply with the Philippine Code of Professional Ethics.

Answer 23

B. The auditor should obtain sufficient approriate evidence primarily through inquiry and analytical procedures to be able to draw reasonable conclusions.

Question 24

31. The primary reason for an audit by an external audit firm Is A. To satisfy governmental regulatory requirements. B. To guarantee that there are no misstatements on the financial statements. C. To provide increased assurance to users as to the fairness of the financial statements. D. To ensure that any fraud will be discovered.

Answer 24

C. To provide increased assurance to users as to the fairness of the financial statements.

Question 25

34. The need for independent audits of financial statements can be attributed to allof the following conditions except: A. Remoteness B. Consequence C. Complexity of Subject Matter D. Validity

Answer 25

D. Validity

Question 25

33. Which one of the following is NOT among the conditions that give rise to a demand by external users for independent audits of financial statements? A. Remoteness of users B. Complexity of making economic decisions C. Potential conflict of interest between users and preparers of the statements D. Consequence for making decisions

Answer 25

B. Complexity of making economic decisions

Question 26

35.Which of the following best describes the reason why an independent auditor reports on financial statements? A. A management fraud may exist and it is more likely to be detected by independent auditors. B. Different interests may exist between the company preparing the statements and the persons using the statements. C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work. D. A poorly designed internal control system is in existence.

Answer 26

B. Different interests may exist between the company preparing the statements and the persons using the statements.

Question 26

36. Which of the following statements does not describe a condition that creates a demand for auditing? A. Conflict between information preparer and a user can result in based information. B. Information can have substantial economic consequences for a decision-maker. C. Expertise is often required for information preparation and verification. D. Users can directly assess the quality of information.

Answer 26

D. Users can directly assess the quality of information.

Question 27

37. 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.

Answer 27

D. Financial statements are used for important decisions.

Question 28

39.Auditing is biased 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, each reach essentially similar conclusions. C. Working independently, can prove, beyond reasonable doubt, the truthfulness of the data. D. Working together, can agree upon the accuracy of the data.

Answer 28

B. Working independently, each reach essentially similar conclusions.

Question 28

40. 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.

Answer 28

B. The auditor’s responsibility is confined to the expression of opinion on the financial statements audited.

Question 29

38. Which of the following statements does not properly describe an element of theoretical framework of auditing? A. The data to be audited can be verified B. Short-term conflicts may exist between managers who prepare the data and auditors who examine the data. C. Auditors act on behalf of the management D. An audit benefits the public

Answer 29

C. Auditors act on behalf of the management

Question 30

41.Which of the following is incorrect about responsibility for financial statements? A. Management is responsible for fair presentation of the financial statements. B. Auditor is responsible for expressing an opinion on the financial statements C. Audit of financial statements does not reduce management’s responsibility D. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.

Answer 30

D. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.

Question 30

42. Which of the following statements does not properly describe an element of theoretical framework of auditing? A. The data to be audited can be verified B. Short-term conflicts may exist between managers who prepare the data and auditors who examine the data. C. Auditors act on behalf of the management D. An audit benefits the public

Answer 30

C. Auditors act on behalf of the management

Question 31

45.Which of the following is one of the limitations of an audit? A. Nature of evidence obtained B. Inadequacy of the accounting records C. Confidentiality of information D. Scope limitations imposed by the entity

Answer 31

A. Nature of evidence obtained

Question 32

43. Which of the following statements about independent financial statement audit is incorrect? A. The term “scope of the audit” refers to audit procedures deemed necessary in the circumstances to achieve the objective of the audit. B. The auditor’s opinion eshances the credibility of the financial statements. C. The phrase used to express the auditor’s opinion is “present fairly, in all material respects? D. The risk that the auditor will fail to uncover material misstatement is eliminated when the auditor conducts the audit in accordance with PSAs.

Answer 32

D. The risk that the auditor will fail to uncover material misstatement is eliminated when the auditor conducts the audit in accordance with PSAs.

Question 33

44.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 undertaken 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.

Answer 33

D. Many financial statement assertions cannot be audited.

Question 34

46. The procedures deemed necessary in the circumstances to achieve the objective of the audit shall be determined by the A. Client management B. Independent auditor C. Internal Auditor D. Those charged with governance

Answer 34

B. Independent auditor

Question 35

47. 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 direct all material misstatements in the financial statements.

Answer 35

C. Users usually lack the necessary expertise to verify the reliability of the financial information.