CHAPTER 1: AUDIT IN GENERAL Flashcards
- Broadly defined, the subject matter of any audit consists of
A. Financial Statements
B. Economic Data
C. Assertions
D. Operating Data
C. Assertions
- The criteria for evaluating quantitative information vary. For example, in the case of an independent audit of financial statements by CPA firms, the criteria are usually the
A. PFRS
B. Philippine Standards on Auditing
C. National Internal Revenue Code
D. Regulations of the Securities and Exchange Commission
A. PFRS
- An audit of financial statements is conducted to determine if the
A. Organization is operating efficiently and effectively
B. Auditee is following specific procedures or rules set down by some higher authority
C. Overall financial statements are stated in accordance with the applicable financial
reporting framework.
D. Client’s internal control is functioning as intended.
C. Overall financial statements are stated in accordance with the applicable financial
reporting framework.
- An audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity’s operating activities in relation to specified objectives is a(n):
A. External Audit
B. Compliance Audit
C. Operational Audit
D. Financial Statements Audit
C. Operational Audit
- An audit involves ascertaining the degree of correspondence between assertions and
established criteria’s. In the case of an audit of financial statements, which of the following
would not be a valid criterion?
A. International Accounting Standards
B. Philippine Financial Reporting Standards
C. Philippine Standards on Auditing
D. Philippine Accounting Standards
C. Philippine Standards on Auditing
- Most of the independent auditor’s work in formulating an opinion on financial statements
consists of
A. Studying and evaluating internal control
B. Obtaining and examining evidential matter
C. Examining cash transactions
D. Comparing recorded accountability with assets
B. Obtaining and examining evidential matter
- Which of the following types of audit uses laws and regulations as criteria?
A. Operational Audit
B. Financial Statements Audit
C. Compliance Audit
D. Performance Audit
C. Compliance Audit
- In financial statement audits, the audit process should be conducted in accordance with
A. The audit program
B. PSA
C. PAS
D. PFRS
B. PSA
- Which of the following best describes the operational audit?
A. It requires constant review by internal auditors of administrative controls as they relate to operations.
B. It concentrates on implementing financial and accounting control in a newly organized
company.
C. It attempts and is designed to verify the fair presentation of company’s results of
operations.
D. It concentrates on seeking out aspects of operations in which waste would be reduced
by the introduction of controls.
D. It concentrates on seeking out aspects of operations in which waste would be reduced
by the introduction of controls.
10.A typical objective of an operational audit is to determine whether an entity’s
A. Internal control structure is adequately operating as designed
B. Operational information is in accordance with GAAP
C. Specific operating units are functioning efficiently and effectively
D. Financial statements present fairly the results of operations.
C. Specific operating units are functioning efficiently and effectively
- 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.
B. Audit report.
- 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
D. External Auditing
- Independent auditing can best be described as a
A. Professional activity that measures and communicates financial accounting data
B. Subset of Accounting
C. Professional activity that attests to the fair presentation of financial statements
D. Regulatory activity that prevents the issuance of improper financial information
C. Professional activity that attests to the fair presentation of financial statements
- Which of the following statements is NOT a distinction between independent auditors and internal auditors?
A. Independent auditors represent third party users external to the auditee entity, whereas
internal auditors report directly to management.
B. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity.
C. Internal auditors are employees of the auditee; where as independent auditors are
independent contractors.
D. The internal auditor’s span of coverage goes beyond financial auditing to encompass
operational and performance auditing.
Financial Statement Audit
B. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity.
- 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.
D. Assist members of the organization in the effective discharge of their responsibilities.
- An audit of the financial statements of KIA Corporation is being conducted by an external auditor. The external auditor is expected to
A. Express an opinion as to the fairness of KIA’s financial statements.
B. Express an opinion as top the attractiveness of KIA for investment purposes.
C. Certify the correctness of KIA’s financial statements
D. Examine all evidence supporting KIA’s financial statements.
A. Express an opinion as to the fairness of KIA’s financial statements.
15.Internal auditing is an independent appraisal function established within an organization to examine and evaluate its activities. To that end, internal auditng provides assistance to
A. External auditors
B. Stockholders
C. Management and the BODs
D. Government
C. Management and the BODs
- Which of the following has the primary responsibility for the fairness of the representations made in the financial statements?
