Auditing Theory: Overview of Auditing

1. Which of the following is not one of the reasons why auditors provide only reasonable
assurance on the financial statements?
a. The auditor commonly examines a sample, rather than entire population of
transactions.
b. Accounting presentations contain complex estimates which involve uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

2. Upon completion of 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 irregularities have been detected
d. A low level of assurance that all material errors and irregularities have been
detected

3. One of the conditions that give arise to a demand for an external audit of financial
statements is expertise. Which of the following best describes the meaning of expertise
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 of necessary expertise to verify the reliability of the financial
statements.
d. As experts, auditors are expected to detect all material misstatements in the
financial statements.

4. Which of the following is an example of management expectations from the independent

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

5. The procedures deemed necessary in the circumstances to achieve the objective of

financial statements audit shall be determined by the
a. Client management
b. Independent auditor
c. Internal auditor
d. Those charge with governance

6. 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 decision.
c. The board of directors as basis of declaring cash dividend
d. The regulatory agencies to verify information that is relevant to their supervisory
functions.

7. Which of the following is one of the limitations of an audit?

a. Nature of evidence obtained
b. Inadequacy of accounting records
c. Confidentiality of information
d. Scope limitations imposed by the entity

8. 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.

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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.

9. 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 audit.
c. The phrase used to express the auditor’s opinion is “present fairy, 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.

10. Which of the following is not an assumption when auditing financial statements?
a. The data in the financial statements are verifiable.
b. The compliance to PFRS results in fair presentation of financial statements.
c. Effective internal control system contributes little to the reliability of the financial
information.
d. The audit should be independent.

11. Which of the following is incorrect about responsibility for financial statements?
a. Management is responsible for fair presentation of 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’ responsibility.

12. 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 financial statements rests with the management and the
auditor assumes responsibility with respect to the notes to financial statements.
d. The auditor is responsible only to his unmodified opinion not for any other types of
opinion.

13. Auditing is based on the assumption that financial data are verifiable. Data are
verifiable when two or more qualified individuals are
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.

14. 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.
15. There are conditions that give rise to the need for and independent audit of financial
statements. One of these is consequence, which means that the
a. Users of the financial statements may not fully understand the consequence of their
actions.

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b. Auditor must anticipate all possible consequences of the report issued.

c. Impact of using different accounting method may not be fully understood by the
users of the financial statements.
d. Financial statements are used for important decisions.

16. Which of the following statement does not describe a condition that creates a demand
for auditing?
a. Conflict between an information prepared 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.

17. Which of the following best describes he reason why an independent auditor reports on
the financial statements?
a. A management fraud may exist and it is more likely to be detected by
independent auditors.
b. Different interest 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 maybe in existence.

18. 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

19. Which of the following would not represent one of the primary problems that would
lead the users to demand for independent audit of the 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 the financial statements.
d. The remoteness of the user to directly obtain financial information from the
company.

20. Which 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

21. Financial statement users often receive unreliable financial information from companies.
Which of the following is not common reason for this?
a. Complex exchange transactions
b. Voluminous data
c. Bias in the preparation of financial statements
d. All of the above – should be none of the above
22. 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.

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c. The auditor should conduct the audit in accordance with PSA.

d. The auditor should comply with the Philippine Code of Professional Ethics.

23. 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.

24. The independent audit is important to readers of financial statements 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 financial
statements.
d. Reports on the accuracy of all information in the financial statements.

25. 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 management.

26. Which of the following statements does not properly describe the limitation of an audit?
a. Many audit conclusions are made on the basis of examining sample of evidence
b. Some evidence supporting peso representations in the financial statements must be
obtained by oral or written representation from the management.
c. Fatigue can cause auditors to overlook pertinent evidence
d. Many financial statements assertions cannot be audited.

27. 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

28. 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:
a. The internal control has its inherent limitations
b. The professional accountants employ testing process
c. The lack of experience of professional accountants in doing a systematic engagement
process
d. The use of judgment in gathering evidence and drawing conclusions based on that
evidence
29. Financial statement users often receive unreliable financial information from companies.
Which of the following is not common reason for this?
a. Complex exchange transactions
b. Voluminous data
c. Bias in the preparation of financial statements
d. All of the above – should be none of the above

30. Assurance services are best described as

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a. Services designed for the improvement of operations, resulting in better outcomes.

b. Independent professional services that improve the quality of information, or its context,
for decision makers.
c. The assembly of financial statements based on assumptions of a reasonable party.
d. Services designed to express an opinion on historical financial statements based on
the results of an audit.

