CHAPTER 1: AUDIT – AN OVERVIEW

1. Recording, classifying, and summarizing economic events in a logical manner for the purpose of
providing financial information for decision making is commonly called:

a. Finance b. Auditing c. Accounting d. Economics

2. An audit involves ascertaining the degree of correspondence between assertions and established
criteria. In the case of financial statement audit, which of the following is not a valid criterion?

a. Philippine Standards on Auditing

b. International Accounting Standards

c. Authoritative financial reporting framework

d. Accounting standards generally accepted in the Philippines

3. Broadly defined, the subject matter of any audit consists of

a. Financial statements c. Assertions

b. Economic data d. Operating data

4. Whenever a CPA professional is engaged to perform an audit of financial statements according to

Philippine Standard on Auditing, he is required to comply with those standards in order to

a. Eliminate audit risk

b. Have a measure of the quality of audit performance

c. To reduce the auditor’s responsibility

d. Eliminate the professional judgment in resolving audit issues

5. 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. Regulations of the Securities and Exchange Commission

6. In "auditing" financial accounting data, the primary concern is with:

a. Determining whether recorded information properly reflects the economic events that occurred
during the accounting period.

b. Determining if fraud has occurred.

c. Determining if taxable income has been calculated correctly

d. Analyzing the financial information to be sure that is complies with government requirements.

7. 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 an identified financial reporting
framework.

d. Client’s internal control is functioning as intended.

8. In determining the primary responsibility of the external auditor for an audit of a company’s
financial statements, the auditor owes primary allegiance to:

a. Stockholders, creditors and the investing public.

b. The management of the audit client because the auditor is hired and paid by management.

c. The Auditing and Assurance Standards Council because it determines auditing standards and
auditor‘s responsibility.
 d. The audit committee of the audit client because that committee is responsible for coordinating
and reviewing all audit activities within the company.

9. 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?

a. International Accounting Standards. c. Generally accepted auditing standards

b. Philippine Financial Reporting Standards d. PFRS for SME’s

(PFRS)
C

10. Most of the independent auditor’s work in formulating an opinion of financial statements consists of

a. Studying and evaluating internal control

b. Obtaining and examining evidence

c. Examining cash transactions

d. Comparing recorded accountability with assets

11. Which of the following is more difficult to evaluate objectively?

a. Efficiency and effectiveness of operations

b. Compliance with applicable government regulations

c. Presentation of financial statements in accordance with the applicable financial reporting

criteria

d. All the given criteria are equally difficult to evaluate objectively

12. 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 c. Operational audit

b. Compliance audit d. Financial statement audit

13. In financial statement audits, the audit process should be conducted in accordance with

a. The audit program c. Philippine Accounting Standards

b. Philippine Standards on Auditing d. Philippine Financial Reporting Standards

14. Internal auditors are expected to add value to the organization through improved operational
effectiveness. In addition, their responsibilities include all the following except:

a. Reviewing the reliability and integrity of information.

b. Ensuring compliance with the company's accounting policies.

c. Verifying accounting information for external users.

d. Ensuring compliance with applicable governmental regulations

15. Which of the following types of audit uses laws and regulations as its criteria?

a. Operational audit c. Compliance audit

b. Financial statement audit d. Performance audit

16. Which of the following best describes an operational audit?

a. It attempts of verifying the fair presentation of a company‘s results of operations.

b. It concentrates on implementing financial and accounting control in a newly organized

company.

c. It concentrates on seeking out aspects of operations in which waste would be reduced by the
introduction of controls.
 d. It requires a constant review of the administrative control: by internal auditors as they relate to
operations of the company.

17. 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 generally accepted accounting principles

c. Specific operating units are functioning efficiently and effectively

d. Financial statements present fairly the results of operations

18. One objective of an operational audit is to:

a. Determine whether the financial statements fairly present the entity's operations.

b. Evaluate the feasibility of attaining the entity's operational objectives.

c. Make recommendations for improving performance.

d. Report on the entity‘s relative success in attaining profit maximization.