A. Client’s Management
B. Audit Committee
C. Independent Auditor
D. Board of Accountancy
A. Client’s Management
- Which of the following statements about independent financial statement audits correct?
A. The audit of financial statements relieve3s management of its responsibilities for the
financial statements.
B. An audit is designed to provide limited assurance that the financial statements taken as a whole are free from material misstatement.
C. The procedures required to conduct an audit in accordance with PSAs should be
determined by the client who engaged the services of the auditor.
D. The auditor’s opinion is not an assurance as to the future viability of the entity as well as
the effectiveness and efficiency with which management has conducted the affairs of the
entity.
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.
- The primary purpose of an independent financial statement audit is to
A. Provide a basis for assessing managements’ performance
B. Comply with government regulatory requirements
C. Assure management that the financial statements are unbiased and free from material error
D. Provide users with an unbiased opinion about the fairness of information reported in the financial statements
D. Provide users with an unbiased opinion about the fairness of information reported in the financial statements
- By providing high level of assurance on audit reports on financial statements, the auditor
A. Guarantees the fair presentation of the financial statements, the auditor
B. Confirms the accuracy of the financial statements
C. Enhances the credibility of the financial statements.
D. Assures the readers that fraudulent activities of employees have been detected.
C. Enhances the credibility of the financial statements.
24.Professional scepticism requires than an auditor assume that management is
A. Honest, in the absence of fraud risk behaviours
B. Dishonest until completion of audit tests.
C. Neither honest nor dishonest
D. Offering reasonable assurance of honesty.
C. Neither honest nor dishonest
- The reason an independent auditor gathers evidence is to
A. Form an opinion on the financial statements
B. Detect fraud
C. Evaluate Management
D. Assures the readers that fraudulent activities of employees have been detected.
A. Form an opinion on the financial statements
- An attitude that includes questioning mind and a crucial assessment of audit evidence is
referred to as
A. Due professional care.
B. Professional scepticism.
C. Reasonable assurance.
D. Supervision.
B. Professional scepticism.
- Jack has been retained as auditor of EVC Company. The functions of Jack’s opinion on
financial statements of EVC Company is to
A. Improve financial decisions of company management
B. Lend credibility to management’s representations
C. Detect fraud and abuse in management operations
D. Serve requirements of BIR, SEC or Central Bank.
B. Lend credibility to management’s representations
- The level of assurance provided when an auditor issues an audit report is:
A. Low
B. Reasonable
C. Moderate
D. None
B. Reasonable
- Which of the following is not one of the limitations of an audit?
A. The use of testing
B. Limitations imposed by the client
C. Human error
D. Nature of evidence that the auditor obtains
B. Limitations imposed by the client
- Which of the following statements does not properly describe a limitation of an audit?
A. Many audit conclusions are made on the basis of examining a sample of evidence.
B. Some evidence supporting peso representation in the financial statements must be
obtained by oral or written representation of management.
C. Fatigue can cause auditors to overlook pertinent evidence.
D. Many financial statement assertions cannot be audited
D. Many financial statement assertions cannot be audited
- Which of the following is one of the limitations of an audit?
A. The possibility that management may prevent the auditor from performing the necessary audit procedures.
B. The likelihood that the auditor may not be able to detect material misstatements in the
financial statements because the auditor is engaged only after the client’s year end.
C. The fact that most audit evidence is persuasive rather than conclusive in nature.
D. The risk that the auditor may not possess the training and proficiency required by the
engagement.
C. The fact that most audit evidence is persuasive rather than conclusive in nature.
- The independent audit is important to readers of financial statement because it
A. Determines the future steward ship of the management of the company whose financial
statements are audited.
B. Measures and communicates financial and business data involved in financial
statements.
C. Involves the objective examination of and reporting on management prepared
statements.
D. Reports on the accuracy of all information in the financial statements.
C. Involves the objective examination of and reporting on management prepared
statements.
- Which of the following is not one of the general principles governing the audit of financial statements?
A. The auditor should plan and perform the audit with an attitude of professional scepticism.
B. The auditor should obtain sufficient approriate evidence primarily through inquiry and analytical procedures to be able to draw reasonable conclusions.
C. The auditor should conduct the audit in accordance with PSA.
D. The auditor should comply with the Philippine Code of Professional Ethics.
B. The auditor should obtain sufficient approriate evidence primarily through inquiry and analytical procedures to be able to draw reasonable conclusions.
