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

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

Broadly defined, the subject matter of any audit consists of

a. Financial statements
b. Economic data
c. Assertions
d. Operating data

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 judgement in resolving audit issues

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 Commision

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 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.

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.

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.

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

b. Philippine Financial Reporting Standards (PFRS)
c. Generally Accepted Auditing Standards
d. PFRS for SMEs

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 evidence
c. Examining cash transactions
d. Comparing recorded accountability with assets

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

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

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

a. The audit program

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

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

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

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 controls by internal auditors as they relate to
operations of the company.

A typical objective of an operational audit is to determine whether and 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.

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.

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

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

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.
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

An examination of part of an organization’s procedures and methods for the purposes of evaluating
efficiency and effectiveness is what type of audit?

a. Operational Audit
b. Compliance Audit
c. Financial Statement Audit
d. Production Audit

Which of the following is not one of the major differences between financial and operating 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 ledger 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.

Independent external auditing can best be described as a

a. Professional activity that measures and communicates financial 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.

Which of the following is NOT a major difference between operational and financial auditing?

a. Purpose of the audit

b. Distribution of the report
c. Testing the effectiveness of internal controls
d. Audits of non-financial areas

The overall objective of internal auditing is to

a. Attest to the efficiency with which resources are employed

b. Ascertain that controls are cost justified
c. Provide assurance that financial data have been accurately recorded
d. Assist members of the organization in the effective discharge of their responsibilities

Internal auditors report to:

a. The audit committee of the board of directors

b. Management
c. External auditors
d. The government regulators
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.

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
b. Stockholders
c. Management and the board of directors
d. Government

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.

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.

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

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 puposes.
c. Certify the correctness of JMV’s financial statements.
d. Examine all evidence supporting JMV’s financial statements.

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

a. The audit of financial statements relieves management of it 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.

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.

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

Philippine Philippine Other authoritative or

Philippine Financial
Standards on Accounting comprehensive financial
Reporting Standards
Auditing Standards reporting framework
a. yes yes yes yes
b. no yes yes yes
c. no yes no yes
d. yes no no no

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.

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.

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.

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

a. Low
b. High
c. Moderate
d. None
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 doing a systematic engagement process.
d. The use of judgment in gathering evidence and drawing conclusions based on that evidence.

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

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.

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 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 process the training and proficiency required by the engagement.

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.

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.

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.

Financial statements 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 preparation of financial statements
d. Each of these choices is a common reason for reliable financial information.

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.

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.

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 the subject matter
d. Validity

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 person 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.

Which of the following statements does not describe a condition that creates 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 decision-maker.
c. Expertise is often required for information preparation and verification.
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 fully understood by the users of the
statements.
d. Financial statements are used for important decisions.

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
data.
c. Auditors act on behalf of the management.
d. An audit benefits the public.

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.

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 statement 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.

Which of the following is incorrect about responsibility for financial statements?

a. Management is responsible about responsibility for financial statements.

b. Auditor is responsible for expressing 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.

Which of the following is not 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.

Which of the following statements about independent financial statement audit is incorrect?
 a. Scope of 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 auditor
conducts audit in accordance with PSAs.

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 evidences.

Which of the following is one of the limitation 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.

The assumption underlying an audit of financial statement 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.

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