19. An audit designed to provide reasonable assurance of detecting violations of a specific provisions of
contracts or grant agreement would be called a(n):

a. Performance audit c. Operational audit

b. Management audit d. Compliance audit

20. The auditor communicates the results of his or her work through the medium of the

a. Engagement letter. c. Management letter.

b. Audit report. d. Financial statements.

B
21. When performing an operational audit, the internal audit team must first determine that:

a. A financial audit has been performed by an independent auditor.

b. A financial audit has been performed by an internal auditor.

c. A review was performed by either an independent or an internal auditor.

d. Specific criteria are developed to define effectiveness.

22. Which of the following types of auditing is performed most commonly by CPA’s on a contractual
basis?

a. Internal auditing c. Government auditing

b. Income tax auditing d. External auditing

23. An examination of part of an organization‘s procedures and methods for the purpose of evaluating
efficiency and effectiveness is what type of audit?

a. Operational audit. c. Financial statement audit.

b. Compliance audit. d. Production audit.

24. Which of the following is not one of the major differences between financial and operational
auditing?

a. The financial audit is oriented to the past, but an operational audit concerns performance for
the future.

b. The financial audit report has widespread distribution, but the operational audit report has
limited distribution.

c. Financial audits deal with the information on the financial statements, but operational audits
are concerned with the information in the ledgers and journals.

d. Financial audits are limited to matters that directly affect the fairness of the financial statement
presentation, but operational audits cover any aspect of efficiency and effectiveness.
 C

25. Independent external 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 misleading financial information.

26. Which one of the following is NOT a mayor difference between operational and financial auditing?

a. Purpose of the audit c. Testing the effectiveness of internal controls

b. Distribution of the report d. Audits of non-financial areas

27. 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.

28. Internal auditors report to:

a. The audit committee of the board of directors.

b. Management.

c. External auditors.

d. The government regulators.

A
29. Which of the following is not a similarity between external and internal auditors?

a. Both must be independent of the company.

b. Both must be competent

c. Both follow a similar methodology in performing their audits

d. Both consider risk and materiality deciding the extent of their tests and evaluating results.

30. Internal auditing is an independent appraisal function established within an organization to examine
and evaluate its activities. To that end, internal auditing provides assistance to

a. External auditors c. Management and the board of directors

b. Stockholders d. Government

31. Which of the following groups could not be involved in an operational audit?

a. External auditors c. Government auditors

b. Internal auditors d. All of the above could be involved.

32. 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, whereas independent auditors are independent
contractors.

d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational
and performance auditing.

B
33. Which of the following has the primary responsibility for the fairness of the representations made in
the financial statements?

a. Client’s management c. Independent auditor

b. Audit committee d. Board of Accountancy

34. An audit of the financial statements of JMV Corporation is being conducted by an external auditor.
The external auditor is expected to

a. Express an opinion as to the fairness of JMV’s financial statements.

b. Express an opinion as to the attractiveness of JMV for investment purposes.

c. Certify the correctness JMV’s financial statements.

d. Examine all evidence supporting JMV‘s financial statements.

35. Which of the following statements about independent financial statement audit is correct?

a. The audit of financial statements relieves management of Its responsibilities tor 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.

36. The primary purpose of an independent financial statement audit is to

a. Provide a basis for assessing management’s 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.

37. Financial statements need to be prepared in accordance with one, or a combination of:

Philippine Philippine Other Authoritative or Philippine Financial

Standards Accounting Comprehensive Financial Reporting Standards
on Auditing Standards Reporting Framework
a. Yes Yes Yes Yes

b. No Yes Yes Yes

c. No Yes No Yes

d. Yes No No No

38. 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. Assume the readers that fraudulent activities of employees have been detected.

39. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements. c. Evaluate management’s performance.

b. Detect fraud. d. Evaluate the entity’s internal control.

40. The trait that distinguishes auditors from accountants is the:

a. Auditor's ability to interpret accounting standards

 b. Auditor's education beyond the bachelor's degree.

c. Auditor's ability to interpret PFRS.

d. Auditor's accumulation and interpretation of evidence related to a company' s financial

statements.