- The primary reason for an audit by an external audit firm Is
A. To satisfy governmental regulatory requirements.
B. To guarantee that there are no misstatements on the financial statements.
C. To provide increased assurance to users as to the fairness of the financial statements.
D. To ensure that any fraud will be discovered.
C. To provide increased assurance to users as to the fairness of the financial statements.
- The need for independent audits of financial statements can be attributed to allof the following conditions except:
A. Remoteness
B. Consequence
C. Complexity of Subject Matter
D. Validity
D. Validity
- 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
B. Complexity of making economic decisions
35.Which of the following best describes the reason why an independent auditor reports on
financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. Different interests may exist between the company preparing the statements and the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.
D. A poorly designed internal control system is in existence.
B. Different interests may exist between the company preparing the statements and the persons using the statements.
- Which of the following statements does not describe a condition that creates a demand for
auditing?
A. Conflict between information preparer and a user can result in based information.
B. Information can have substantial economic consequences for a decision-maker.
C. Expertise is often required for information preparation and verification.
D. Users can directly assess the quality of information.
D. Users can directly assess the quality of information.
- 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.
D. Financial statements are used for important decisions.
39.Auditing is biased on the assumption that financial data are verifiable. Data are verifiable
when two or more qualified individuals,
A. Working together, can prove, beyond doubt, the accuracy of the data.
B. Working independently, each reach essentially similar conclusions.
C. Working independently, can prove, beyond reasonable doubt, the truthfulness of the
data.
D. Working together, can agree upon the accuracy of the data.
B. Working independently, each reach essentially similar conclusions.
- The best statement of the responsibility of the auditor with respect to audited financial
statement is:
A. The auditor’s responsibility on fair presentation of financial statements is limited only up to the date of the audit report.
B. The auditor’s responsibility is confined to the expression of opinion on the financial
statements audited.
C. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements
D. The auditor is responsible only to his qualified opinion but not for any other type of
opinion.
B. The auditor’s responsibility is confined to the expression of opinion on the financial
statements audited.
- 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
C. Auditors act on behalf of the management
41.Which of the following is incorrect about responsibility for financial statements?
A. Management is responsible for fair presentation of the financial statements.
B. Auditor is responsible for expressing an opinion on the financial statements
C. Audit of financial statements does not reduce management’s responsibility
D. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.
D. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.
- 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
C. Auditors act on behalf of the management
45.Which of the following is one of the limitations of an audit?
A. Nature of evidence obtained
B. Inadequacy of the accounting records
C. Confidentiality of information
D. Scope limitations imposed by the entity
A. Nature of evidence obtained
- Which of the following statements about independent financial statement audit is incorrect?
A. The term “scope of the audit” refers to audit procedures deemed necessary in the
circumstances to achieve the objective of the audit.
B. The auditor’s opinion eshances the credibility of the financial statements.
C. The phrase used to express the auditor’s opinion is “present fairly, in all material respects?
D. The risk that the auditor will fail to uncover material misstatement is eliminated when the
auditor conducts the audit in accordance with PSAs.
D. The risk that the auditor will fail to uncover material misstatement is eliminated when the
auditor conducts the audit in accordance with PSAs.
44.Which of the following statements does not properly describe a limitation of an audit?
A. Many audit conclusions are made on the basis of examining a sample of evidence.
B. The work undertaken by the auditor is permeated by judgment.
C. Fatigue and human weaknesses can cause auditors to overlook pertinent evidence.
D. Many financial statement assertions cannot be audited.
D. Many financial statement assertions cannot be audited.
- The procedures deemed necessary in the circumstances to achieve the objective of the
audit shall be determined by the
A. Client management
B. Independent auditor
C. Internal Auditor
D. Those charged with governance
B. Independent auditor
- One of the conditions that give rise to a demand for an external audit of financial
statements is expertise. Which of the following best describes the meaning of expertise as
used in this context?
A. Auditors usually rely on the work of an expert as a basis for evaluating some assertions
embodied in the financial statements.
B. The readers of the financial statements must possess the necessary expertise to be able to understand the financial statements.
C. Users usually lack the necessary expertise to verify the reliability of the financial
information.
D. As experts, auditors are expected to direct all material misstatements in the financial
statements.
C. Users usually lack the necessary expertise to verify the reliability of the financial
information.