31. Assurance services least likely involve

a. Improving the quality of information for decision purposes.
b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of information.

32. Which of the following statements is (are) true regarding the provision of assurance
services?
a. The third party who receives the assurance generally pays for the assurance
received.
b. Assurance services always involve a report by one person to a third party on which
an independent organization provides assurance.
c. Assurance services can be provided either on information or processes.
d. All of the above.

32. In performing an attestation engagement, a CPA typically

a. Supplies litigation support services.
b. Assesses control risk at a low level.
c. Expresses a conclusion about an assertion.
d. Provides management consulting advice.

33. Which of the following services would be most likely to be structured as an attest
engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data base system for the revenue
cycle.
c. An engagement to issue a report addressing an entity’s compliance with requirements of
specified laws.
d. The compilation of a client’s forecast information.

34. Which of the following is broadest in scope?

a. Audits of financial statements. c. Internal control audit.
b. Assurance services. d. Attestation services.

35. Independent auditing can 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 regulating function that prevents the issuance of erroneous or improper financial
information.

36. A financial statement audit is designed to

a. Provide assurance on internal control and to identify reportable conditions.
b. Detect error or fraud in the financial statements, regardless of whether or not the
error or fraud is material.
c. Obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether caused by error or fraud.
d. Obtain absolute assurance on the financial statements and express an opinion on
the financial statements.

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37. Which of the following best describes why an independent auditor is asked to express
an opinion on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a company’s financial
position and changes in financial position and operations without the expertise of an
independent auditor.
b. It is management’s responsibility to make available independent aid in the
preparation of the financial information shown in the financial statements.
c. The opinion of an independent party is needed because a company may not be objective
with respect to its own financial statements.
d. It is a customary courtesy that shareholders of a company receive an independent
report on management’s status in managing the affairs of the business.

38. An audit of the financial statements of Camden Corporation is being conducted by an

external auditor. The external auditor is expected to
a. Express an opinion as to the fairness of Camden's financial statements.
b. Express an opinion as to the attractiveness of Camden for investment purposes.
c. Certify to the correctness of Camden's financial statements.
d. Critique the wisdom and legality of Camden's business decisions.

39. A type of audit the purpose of which is to determine whether the auditee is following
specific procedures or rules set down by some higher authority
a. Operational audit. c. Financial audit.
b. Compliance audit. d. Management audit.

40. A technique for regularly and systematically appraising a unit of function and its
effectiveness against corporate and industry standards with the objective of assuring
management that its aims are being carried out and/or identifying conditions capable of
being improved
a. Financial auditing. c. Operations auditing.
b. Compliance tests. d. Management auditing.

41. A detailed examination of the utilization of the resources of the company, including the
organization structure to carry out objectives, to indicate areas of increased efficiency
and possible cost reduction is
a. Internal audit. c. Management audit.
b. Audit of assets. d. Financial audit.

42. Which of the following types of audits are most similar?

a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
d. Internal audits and independent financial statement audits.

43. To make the internal audit department independent, he should report directly to the
a. Board of Directors. c. Stockholders.
b. Audit committee. d. Controller.

44. An independent audit

a. Supports an internal audit. c. Duplicates an internal audit.
b. Negates an internal audit. d. Complements an internal audit.

45. The members of the Commission on Audit should

a. Be a member of the bidding committee of the agency.
b. Hold office for nine years without reappointment.
c. Be a commissioner and an associate commissioner.
d. Be a CPA or member of the Bar with ten-year experience.

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46. Besides expressing an opinion on the fairness of financial statement presentation, a

government auditor normally includes audit of effectiveness, compliance as well as
a. Internal control. c. Mathematical accuracy.
b. Economy. d. Risk evaluation.

47. Governmental effectiveness (program) auditing seeks to determine whether the desired
results are being achieved and objectives are being met. The first step in the
performance of such an audit would be:
a. Evaluate the system used to measure results.
b. Determine the sampling frame to use in studying the system.
c. Collect and analyze quantifiable data.
d. Identify the legislative intent of the program being audited.

48. 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

49. Broadly defined, the subject matter if any audit consists of

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

50. 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 assertion?
a. International Accounting Standards
b. Philippine Financial Reporting Standards
c. Generally accepted auditing standards
d. PFRS for SMEs

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