Chapter 1- Audit- An Overview- Salosagcol

Question 1

When auditing financial statements, the primary concern is with

a. determining whether recorded information properly reflects 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.

Answer 1

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

Question 2

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

Answer 2

c. accounting

Question 3

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 continuing professional development.
d. auditor’s accumulation and interpretation of evidence related to the company’s financial statements.

Answer 3

d. auditor’s accumulation and interpretation of evidence related to the company’s financial statements.

Question 4

The subject matter of any audit consists of

a. assertions about economic actions and events.
b. economic data
c. financial statements
d. operating data

Answer 4

a. assertions about economic actions and events.

Question 5

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

a. Philippine Standards on Auditing
b. Philippine Financial Reporting Standards
c. PFRS for Small and Medium-sized Entities
d. PFRS for Small Entities

Answer 5

a. Philippine Standards on Auditing

Question 6

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

Answer 6

b. Philippine Financial Reporting Standards

Question 7

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

a. obtaining and examining evidence
b. examining cash transactions
c. comparing recorded accountability with assets
d. studying and evaluating internal control

Answer 7

a. obtaining and examining evidence

Question 8

An audit of financial statements is conducted to determine if the

a. organization is operating efficiently and effectively
b. client is following a specific procedure 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 8

c. overall financial statements are stated in accordance with the applicable financial reporting framework

Question 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 be a valid criterion?

a. Internal Standards on Auditing
b. Philippines Standards on Auditing
c. Philippine Financial Reporting Standards
d. Quality Control Standards

Answer 9

c. Philippine Financial Reporting Standards

Question 10

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

a. The audit program
b. The Philippine Standards on Auditing
c. The Philippine Accounting Standards
d. The Philippine Financial Reporting Standards

Answer 10

b. The Philippine Standards on Auditing

Question 11

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

Answer 11

c. compliance audit

Question 12

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

a. performance audit
b. management audit
c. operational audit
d. compliance audit

Answer 12

d. compliance audit

Question 13

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

Answer 13

c. operational audit

Question 14

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

Answer 14

a. efficiency and effectiveness of operations

Question 15

Which of the following best describes an operational audit?

a. It attempts of verifying the fair presentation of a company’s result 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 controls by internal auditors as they relate to operations of the company.

Answer 15

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

Question 16

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 effectively and efficiently
d. financial statements present fairly the results of operations

Answer 16

c. specific operating units are functioning effectively and efficiently

Question 16

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 16

b. audit report

Question 16

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.

Answer 16

c. make recommendations for improving performance.

Question 17

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.

Answer 17

d. specific criteria are developed to define effectiveness.

Question 18

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 18

d. external auditing

Question 19

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
b. compliance audit
c. financial statement audit
d. production audit

Answer 19

a. operational audit

Question 20

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 of 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 audit 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.

Answer 20

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

Question 21

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 21

d. assist members of the organization in the effective discharge of their responsibilities.

Question 22

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

a. external auditors
b. stockholders
c. management and the board of directors
d. government

Answer 22

c. management and the board of directors

Question 23

Internal auditor’s independence is enhanced as when they report to

a. the audit committee of the board of directors.
b. the head of the finance department
c. the external auditors
d. the president of the company

Answer 23

a. the audit committee of the board of directors.

Question 24

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

a. external auditors
b. internal auditors
c. government auditors
d. all of the above could be involved

Answer 24

d. all of the above could be involved

Question 25

Which of the following statements is not a distinction between external auditors and internal auditors?

a. external auditors represent third party users, whereas internal auditors report directly to management.
b. although external 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.

Answer 25

b. although external auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity.

Question 26

The objective of the ordinary examination by the independent auditor is the expression of an opinion on

a. the fairness of the financial statements
b. the accuracy of the financial statements
c. the accuracy of the annual report
d. the balance sheet and income statement

Answer 26

a. the fairness of the financial statements

Question 27

Auditors accumulate evidence to

a. defend themselves in the event of a lawsuit
b. justify the conclusions they have otherwise reached
c. satisfy the requirements of the securities and exchange commission
d. enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.

Answer 27

d. enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.

Question 28

The responsibility for the preparation of the financial statements and the accompanying notes belongs to

a. the auditor
b. the management
c. both management and the auditor equally
d. the management for the statements and the auditor for the notes

Answer 28

b. the management

Question 29

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 the financial statements.
d. regulatory activity that prevents the issuance of misleading financial information.

Answer 29

c. professional activity that attests to the fair presentation of the financial statements.

Question 30

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 of JMV’s financial statements.
d. examine all evidence supporting JMV’s financial statements.

Answer 30

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

Question 31

which of the following statements about independent financial statement audit is correct?

a. the audit of financial statements relieves 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 PSA’s 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 31

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 32

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.

Answer 32

d. provide users with an unbiased opinion about the fairness of information reported in the financial statements.

Question 33

The level of assurance provided by an auditor when expressing an opinion on the financial statement is

a. low
b. reasonable
c. limited
d. none

Answer 33

b. reasonable

Question 34

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.

Answer 34

c. Enhances the credibility of the financial statements.

Question 35

The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management’s performance.
d. Evaluate the entity’s internal control.

Answer 35

a. Form an opinion on the financial statements.

