1.

As a guidance for measuring the quality of the performance

of an auditor, the auditor should refer to
a. Statements of the Financial Accounting Standards
Board.
b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing
Standards.
d. Statements on Quality Control Standards.

2. Which of the following best describes what is meant by

generally accepted auditing standards?
a. Audit objectives generally determined on audit
engagements.
b. Acts to be performed by the auditor.
c. Measures of the quality of the auditor's performance.
d. Procedures to be used to gather evidence to support
financial statements.

3. A CPA who has never audited a commercial bank

a. May not accept such an engagement.
b. May accept the engagement only if the accounting firm
specializes in the audit of commercial banks.
c. May accept the engagement after attaining a suitable
level of understanding of the transactions and
accounting practices unique to commercial banking.
d. May accept the engagement because training as a CPA
transcends unique industry characteristics.

4. In determining estimates of fees, an auditor may take into

account each of the following, except the
a. Value of the service to the client.
a. Degree of responsibility assumed by undertaking the
engagement.
b. Skills required to perform the service.
c. Attainment of specific findings.

5. A CPA, while performing an audit, strives to achieve

independence in appearance in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of field
work.
b. Become independent in fact.
c. Maintain public confidence in the profession.
6. Internal auditing often extends beyond examinations
leading to the expression of an opinion on the fairness of
financial presentation and includes audits of efficiency,
effectiveness, and
a. Internal control.
b. Evaluation.
c. Accuracy.
d. Compliance.

7. Which of the following best describes the operational

audit?
a. It requires the constant review by internal auditors
of the administrative controls as they relate to
operations of the company.
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 a 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.

8. The auditor's judgment concerning the overall fairness of

the presentation of financial position, results of
operations, and changes in financial position is applied
within the framework of
a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

9. The auditor communicates the results of his or her work

through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

10. The best description of the scope of internal auditing

is that it encompasses
a. Primarily operational auditing.
b. Both financial and operational auditing.
c. Primarily the safeguarding of assets and verifying the
existence of such assets.
 d. Primarily financial auditing.

11. A typical objective of an operational audit is to

determine whether an entity's
a. Financial statements fairly present financial position
and cash flows.
b. Financial statements present fairly the results of
operations.
c. Financial statements fairly present financial
position, results of operations, and cash flows.
d. Specific operating units are functioning efficiently
and effectively.

12. The scope and nature of an auditor's contractual

obligation to a client is ordinarily set forth in
the
a. Scope paragraph of the auditor’s report.
b. Opinion paragraph of the auditor’s report.
c. Management letter.
d. Engagement letter.

13. The four major steps in conducting an audit are:

a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances

The proper sequence in applying the above steps is:

a. cadb
b. cdab
c. bcda
d. adcb

14. As used in auditing, which of the following statements

best describes "assertions"?
a. Assertions are the representations of management as to
the reliability of the information system.
b. Assertions are the auditor's findings to be
communicated in the audit report.
c. Assertions are the representations of management as to
the fairness of the financial statements.
d. Assertions are found only in the footnotes to the
financial statements.
15. Which of the following statements is not a distinction
between independent auditing and internal auditing?
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.

16. Which of the following best describes the purpose of

the engagement letter?
a. The engagement letter relieves the auditor of some
responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the
engagement letter helps to avoid and resolve
misunderstandings between CPA and client regarding the
precise nature of the work to be performed and the
type of report to be issued.
c. The engagement letter conveys to management the
detailed steps to be applied in the audit process.
d. The engagement letter should be signed by both the
client and the CPA and should be used only for
independent audits.

17. An audit can have a significant effect on:

a. Information risk
b. Business risk
c. Risk free interest rate
d. All of these

18. Which of the following methods is most commonly used to

reduce information risk?
a. Allow users to verify information
b. Users share information risk with management
c. Have the financial statements audited.
d. Allow all users to prepare the statements

19. Management assertions are:

 a. Stated in the footnotes to the financial statements
b. Implied or express representations about the accounts in the
financial statements
c. Explicitly expressed representations about the financial
statements.
d. Provided to the auditor in the assertions letter, but are not
disclosed in the financial statements of the entity.

20. To provide for the greatest degree of independence in

performing internal audit functions, an internal auditor most
likely should report to:
a. Those charged with governance
b. The corporate controller
c. The vice-president for finance
d. The shareholders of the company

21. This is an independent appraisal activity established

within an entity as a service to the entity:
a. Independent auditing
b. Internal audit function
c. Government auditing
d. Compliance audit function

22. This type of audits is performed to determine whether an

entity’s financial statements fairly stated in conformity with
generally accepted accounting principles
a. Operational audit
b. Compliance audit
c. Internal audit
d. Financial statements audit

T/F
1. The person or persons conducting an audit engagement is known as
the auditor. T
2. The essence of an independent audit is to determine whether the
client’s financial statements complied with general accepted
auditing standards. F
3. The primary objective of a financial statement audit is to
determine compliance with internal and external requirements, and
seek necessary improvements to maximize the reliability of
accounting data and company efficiency. F
4. An independent auditor may participate in preparing financial
statements, including accompanying notes. F
5. The independent audit is important to readers of financial
statements because it involves the objective examination of and
reporting on management prepared statements. T
6. An independent audit aids in the communication of economic data
because the audit guarantees that financial data are fairly
presented. F
7. After conducting an audit and release of the auditor’s report,
the primary responsibility on the fairness of the financial
statements is shifted to the auditor. F
8. Financial statements are assertions by an organization’s
management and are, therefore, the responsibility of management.
F.
9. Information risk is the risk that information provided to users
may be materially misstated. T
10. One of the primary reasons for an independent audit is the
inherent potential conflict between an entity’s management and
other users of financial statement. T
11. Today, the most cost-beneficial option to reduce
information risk is to have users directly verify the
information. F
12. An audit, if properly conducted, ensures that fraud is
prevented. F
13. The use of selective testing is one of the reasons why
auditors can provide reasonable (but not absolute) assurance on
the fairness of financial statements. F
14. Compared to the auditor of the past, the auditor of today
focuses on the detector. F
15. A typical objective of an operational audit is for the
auditor to make recommendations for improving performances. T
16. Compliance audits are used to determine adherence to rules
and regulations set by the auditor. F
17. External auditing refers to financial statement audits
performed by independent auditors. T
18. Internal auditing is a managerial control which functions
by measuring and evaluating the effectiveness of other controls.
T
19. An operational audit conducted by an internal auditor is
intended to provide an aid in the independent auditor examining
the financial statements. F
20. The major beneficiaries of an internal audit are management
and third-party users of the financial statement. F
21. An independent auditor need not be a CPA. F
22. Auditing requires that data should be externally-generated.
F
23. Auditors must have independence and freedom from management
constraint. T
 24. An audit benefits the public. T
25. The main difference between auditors and accountants is the
auditor’s ability to interpret PSAs. F

Case 1-
You are Leslie, CPA and you are the Chief Financial Officer (CFO) of
USB Computer Technologies, Inc. a company that specializes in
customized business software. You have been requested by the Board of
Directors of the company to attend its meeting. During the meeting,
one of the directors asked you, “Why are audits of our company
performed different auditors (internal, external, government)?” Before
you could answer questions, another director mentioned that “it would
be more const-efficient if our internal audit performed all the
audits.”
1. Write down your reply to each question of the members of the
Board of Directors.