41. The level of assurance provided by an auditor on an audit report is:

a. Low b. High c. Moderate d. None

42. Theoretically, it is possible to provide an infinite range of assurance from a very low level of
assurance to an absolute level of assurance. In practice, the professional accountants cannot
provide absolute assurance because of the following except,

a. The internal control has its inherent limitations.

b. The professional accountants employ testing process.

c. The lack of expertise of the professional accountants in doing a systematic engagement process.

d. The use of judgment in gathering evidence and drawing conclusions based on that evidence.

43. Which of the following is not one of the limitations of an audit?

a. The use of testing c. Human error

b. Limitations imposed by client d. Nature of evidence that the auditor

obtains
B

44. Which of the following statements does not properly describe 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. Can cause auditors to overlook pertinent evidence.

 d. Many financial statement assertions cannot be audited.

45. 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 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.

46. The independent audit is important to readers of financial statement because it

a. Determines the future stewardship 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.

47. 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 in the financial statements

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

d. To ensure that any fund will be discovered.

C
48. 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 skepticism.

b. The auditor should obtain sufficient appropriate 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.

49. Financial statement users often receive unreliable financial information from companies. Which of
the following is not a common reason for this?

a. Complex exchange transactions.

b. Voluminous data.

c. Bias in the preparation of financial statements.

d. Each of these choices is a common reason for unreliable financial information.

50. 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

51. Which of the following would not represent one of the primary problems that would lead the users
to demand for independent audit of a company’s financial statements?

a. The downsizing of business and financial markets.

b. Management bias in preparing financial statements.

 c. The complexity of transactions affecting financial statements.

d. The remoteness of the user to directly obtain financial information from the company.

52. The need for independent audits of financial statements can be attributed to all of the following
conditions except:

a. Remoteness c. Complexity of subject matter

b. Consequence d. Validity

53. 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 may be in existence.

54. Which of the following statement does not describe a condition that creates a demand for auditing?

a. Conflict between an information preparer and a user can result in biased 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.

55. 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.

56. 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

57. 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, each reach 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

58. 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 unmodified opinion but not for any other types of opinion.

59. 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.

60. Which of the following one of the assumptions when auditing financial statements?

a. The data in the financial statements are verifiable.

b. Compliance to PFRS results in fair presentation of financial statements.

c. Effective internal control system contributes little to the reliability of financial information.

d. The auditor should be independent.

61. Which of the following statements about independent financial statement audit is incorrect?

a. 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 enhances 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.

62. 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. The auditor might misinterpret the evidence obtained.

d. Most of the items in the financial statements do not have supporting evidence.

63. Which of the following is one of the limitations of an audit?

a. Nature of evidence obtained c. Confidentiality of information

b. Inadequacy of the accounting records d. Scope limitations imposed by the entity

64. The assumption underlying an audit of financial statements is that they will be used by

a. Different groups for different purposes.

b. The general public in making investment decisions.

c. The board of directors as basis of declaring cash dividends.

d. The regulatory agencies to verify information that is relevant to their supervisory functions.

65. The procedures deemed necessary in the circumstances to achieve the objective of a financial
statement audit shall be determined by the

a. Client management

b. Independent auditor

c. Internal Auditor

d. Those charged with governance

66. Which one of the following is an example of management expectations that independent auditors?
a. An active participant in management decision making.
 b. An internal source expertise of financial and other matters.

c. An expert providing written communication as the product of the engagement.

d. Individuals who perform day-to-day accounting functions on behalf of the company.

67. 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.

68. Upon completion of a financial statement audit, the auditor has

a. No assurance that the financial statements are fairly presented.

b. Absolute assurance that the financial statements are fairly presented.

c. Reasonable assurance that all material errors and irregularities have been detected.

d. A low level of assurance that all material errors and irregularities have been found.

69. Which of the following is not one of the reasons why auditors provide only reasonable assurance on
the financial statements?

a. The auditor commonly examines a sample, rather than the entire population of transactions.

b. Accounting presentations contain complex estimates which involve uncertainty.

c. Fraudulently prepared financial statements are often difficult to detect.

d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
D