Question 36

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. There are inherent limitations of audit that cannot be eliminated.
b. The auditor employs testing process when performing audit procedures.
c. The auditor usually lacks the expertise necessary to verify the financial statements.
d. The auditor uses professional judgment in gathering evidence and drawing conclusions based on that evidence.

Answer 36

c. The auditor usually lacks the expertise necessary to verify the financial statements.

Question 37

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 obtained

Answer 37

b. Limitations imposed by client

Question 38

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. Fatigue can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.

Answer 38

d. Many financial statement assertions cannot be audited.

Question 39

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.

Answer 39

c. the fact that most audit evidence is persuasive rather than conclusive in nature.

Question 40

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 fraud will be discovered.

Answer 40

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

Question 41

The independent audit is important to readers of financial 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.

Answer 41

c. involves the objective examination of and reporting on management prepared statements.

Question 42

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.

Answer 42

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

Question 43

which of the following is incorrect about the 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. the fair presentation of financial statements is an implicit part of the auditor’s responsibility.

Answer 43

d. the fair presentation of financial statements is an implicit part of the auditor’s responsibility.

Question 44

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. internal auditors are not independent enough to express an opinion on the financial statements of an entity where they are employed.
d. the risk that the auditor will fail to uncover material misstatement is eliminated when the auditor conducts the audit in accordance with the PSAs.

Answer 44

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

Question 45

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.

Answer 45

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

Question 46

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 limitation imposed by the entity

Answer 46

a. nature of evidence obtained

Question 47

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.

Answer 47

a. different groups for different purposes

Question 48

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

Answer 48

b. independent auditor

Question 49

Which one of the following is an example of management expectations from the independent auditors?

a. an active participant in management decision making.
b. an internal source of expertise of financial and other matters.
c. an expert providing a written communication as the product of the engagement.
d. individuals who perform day-to-day accounting functions on behalf of the company.

Answer 49

c. an expert providing a written communication as the product of the engagement.

Question 50

Which of the following is not one of the general principles governing an 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.

Answer 50

b. the auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to be able to draw reasonable conclusions.

Question 51

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 51

b. complexity of making economic decisions

Question 52

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. 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.

Answer 52

a. the downsizing of business and financial markets.

Question 53

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

a. remoteness
b. consequence
c. complexity of subject matter
d. validity

Answer 53

d. validity

Question 54

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

Answer 54

b. different interests may exist between the company preparing the statements and the persons using the statements

Question 55

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 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

Answer 55

d. users can directly assess the quality of information

Question 56

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 financial 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 making important decisions

Answer 56

d. financial statements are used for making important decisions

Question 57

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

Answer 57

c. users usually lack the necessary expertise to verify the reliability of the financial information

Question 58

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 fraud affecting the financial statements have been detected
d. a low level of assurance that all material errors and irregularities have been found

Answer 58

c. reasonable assurance that all material errors and fraud affecting the financial statements have been detected

Question 59

An auditor should recognize that the application of auditing procedures may produce evidential matter indicating the possibility of errors or fraud and therefore should

a. plan and perform the engagement with an attitude of professional skepticism
b. not depend on internal accounting control features that are designed to prevent or detect errors or fraud
c. design audit tests to detect unrecorded transactions
d. extend the work to audit most recorded transactions and records of an entity

Answer 59

a. plan and perform the engagement with an attitude of professional skepticism

Question 60

An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as

a. due professional care
b. professional skepticism
c. reasonable assurance
d. supervision

Answer 60

b. professional skepticism

Question 61

Professional skepticism require that an auditor assume that management is

a. honest, in the absence of fraud risk factors
b. dishonest until completion of audit tests
c. neither honest nor dishonest
d. offering reasonable assurance of honesty

Answer 61

c. neither honest nor dishonest

Question 62

Which of the following is not one of the reason why auditors cannot provide absolute assurance when auditing financial statements?

a. the auditor commonly examines a sample, rather than the entire population of transactions
b. the nature of the financial reporting frameworks usually requires the use of complex estimates which involve uncertainty
c. the fact that most audit evidence is only persuasive and not conclusive in nature
d. the auditors are usually prevented by the client from verifying certain accounts in the financial statements

Answer 62

d. the auditors are usually prevented by the client from verifying certain accounts in the financial statements

Question 63

Which of the following is not one of the major 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 statements
d. the auditor should be independent

Answer 63

c. effective internal control system contributes little to the reliability of financial statements

Question 64

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 64

c. auditors act on behalf of the management

Question 65

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 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 65

b. working independently, each reach essentially similar conclusions

Question 66

Which of the following statements is true when the CPA has been engaged to do an audit engagement?

a. the CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client
b. The CPA firm is engaged and paid, but the primary beneficiaries of the audit are the statement users
c. should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact client’s financial statements either positively or negatively, the CPA is free to endorse the choice which is in the client’s interests
d. as long as CPA firms are competent, it is not required that they remain unbiased

Answer 66

b. The CPA firm is engaged and paid, but the primary beneficiaries of the audit are the statement users

Question 67

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 engagement 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

Answer 67

a. stockholders, creditors and the investing public

Question 68

Which of the following has the primary responsibility for the fairness of the representatives made in the financial statements?

a. client’s management and those charged with governance
b. audit committee
c. independent auditor
d. board of accountancy

Answer 68

a. client’s management and those charged with governance