SSC:AT 02_ INTRODUCTION TO FINANCIAL STATEMENTS AUDIT AY 2019-2020

SAN CARLOS COLLEGE

COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
COMPREHENSIVE REVIEW ON Auditing theory

AT02 – INTRODUCTION TO FINANCIAL STATEMENTS AUDIT

EXERCISES

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

A. provides a measure of management’s stewardship function.
B. measures and communicates the financial data included in the financial statements.
C. objectively examines and reports on management’s financial statements.
D. reports on the accuracy of information in the financial statements.
2. I. An Independent Financial Statements Audit provides enhancement on the reliability of the
information embodied in the Financial Statements by providing an accurate report on it.
II. Auditor’s opinion enhances the credibility of information and enhances future viability if the entity
and efficiency and effectiveness with which management conducted the affairs of the entity.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017
3. I. Users of financial information are usually prevented from directly assessing the reliability of the
information. Most of the users do not have access to the entity's records to personally verify the
quality of the financial information. Consequently, an independent auditor is needed to assist them
in verifying the reliability of the financial information.
II. The complexity of accounting and auditing requires expertise in verifying the quality of the financial
information. Since most of the users of .financial information are not equipped with the necessary
skills and competence to determine whether the financial statements are reliable, a qualified
person is hired by users to verify the reliability of the financial statements on their behalf.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017
4. Which of the following would not represent one of the primary problems that would lead the users to
demand for independent audits of a company’s financial statements?
A. Management bias in preparing financial statements.
B. The downsizing of business and financial markets.
C. The complexity of transactions affecting financial statements.
D. The remoteness of the user from the organization and thus the inability of the user to directly
obtain financial information from the company.
5. Causes of information risk are the following except:
I. Conflict of interest between the manager and those charged with governance.
II. Voluminous data
III. Remoteness between the user and the providers of information.
A. I and II D. III only
B. I only E. None from I, II and III
C. II only KGAUCP2017
6. The highest level of assurance that may be provided by the auditor is reasonable assurance and not
absolute because of the following factors, excecpt:
A. Non-sampling risk and human error
B. Employment of testing in the procedures
C. Conclusive evidence rather than persuasive evidence
D. Reliance on management representations KGAUCP2017
7. I. Although the auditor performs procedures to detect material misstatements whenauditing financial
statements, such procedures may not be effective in detecting misstatements resulting from
collusion among employees or management's circumvention of internal control.
II. The work undertaken by the auditor to form an opinion is permeated by judgment. Human
weaknesses can are not an excuse for auditors to commit mistakes in the application of audit
procedures and evaluation of evidence.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017

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SSC:AT 02_ INTRODUCTION TO FINANCIAL STATEMENTS AUDIT AY 2019-2020
8. An audit has inherent limitations that affect the auditors’ ability to detect material misstatements. Which
of the following is among the factors that result to these inherent limitations?
A. Use of testing
B. Inherent limitations of accounting and internal controls
C. Evidence that is basically persuasive rather than conclusive
D. All of the choices properly describe factors that result to inherent limitations of audits RESA0516
9. According to the IAASB’s glossary of terms, this term refers to persons with executive responsibilities for
the conduct of entity’s operations
A. Top rank personnel C. Board of directors
B. Those charged with governance D. Management RESA0516
10. I. The management is responsible for preparing and presenting the financial statements in
accordance with the financial reporting framework.
II. The auditor's responsibility is confined in forming and expressing an opinion on these financial
statements based on his audit.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017
11. An audit is conducted on the premise that management and, where appropriate, TCWG have
responsibility: (choose the exception) KGAUCP2017
A. for the preparation and presentation of financial statements in accordance with applicable financial
reporting framework
B. to provide the auditor unlimited access within the entity necessary for him to obtain additional
evidence.
C. to determine the appropriate audit fees in relation to the audit engagement
D. to design, maintain and implement effective internal and accounting system.
12. Which of the following statements about theoretical framework of auditing is (are) incorrect?
I. The data to be audited can be verified
II. Long-term conflicts may exist between managers who prepare the data and auditors who examine
the data.
III. Auditors act on behalf of management
IV. An audit benefits the public.
A. II and III only C. II only
B. II, III and IV only D. III only PRTC0516
13. 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 Salosagcol 2014
14. 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 auditor shall plan and perform an audit with an attitude of professional scepticism recognizing the
circumstances may exist that cause the financial statements to be materially misstated.

