Auditing (Theoretical Concepts): INTRODUCTION TO AUDITING

FAR EASTERN UNIVERSITY – MANILA

INTRODUCTION TO AUDITING

1. Which of the following statements refers to the definition of auditing?

A. A service activity which function is to provide quantitative information primarily financial in nature about
economic entities that is intended to be useful in making economic decisions.
B. The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions
and events which are in part at least of a financial character and interpreting the results thereof.
C. The process of identifying, measuring and communicating economic information to permit informed judgment
and decisions by users of the information.
D. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between these assertions and established
criteria and communicating the results thereof.

2. The word auditing comes from the Latin audire, which means:
A. To see
B. To hear
C. To detect
D. To test

3. Which of the following is an incorrect phrase?

A. Auditing is a systematic process.
B. Auditing objectively obtains and evaluates evidence.
C. Auditing evaluates evidence regarding assurance.
D. Auditing communicates results to interested users.

4. The trait that distinguishes auditors from accountants is the:

A. auditor’s ability to interpret accounting principles generally accepted in the Philippines.
B. auditor’s education beyond the Bachelor’s degree.
C. auditor’s ability to interpret accounting and auditing standards.
D. auditor’s accumulation and interpretation of evidence related to a company’s financial statements.

5. 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 if fraud has occurred.
C. determining if taxable income has been calculated correctly.
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D. analyzing the financial information to be sure that it complies with government requirements.

6. Which of the following types of audits is performed to determine whether an entity’s financial statements are fairly
stated in conformity with generally accepted accounting principles?
A. Operational audit
B. Financial statement audit
C. Compliance audit
D. Performance audit

7. Which of the following types of audit uses as its criteria laws and regulations?
A. Operational audit
B. Financial statement audit
C. Compliance audit
D. Financial audit

8. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis?
A. Internal auditing
B. Government auditing
C. BIR auditing
D. External auditing

9. An auditor’s overall objective in a financial statement audit is to

A. Determine that all individual accounts and footnotes are fairly presented.
B. Employ the audit risk model.
C. Express an opinion on the fair presentation of the financial statements in accordance with generally accepted
accounting principles.
D. Detect all errors and fraud.

10. In the audit of historical financial statements, which of the following accounting bases is the most common?
A. Regulatory accounting principles.
B. Cash basis of accounting.
C. Generally accepted accounting principles.
D. Liquidation basis of accounting.

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Auditing (Theoretical Concepts): INTRODUCTION TO AUDITING
11. An operational audit has as one of its objectives 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.

12. An examination of part of an organization’s procedures and methods 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.

13. 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.

14. 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.

15. 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.

16. To maximize independence, the director of internal auditing should report to the
A. Audit committee.
B. Controller.
C. Chief financial officer.
D. Director of information systems.
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17. 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.

18. 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.

19. Which statement is correct regarding the relationship between internal auditing and the external auditor?
A. Some judgments relating to the audit of the financial statements are those of the internal auditor.
B. The external audit function's objectives vary according to management's requirements.
C. Certain aspects of internal auditing may be useful in determining the nature, timing and extent of external
audit procedures.
D. The external auditor is responsible for the audit opinion expressed, however that responsibility may be
reduced by any use made of internal auditing.

20. AAA Corp. has engaged a public accounting firm to issue a report on the accuracy of product quality
specifications included in trade sales agreements. This is an example of a (an):
A. Financial statement audit
B. Attestation service
C. Compliance audit
D. Operational audit

21. Governmental auditing beyond examinations leading to the expression of opinion on the fairness of financial
presentation and includes audits of efficiency, economy, effectiveness, and also
A. Accuracy
B. Evaluation
C. Compliance
D. Internal control

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Auditing (Theoretical Concepts): INTRODUCTION TO AUDITING
22. Which of the following is/are correct?
Statement 1: The primary purpose of a compliance audit is to determine whether the financial statements are
prepared in compliance with generally accepted accounting principles.
Statement 2: Results of compliance audits are typically reported to someone within the organizational unit being
audited rather than to a broad spectrum of outside users.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.

23. Which one of the following is more difficult to evaluate objectively?

A. Presentation of financial statements in accordance with generally accepted accounting principles.
B. Compliance with government regulations.
C. Efficiency and effectiveness of operations.
D. All three of the above are equally difficult.

24. Which of the following audits can be regarded as generally being a compliance audit?
A. BIR examiners’ examinations of taxpayer returns.
B. COA auditor’s evaluation of the computer operations of governmental units.
C. An internal auditor’s review of a company’s payroll authorization procedures.
D. A CPA firm’s audit of the local school district.

25. 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.

26. 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.

27. An audit of historical financial statements most commonly includes the:

A. Statement of Cash Flows, the Statement of Financial Position, and the Retained Earnings Statement.
B. Statement of Financial Position, the Statement of Comprehensive Income, and the Statement of Cash Flows.
C. Statement of Comprehensive Income, the Statement of Cash Flows, and the Statement of Net Working
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D. Statement of Financial Position, the Statement of Comprehensive Income, the Statement of Cash Flows, and
the Statement of Changes in Equity.

