CHAPTER 1

Audit in General
1. When auditing financial statements, the primary concern is with

a. Determining whether recorded information properly reflects the economic

events that occurred during the accounting period.

b. Determining if 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.

2. 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

3. 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 continuing professional development.

d. Auditor's accumulation and interpretation of evidence related to the company's

financial statements.

4. The subject matter of any audit consists of

a. Assertions about economic actions and events

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

5. An audit involves ascertaining the degree of correspondence between assertions and

established criteria. In the case of a financial statement audit, which of the following
is not a valid criterion?

a. Philippine Standards on Auditing

b. Philippine Financial Reporting Standards
 c. PFRS for Small and Medium-sized Entities
d. PFRS for Small Entities

6. 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 Commission

7. Most of the independent auditor's work in formulating an opinion on the financial

statements consists of

a. Obtaining and examining evidence

b. Examining cash Transactions
c. Comparing recorded accountability with assets
d. Studying and evaluating internal control

8. An audit of financial statements is conducted to determine if the

a. Organization is operating efficiently and effectively
b. Client 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.

9. 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 be a valid criterion?

a. International Standards on Auditing

b. Philippine Standards on Auditing

c. Philippine Financial Reporting Standards
d. Quality Control Standards
10. In financial statement audits, the audit process should be conducted accordance with

a. The audit program

b. Philippine Standards on Auditing
c. The Philippine Accounting Standards
d. Philippine Financial Reporting Standards
11. 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
12. An audit designed to provide reasonable assurance of detecting violations of a
specific provisions of contracts or grant agreement would be called a(n)

a. Performance audit

b. Management audit

c. Operational audit

d. Compliance audit

13. 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
14. 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 applicable financial
reporting criteria
d. All the given criteria are equally difficult to evaluate objectively
15. 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 d. internal auditors
as they relate to operations of the company
16. 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 generally accepted accounting principles
c. Specific operating units are functioning efficiently and effectively
d. Financial statements present fairly the results of operations.
17. 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 the objectives.
c. Make recommendations for improving performance.
d. Report on the entity's relative success in attaining profit maximization.
18. 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 statement
19. 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

20. 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

21. An examination of part of an organization 's procedures and method for the
purpose of evaluating efficiency and effectiveness is what type of audit?

a. Operational audit.
b. Compliance audit.
c. Financial statement audit.
d. Production audit.
22. Which of the following is not one of the major differences between all financial and
operational 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 d 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 ledgers and
journals.
d. Financial audits are limited to matters that directly affect fairness of the financial
statement presentation, but operational directly affect the audits cover any aspect
of efficiency and effectiveness.
23. 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 b c. recorded

d. Assist members of the organization in the effective discharge of their responsibilities.

24. 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
25. Internal auditors' independence is enhanced when they report to

a. The audit committee of the board of directors.

b. The head of the finance department.

c. The external auditors.

d. The president of the Company.

26. Which of the following groups could not be involved in an operational audit?

a. External auditors audit

b. Internal auditors

c. Government auditors

d. All of the above could be involved.

27. Which of the following statements is not a distinction between external auditors and
internal auditors?

a. External auditors represent third party users, whereas internal auditors report
directly to management.
b. Although external 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
28. The objective of the ordinary examination by the independent auditor is the
expression of an opinion on

a. The fairness of the financial statements

b. The accuracy of the financial statements

c. The accuracy of the annual report

d. The balance sheet and income statement

29. Auditors accumulate evidence to

a. Defend themselves in the event of a lawsuit

b. Justify the conclusions they have otherwise reached

c. Satisfy the requirements of the Securities and Exchange Commission.

d. Enable them to reach conclusions about the fairness of the financial statements and
issue an appropriate audit report.

30. The responsibility for the preparation of the financial statements and the
accompanying notes belongs to

a. The auditor

b. The management

c. Both management and the auditor equally

d. The management for the statements and the auditor for the notes

31. 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 the financial statements

d. Regulatory activity that prevents the issuance of misleading financial information.

32. 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 purposes
c. Certify the correctness of JMV's financial statements.
d. Examine all evidence supporting JMV's financial statements.
33. Which of the following statements about independent financial statement audit is correct?

a. The audit of financial statements relieves 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

34. 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 requirement

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.

35. The level of assurance provided by an auditor when expressing an opinion on the
financial statements is

a. Low
b. Reasonable
c. Limited
d. None
36. 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.
37. 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
38. 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. There are inherent limitations of audit that cannot be eliminated

b. The auditor employs testing process when performing audit procedures
c. The auditor usually lacks the expertise necessary to verify the financial statements
d. The auditor uses professional judgement in gathering evidence and drawing
conclusions based on that evidence.
39. Which of the following is not one of the limitations of an audit?
a. The use of testing
b. Limitation imposed by clients
c. Human error
d. Nature of evidence obtained
40. 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.

41. 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 engagement.
42. 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.
43. 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.
44. 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 unmodified opinion but nor for any
other types of opinion.
45. Which of the following is incorrect about the 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. The fair presentation of financial statements is an implicit part of the

auditor's responsibility.