The auditor shall exercise professional judgment in planning and performing the audit in accordance with
PSAS.
A. True, true C. False, true
B. True, false D. False, false PRTC0516
16. I. In planning and performing an audit, the auditor neither assumes that the management is honest
nor assumes unquestioned honesty.
II. Philippine Standards on Auditing contain the basic principles and essential procedures which the
auditor should follow. The standards also include explanatory and other materials which, rather
than being prescriptive.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017

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17. This term refers to the application of relevant training, knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions about the courses
of action that are appropriate in the circumstances of the audit engagement
A. Professionalism C. Professional judgment
B. Conservatism D. Materiality RESA0516
18. In relation to the proper conduct of an audit engagement, which of the following statement is incorrect?
KGAUCP2017
A. Throughout the performance of the audit, the auditor shall comply with the relevant ethical
requirements including those pertaining to independence, relating to financial statements audit
engagement.
B. Professional judgment involves the application of accumulated knowledge and training in the
conduct of audit and not in evaluating management’s judgments.
C. Professional scepticism includes being alert to conditions that may indicate possible fraud.
D. Professional judgment is necessary in decisions regarding the nature, timing and extent of the
audit procedures to be done by the auditor.
19. As guidance for measuring the quality of the performance of an auditor, the auditor should refer to
A. Statements of Financial Accounting Standards Board.
B. Philippine Standards on Auditing.
C. Interpretations of Rules of Conduct.
D. Statements on Quality Control Standards.
20. The decision as to how much evidence to be accumulated for a given set of circumstances is.
A. provided by following the generally accepted accounting principles.
B. one requiring professional judgment
C. determined by statistical analysis
D. provided in the Philippines Standards on Auditing.
21. Assertions used by the auditor fall into three categories. Completeness is included under
A. Assertions about classes of transactions and events for the period under audit.
B. Assertions about account balances at the period end
C. Assertions about presentation and disclosure
D. All of the above KGAUCP2017
22. Which of the following is not an assertion relating to classes of transactions?
A. Accuracy C. Cut-off
B. Consistency D. Occurrence PRTC0516
23. Which of the following statements is not correct? Salosagcol 2014
a. It would be a violation of the completeness assertion if management would record a sale that did
not take place.
b. The completeness assertion deals with matters opposite from those of the existence assertion.
c. The completeness assertion is concerned with the possibility of omitting items from the financial
statements that should have been included.
d. The existence assertion is concerned with inclusion of amount that should not have been.
24. An assertion that transactions are recorded in the proper accounting period is:
a. classification c. occurrence
b. accuracy d. cut-off Salosagcol 2014
25. Which of the following information does not show proper matching of the definitions of assertions?
I. Completeness - transactions and events that have been recorded have occurred and pertain to the
entity.
II. Existence - assets, liabilities, and equity interests exist
III. Classification and understandability - disclosed events, transactions, and other matters have
occurred and pertain to the entity.
A. II only D. I only
B. I and III only E. I, II and III
C. III only KGAUCP2017
26. Which of the following is not an assertion about classes of transactions and events for the period ended?
I. Occurrence III. Cut-off
II. Rights and Obligations IV. Completeness
A. I and II D. I and IV
B. II and III E. None from A, B, C and D
C. III and IV KGAUCP2017
27. The requirement of PSAs in the “conduct of financial statements” section follows a ___________
approach audit process. KGAUCP2017
A. Profit-based C. Efficiency-based
B. Risk-based D. Accuracy-based
28. Set the following phases in proper order: ASUNCION, ESCALA, NGINA 2017

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I. Pre-engagement IV. Planning
II. Internal controls V. Post-audit responsibilities
III. Evidence gathering VI. Reporting
A. I, II, III, IV, V, VI C. I, IV III, II, V, VI
B. I, IV, II, III, VI, V D. I, IV, II, III, V, VI

29. Acts to be performed in order to obtain audit evidence

A. Audit procedures C. Audit program
B. Audit standards D. Audit strategy ASUNCION, ESCALA, NGINA 2017

30. Which of the following phase of audit engagement has an objective of accepting or rejecting clients to
reduce the risk of being associated to clients with no or questioned integrity? KGAUCP2017
A. Audit planning C. Completing the audit
B. Pre-engagement activities D. Responding to assessed risks

