Auditing Theory Material No.

1. Which of the following is an incorrect phrase?

a. Auditing is a systematic process.
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.

2. The objective of a review of financial statements

a. Is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework.
b. Is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be
required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial
statements are not prepared, in all material respects, in accordance with an identified financial reporting framework.
c. Is to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties
have agreed and to report on factual findings.
d. Is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information.

3. Which of the following is a correct statement relating to the theoretical framework of auditing?
a. The financial data to be audited can be verified.
b. Short-term conflicts do not exist between managers who prepare data and auditors who examine data.
c. Auditors do not necessarily need independence.
d. An audit has a benefit only to the owners.

4. The essence of the attest function is to

a. Detect fraud
b. Examine individual transactions so that the auditor can certify as to their validity
c. Determine whether the client’s financial statements are fairly stated
d. Ensure the consistent application of correct accounting procedures

5. In “auditing” accounting data, the 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 it complies with government requirements.

6. Users of financial statements demand independent audit because

a. Users demand assurance that fraud does not exist
b. Management may not be objective in reporting.
c. Users expect auditors to correct management errors.
d. Management relies on the auditor to improve internal control.

7. 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

8. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis?
a. Internal auditing
b. Government auditing
c. BIR auditing
d. External auditing

9. Which of the following is incorrect regarding the Philippine Standards on Assurance Engagements (PSAE)?
a. It provides an overall framework for assurance engagements intended to provide either a high or moderate level of
assurance.
b. It provides basic principles and essential procedures for engagements intended to provide a moderate level of assurance.
c. When a professional accountant is engaged to perform an assurance engagement for which specific standards
exist, those standards apply.
d. If no specific standards exist for an assurance engagement, PSAE apply.

10. Agreed-upon procedures provides what level of assurance?

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

11. Which of the following procedures ordinarily performed during an audit are also performed in review?
a. Assessment of accounting and internal control systems
b. Test of controls
c. Tests of records and of responses to inquiries
d. Inquiry and analytical procedures

12. An assurance engagement should exhibit the following elements except

a. A three-party relationship
b. Appropriate professional fee
c. A conclusion
d. A subject matter

13. The following are assurance engagements except

a. Financial statements audit
b. Review of financial statements
c. Information system reliability services
d. Tax consulting

14. Engagements frequently performed by professional accountants that are not assurance engagements include the following
 except
a. Agreed-upon procedures.
b. Compilation
c. Compliance audit
d. Management consulting.

15. The subject matter of an assurance engagement may take many forms, including
a. Data
b. Systems and processes
c. Behavior
d. All of these

16. The decision as to whether the criteria are suitable involves considering whether the subject matter is capable of reasonably
consistent evaluation against or measurement using such criteria. The characteristics for determining whether criteria are
suitable include the following, except
a. Relevance
b. Reliability
c. Understandability
d. Sufficiency

17. When the professional accountant has obtained sufficient appropriate evidence to conclude that the subject matter
conforms in all material respects with identified suitable criteria, he or she can provide what level of assurance?
a. None
b. High
c. Moderate
d. Absolute
18. Absolute assurance is generally not attainable as a result of such factors as:
a b c d
 The use of selective testing Yes Yes Yes No
 The inherent limitations of control systems Yes Yes Yes Yes
 The fact that much of the evidence available to the professional
accountant is persuasive rather than conclusive Yes Yes No Yes
 The use of judgment in gathering evidence and drawing conclusions
based on that evidence Yes No No No

19. Which of the following is incorrect regarding the “three-party relationship” element of assurance engagements?
a. Professional accountants as those persons who are members of an IFAC member body, which should be in public
practice.
b. The responsible party and the intended user will often be from separate organizations but need not be.
c. The responsible party is the person or persons, either as individuals or representatives of an entity, responsible
for the subject matter.
d. The intended user is the person or class of persons for whom the professional accountant prepares the report for a
specific use or purpose.

20. The single feature that most clearly distinguishes audit, review, compilation, and agreed-upon procedures is
a. Type of service.
b. Training required to perform the service.
c. Level of assurance.
d. CPA’s approach to the service.

21. The primary goal of the CPA in performing the attest function is to
a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.

22. Internal auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial
presentation and includes audits of efficiency, effectiveness, and
a. Internal control.
b. Evaluation.
c. Accuracy.
d. Compliance.

23. Which of the following best describes the operational audit?

a. It requires the constant review by internal auditors of the administrative controls as they relate to operations of the
company.
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 a 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.

24. The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations,
and changes in financial position is applied within the framework of
a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

25. Which of the following is not considered an assertion as formulated by the Auditing Standards Board?
a. Valuation or allocation.
b. Mathematical accuracy.
c. Rights and obligations.
d. Presentation and disclosure.

26. Which of the following is not a distinguishing feature of risk-based auditing?

a. Identifying areas posing the highest risk of financial statement errors.
b. Analysis of internal control.
 c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

27. To maximize independence, the director of internal auditing should report to the
a. Audit committee.
b. Controller.
c. Chief financial officer.
d. Director of information systems.

28. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

29. The best description of the scope of internal auditing is that it encompasses
a. Primarily operational auditing.
b. Both financial and operational auditing.
c. Primarily the safeguarding of assets and verifying the existence of such assets.
d. Primarily financial auditing.

30. A typical objective of an operational audit is to determine whether an entity's

a. Financial statements fairly present financial position and cash flows.
b. Financial statements present fairly the results of operations.
c. Financial statements fairly present financial position, results of operations, and cash flows.
d. Specific operating units are functioning efficiently and effectively.

31. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the
a. Scope paragraph of the auditor’s report.
b. Opinion paragraph of the auditor’s report.
c. Management letter.
d. Engagement letter.

32. The four major steps in conducting an audit are:

a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances

The proper sequence in applying the above steps is:

a. cadb
b. bcda
c. cdab
d. adcb

33. Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.

34. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements.

35. Which of the following statements is not a distinction between independent auditing and internal auditing?
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.

36. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings
between CPA and client regarding the precise nature of the work to be performed and the type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in the audit process.
d. The engagement letter should be signed by both the client and the CPA and should be used only for independent
audits.

37. In assessing audit risk, the CPA needs to do all of the following except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed by the client.
d. Understand the entity and the industry in which it operates.

38. Which of the following tasks should be performed prior to the final audit?
a. Determining the fairness of property, plant, and equipment.
b. Confirming accounts receivable.
c. Testing internal control.
d. Collecting and evaluating evidence supporting the fairness of inventory values.

39. An audit approach that attempts to identify areas posing the highest probability of financial statement errors and allocate audit
resources to those areas is known as auditing.
a. Compliance
 b. Error-based
c. Fraud-based
d. Risk-based

40. Because is the standard for measuring fairness, independent auditors must be expert in accounting matters.
a. PSA
b. PSQR
c. GAAP
d. PSRE

41. The assertion stating that no assets, equities, or transactions have been omitted from the financial statements is known as the
assertion.
a. Existence
b. Valuation
c. Completeness
d. Rights and Obligation

42. The auditor’s opinion

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

43. Which of the following is incorrect regarding the general principles of an audit?
a. The auditor should comply with the “Code of Ethics for Professional Ethics for Certified Public Accountants” promulgated
by the Philippine Professional Regulation Commission.
b. The auditor should conduct an audit in accordance with PSAs.
c. The auditor should 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.
d. The auditor would ordinarily expect to find evidence to support management representations and assume they are
necessarily correct.

44. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.
a. Scope of an audit
b. Objective of an audit
c. Audit program
d. Reasonable assurance

45. Which of the following are sources of procedures to be considered by the auditor to conduct an audit in accordance
with PSAs?
PSA Legislation Terms of Audit Engagement Type of Opinion
a. Yes No No No
b. No No Yes Yes
c. No Yes Yes No
d. Yes Yes Yes No

46. Which of the following is an objective of a review engagement?

a. Expressing a positive opinion that the financial information is presented in conformity with generally accepted
accounting principles.
b. Expressing a limited assurance to users who have agreed as to procedures that will be performed by the CPA.
c. Reporting whether material modifications should be made to such financial statements to make them conform with
generally accepted accounting principles.
d. Reporting that the financial statements, in all materials respects, fairly present the financial position and operating
results of the client.

47. According to Philippine Standard on Auditing, the procedures employed in doing compilation are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
d. Less extensive than review procedures but more extensive than agreed-upon procedures.

48. Any services in which the CPA firm issues a written communication that express a conclusion with respect to the reliability of a
written assertion that is the responsibility of another party is a (n)
a. Accounting and bookkeeping service
b. Attestation service
c. Management advisory service
d. Tax service

49. Which of the following is not primary category of attestation report?

a. Compilation report
b. Review report
c. Audit report
d. Special audit report based on a basis of accounting other than generally accepted accounting principles.

50. The primary goal of the CPA in performing the attest function is to
a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures
MATCHING:

Match each of the listed procedures with the primary assertion that is satisfied by the procedure

a. existence or occurrence
b. completeness
c. rights and obligations
d. valuation or allocation
e. presentation and disclosure

_ 1. Calculated depreciation expense for the year.

_ 2. Test counted client’s year-end inventory of materials and finished goods.
_ 3. Examined vehicle title applicable to new truck purchased during the current year.
_ 4. Considered need for a footnote describing a lawsuit pending against the client.
_ 5. Conducted a search for unrecorded liabilities.
_ 6. Advised client of the need to reclassify the current portion of a long-term mortgage note.
_ 7. Performed tests to determine that overhead had been properly applied to ending inventory and cost of sales.
_ 8. Reconciled client’s bank accounts as of year-end.
_ 9. Examined appraisal reports applicable to land donated by the city.
_ 10. Obtained written confirmation from customers regarding year end balances in selected accounts receivable.