DEFENCE UNIVERSITY

COLLGE OF RESOURCE MANAGEMET

DEPARTMENT OF ACCOUNTING & FINANCE
Auditing I Mid Term Exam

Time Allowed: 1:30 hours

August 2/ 2013

Student’sname:____________________________I.D.No____________Section____

GENERAL INSTRUCTION:
 Read the instructions carefully and answer the questions accordingly.
 Use of pencil and red pen is strictly forbidden.
 Use of calculator is allowed.
 Switch off your mobile phones before you start the exam.
 Make sure that the question paper has three parts & 9 printed pages including
the cover page. DO NOT DETACH THE ANSWER SHEET.
 Don’t turn this page until you are told to do so
 Attempt all questions and give your answer on the answer sheet provided.
Part: One True or false
Write “true” if the statement is correct and “false” if the statement is wrong
in the separate answer sheet attached at the end of the booklet .
1. Auditing is analytical , where as Accounting is constructive work
2. Financial statement audit is important since it guarantees that financial statements
are fairly presented.
3. Internal Auditors can perform both management audit & Compliance Audit
4. Auditors are responsible for the quality of the financial statements of their client
5. The Auditor should not undertake an engagement if the fee is based on whether or
not the auditor’s report leads to the approval of the client’s application for a bank
loan.
6. Audit evidence is the basis for conclusion of audit opinion.
7. Enquiries involve seeking information from the client's staff or external sources.
8. Relevance is degree to which evidence can be considered believable or worthy of
trust
9. A large sample of highly competent evidence is not persuasive unless it is
relevant to the audit objective being tested.
10. Computations involve analysis of significant ratios and trends including the
resulting investigation.
11. Analytical Procedures doesn’t give evidence.
12. Analytical procedures can be the most cost-effective substantive procedures.
13. As the auditor’s assessment of inherent & control risk increases, the acceptable
level of detection risk also increases
14. The actual level of detection risk can be changed by the auditor by varying the
nature, timing and extent of substantive tests performed on an assertion.
15. In developing, preliminary audit strategy for sufficient assertion, when controls
related to the assertion are ineffective or do not exist, the auditor has to plan
extensive substantive .
16. Examination of transactions with reference to laws and regulations, as well as
statutory law of the country can be considered as Operational audit.
17. An auditor will not be liable if it can show that it exercised the ordinary care and
skill of a reasonable man in the conduct of its own affairs.

Part Two:. Multiple Choice Questions choose the best answer

and write the letter of your choice in the answer sheet
provided

1. An audit that determines whether the specified rules, regulations, or

procedures are being carried out or followed is termed as :
A. Performance audit C. Financial audit
B. Compliance audit D. Operational audit
2. Which of the following is not true about internal auditor?
A. An internal auditor is paid salary as employee of the organization
B. Internal auditor is physically independent of the company he/ she provide
service.
 C. Internal auditor is directly responsible to Board of Directors
D. Internal auditor provides audit service on fee basis
3. What is the essence of the external audit function?
A. To detect fraud
B. To examine individual transactions so that the auditor may certify their
validity.
C. To determine whether the client’s financial statements are fairly stated.
D. To assure the consistent application of correct accounting procedures.
4. Primary purpose of an operational audit is to provide:
A. Means of assurance that internal control structure is functioning as
planned.
B. A measure of management performance in meeting organizational goals.
C. The results of internal audits of financial and accounting matters to a
company’s top-level management.
D. Aid to the independent auditor who is conducting the audit of the financial
statements.
5. Compared to the external auditor, what is more likely to concern an
internal auditor?
A. Fairness of the financial statements
B. Management policies and procedures
C. Cost accounting procedures
D. Generally accepted accounting principles.
6. An audit firm will be liable for any fraudulent scheme it does not
detect.
A. true
B. false
7. Which of the following factor does not impair independence?
A. Investment interest in audit client
B. Consultancy service in client co.
C. Litigation between CPA firm and client
D. Hospitality or goods and services
E. None of the above
8. An accountant should be straightforward, honest and sincere in his
approach to his professional work; this professional code of ethics is called:
A. Confidentiality
B. Objectivity
C. Independence:
D. Integrity
9. One of the following is not the importance evaluating the internal
control o the business under audit.
A. To determine the nature of the audit
B. To determine the time of the audit
C. To determine the extent of the audit
D. All of the above
10. Which of the following standard is different from others?
A. Independence
B. Competence
 C. Due professional care
D. Adequate supervision and planning
11.Which comes first?
11.Which
A. Reporting the findings
B. Accepting the engagement
C. Performing the field work
D. planning the engagement
12.One of the following is not the importance evaluating the internal control o the business
12.One
under audit.
E. To determine the nature of the audit
F. To determine the time of the audit
G. To determine the extent of the audit
H. All of the above
13.Engagement letter specify the following, except.
13.Engagement
A. Restrictions to be imposed on auditors work.
B. Dead line for completing the audit.
C. Agreement on audit fees.
D. Other services provided by auditors.
E. None of the above.
14.The
14. risk that an auditor’s procedures will lead to the conclusion that a material
misstatement does not exist in an account balance when, in fact, such
misstatement does exist is referred to as
a. Audit risk
b. Inherent risk
c. Control risk
d. Detection risk
15. auditor strives to achieve independence in appearance to
15.An
a. maintain public confidence in the profession
b. become independent in fact
c. comply with the generally accepted auditing standards of field work
d. maintain an unbiased mental attitude