End of Exercises

“”We know what we are, but know not what we may be” – William Shakespeare

QUIZZER (DO-IT-YOURSELF DRILL)

1. An auditor’s opinion PRTC0516
A. Guarantees the credibility of the financial statements
B. Is an assurance as to the future viability of the entity
C. Certifies correctness of the financial statements.
D. Is not an assurance as to the efficiency with which management has conducted the affairs of the
entity.
2. An operating committee of a company’s board of directors that is in charge of overseeing financial
reporting and disclosure.
A. Governance C. Control environment
B. Audit committee D. Management RESA0516
3. 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 C. I, II, and III only
B. II and IV only D. I, II, III, and IV
4. Which of the following is not one of the limitations of an audit?
A. The use of testing
B. Limitations imposed by client
C. Human error
D. Nature of evidence that the auditor obtains Salosagcol 2014
5. Which of the following is a cause of information risk?
A. Voluminous data.
B. Biases and motives of the provider of information.
C. Remoteness of the provider of the information.
D. Each of these is a cause of information risk.
6. Which of the following is the most common way in reducing information risk?
I. Allow user to verify information
II. Conduct an independent audit of financial statements
III. Allow users to share with the risk
A. I only D. I and II
B. II only E. I, II and III
C. III only KGAUCP2017
7. The hallmark of auditing is
A. Available audit technology.
B. Generally accepted auditing standards
C. Professional judgment
D. Materiality and audit risk

8. Which of the following is not an assumption of an effective conduct of independent financial statements
audit?

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A. Data to be audited is verifiable at all times.
B. Independence adds credibility to the auditors’ report and thus be maintained all throughout the
engagement.
C. Long-term conflicts may exist between managers who prepare the data and auditors who examine
the data.
D. Audit benefits the public. KGAUCP2017
9. 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. Salosagcol 2014
10. The market for auditing services is driven by
A. The regulatory authority of Securities and Exchange Commission
B. A demand by external users of financial statements
C. Pronouncements issued by AASC
D. Congress through RA. 9298 PRTC0516
11. Decisions where professional judgment is necessary includes the following except:
A. Materiality C. Evidence gathering
B. Audit risk D. Assertions KGAUCP2017
12. The procedures deemed necessary in the circumstances to achieve the objective of a financial statement
audit shall be determined by the
A. Client management C. Internal Auditor
B. Independent auditor D. Those charged with governance
13. This assertion addresses whether all transactions that should be included in the financial statements are
in fact included.
a. occurrence c. rights and obligations
b. completeness d. existence
14. Disclosed events, transactions and other matters have occurred and pertain to the entity.
A. Occurrence C. Accuracy
B. Rights and Obligations D. Both A and B KGAUCP2017
15. I. Assertions guide the auditor in the performance of auditor procedures in obtaining audit evidence.
II. If an auditor is auditing the cash account, the assertion that he is primarily concerned to is
completeness rather than existence.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017
16. The phase in an audit engagement where the auditor is making his initial assessment of audit risks and
its component is KGAUCP2017
A. Audit planning C. Completing the audit
B. Pre-engagement activities D. Responding to assessed risks
17. Which phase of an independent financial statements audit which is not always performed is
A. Audit planning C. Completing the audit
B. Pre-engagement activities D. Test of controls KGAUCP2017
18. Independent auditing can best be described as
A. A branch of accounting.
B. A professional activity that measures and communicates financial and business data.
C. A discipline which attests to the results of accounting and other functional operations and data.
D. A regulatory function that prevents the issuance of improper financial information.
19. I. Representations from management are not a substitute for obtaining sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit opinion.
II. The procedures required to conduct an audit in accordance with PSAs should be determined by the
auditor having regard to the requirements of PSAs, relevant professional bodies, legislations,
regulations, and where appropriate, the terms of the engagement and the reporting requirements.
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017

20. Management is responsible for the fair presentation of financial statements that reflect the nature and
operations of the entity.

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Assertions about classes of transactions and events for the period under audit includes completeness and
existence
A. True, true C. False, true
B. True, false D. False, false KGAUCP2017

End of Handouts

“”Accept what is, let go of what was and have faith in what will be” – Sonia Ricotti

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