16.The
16. auditor Code of Professional Conduct states that an auditor shall not disclose any
confidential information obtained in the course of a professional engagement
 except with the consent of the client. In which one of the following situation
would disclosure by an auditor be in violation of the code?

a. Disclosing confidential information in order to properly discharge the auditor’s

Responsibilities in accordance with the profession’s standards.
b. Disclosing confidential information in compliance with a subpoena issued by a
court
c. Disclosing confidential information to another accountant interested in
purchasing the auditor ’s practice
d. Disclosing confidential information during authorized peer review

17. law suit for breach of contact may be normally brought against the auditor by
17.A
a. client
b. all users of the audit report
c. other third parties
d. suppliers
e. banks
18.Which
18. of the following is less reliable audit evidence?
A. confirmation
B. analytical procedures
C. observation
D. inquiry
19.The
19. customer is requested to confirm the balance to the auditor whether it is correct ,
which type of confirmation is this?
A. positive
B. negative
C. Blank
20.Which
20. of the following statements relating to reliability of audit evidence is/are true?
A. Evidence obtained from independent external sources is reliable.
B. Accounting data developed under satisfactory conditions of internal control
are more reliable than data developed under unsatisfactory conditions of
internal control.
C. Oral representations made by employees or managerial personnel are never
reliable
D. Documentary evidence originating from and held by the enterprise is never
reliable.
E. A and B
21.Which
21. of the following types of evidence is least reliable?
A. Oral representations by management confirmed subsequently in writing
B. Oral representations by management which it refuses to confirm in writing
C. Documentary evidence originating from an independent third pary
D. Documentary evidence created by the enterprise
22.Which
22. of the following statements concerning reliability of audit evidence is correct?
A. The degree of reliability of evidence created within the enterprise has no
relationship with the effectiveness of the internal control system.
B. Entries in the books of account usually provide sufficient appropriate audit
evidence to support the financial statements.
C. An auditor cannot place any reliance on representations made by the
management
D. External evidence is usually more reliable than internal evidence.
E. A and B
23.Some
23. students of auditing who have recently listened to a talk on audit evidence make
the following statements. Which of these statements is not correct?
A. If I know for certain that an item is not material, I will not dig too hard to get
supporting evidence.
B. I would be more careful in obtaining evidence on matters which are
susceptible to misstatement
C. The totality of audit evidence is seldom such that an auditor can be absolutely
certain that the conclusions reached by him are correct
D. If evidence is only persuasive, it is of no use to the auditor.
24. Which of the following statements relating to reliability of audit evidence is/are true?
24..
A. Evidence obtained from independent external sources is reliable.
B. Accounting data developed under satisfactory conditions of internal control
are more reliable than data developed under unsatisfactory conditions of
internal control.
C. Oral representations made by employees or managerial personnel are never
reliable
D. Documentary evidence originating from and held by the enterprise is never
reliable.
E. A and B
25.Which
25.Which of the following is the most persuasive evidence?
A. Information detained through inquiry directly from independent sources

B. Information obtained through inquiry from the management of the

organization.

C. Evidence obtained by re-performing calculations and reconciliation made

by the client.

D. Evidence obtained by observing employees while performing their tasks..

26.Which
26.Which of the following is the least persuasive type evidence?
A. Bank statement obtained from the client.

B. Computation made by the auditor.

 C. Pre-numbered client sales invoices.

D. Vendor’s invoice.
Part Three: Matching Questions
Column A Column B
Independence
inherent risk
physical examination
General standard
Gross Negligence
Contributory negligence
Demand for Audit
Audit of efficiency and effectiveness
External/internal evidence
External Auditing

Part IV: Short answer questions

1. State clearly the difference between auditing and accounting.

2. Under what conditions auditors are responsible to their clients and
third parties
3. Write the three major categories of GAAS
4. Explain the three general standards in auditing
5. Define the following terminologies
I. Performance Audit
II. External auditors
6. Describe audit risk and its components of inherent risk, control risk, and
detection risk.
7. Distinguish between independence in fact and independence in
appearance in audit work
8.