28. The auditor is required to comply with all PSAs relevant to the audit of an entity's financial statements. A PSA is
relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist
A. I only
B. II only
C. Either I or II
D. Both I and II

29. “Philippine Standards on Auditing (PSAs)” is best described to mean

A. Acts to be performed by the auditor
B. Measures of the quality of the auditor’s performance
C. Procedures to be used to gather evidence to support financial statements
D. Audit objectives generally determined on audit engagements

30. An audit of historical financial statements is most often performed to determine whether the:
A. organization is operating efficiently and effectively.
B. entity is following specific procedures or rules set down by some higher authority.
C. management team is fulfilling its fiduciary responsibilities to shareholders.
D. none of these choices.

31. Which of the following is/are correct?

Statement 1: The financial statements most commonly audited by external auditors are the Statement of
Financial Position, the Statement of Comprehensive Income, and the Statement of Changes in Retained Earnings.
Statement 2: Only companies that file annual statements with the Securities and Exchange Commission are
required to have an annual external audit.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.

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Auditing (Theoretical Concepts): INTRODUCTION TO AUDITING
32. The auditor's opinion
A. Enhances the credibility of the financial statements.
B. Is an assurance as to the future viability of the entity.
C. Is an assurance as to the efficiency with which management has conducted the affairs of the entity, but
not effectiveness.
D. Certifies the correctness of the financial statements.

33. The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.
A. I and II only
B. II and IV only
C. I, II and III only
D. I, II, III and IV

34. Primary responsibility for the assertions in financial statements rests with the:
A. Audit partner assigned to the engagement
B. Senior auditor in charge of field work
C. Staff auditor who drafts the statements
D. Clients management

35. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the
audit.
A. Scope of an audit
B. Objective of an audit
C. Audit program
D. Reasonable assurance

36. Which of the following are sources of procedures to be considered by the auditor to conduct an audit in
accordance with PSAs?
Terms of Audit Type of Opinion
PSA Legislation Engagement
A. Yes No No No
B. No No Yes Yes
C. No Yes Yes No
D. Yes Yes Yes No
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37. 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.

38. When the auditor issues an erroneous opinion as the result of an underlying failure to comply with the
requirements of generally accepted auditing standards, it results in
A. Business failure
B. Audit failure
C. Audit risk
D. All of the above

39. Which of the following statements does not properly describe a limitation of an audit?
A. Many financial statement assertions cannot be audited.
B. Many audit conclusions are made on the basis of examining a sample of evidence.
C. Some evidence supporting peso representations in the financial statements must be obtained by oral or
written representations of management.
D. Fatigue and carelessness can cause auditors to overlook pertinent evidence.

40. The market for auditing services is driven by

A. The regulatory authority of the Securities and Exchange Commission.
B. A demand by external users of financial statements.
C. Pronouncements issued by the Auditing Standards Board.
D. Congress at the federal level and elected legislative bodies at the state level.

41. Financial statement users often receive unreliable financial information from companies. Which of the following is
not a common reason for this?
A. Complex business transactions.
B. Large amounts of data.
C. Lack of firsthand knowledge about the business.
D. Each of these choices is a common reason for unreliable financial information.

42. Which of the following can be significantly affected by an audit?

A. Business risk.
B. Information risk.
C. The risk-free interest rate.
D. Inherent risk.

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Auditing (Theoretical Concepts): INTRODUCTION TO AUDITING

43. Which of the following statements does not describe a condition that creates a 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 a decision maker.
C. Expertise is often required for information preparation and verification.
D. Users can directly assess the quality of information.

44. Which of the following best describes the reason why an independent auditor reports on financial statements?
A. A poorly designed internal control system may be in existence.
B. A management fraud may exist and it is more likely to be detected by independent auditors.
C. Different interest may exist between the company preparing the statements and the persons using the
statements.
D. A misstatement of account balances may exist and is generally corrected as the result of the independent
auditor’s work.

45. The underlying conditions that create demand by users for reliable information include the following, except
A. Transactions that are numerous and complex
B. Users separated from accounting records by distance and time.
C. Financial decisions that are important to investors and users
D. Decisions are not time sensitive

46. 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 be fully understood by the users of the statements.
D. Financial statements are used for important decisions.

47. Which of the following is incorrect regarding the general principles of an audit?
A. The auditor should comply with the "Code of Ethics for Professional Ethics for Certified Public
Accountants" promulgated by the Philippine Professional Regulation Commission.
B. The auditor should conduct an audit in accordance with PSAs.
C. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.
D. The auditor would ordinarily expect to find evidence to support management representations and assume
they are necessarily correct.

48. Which of the following statements does not properly describe an element of the theoretical framework of auditing?
A. The data to be audited can be verified.
B.
C.
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Short-term conflicts may exist between managers who prepare data and auditors who examine the data.
Auditors act on behalf of management.
D. An audit benefits the public.

49. Which of the following is a correct statement relating to the theoretical framework of auditing?
A. The financial data to be audited can be verified.
B. Short-term conflicts do not exist between managers who prepare data and auditors who examine data.
C. Auditors do not necessarily need independence.
D. An audit has a benefit only to the owners.

50. Auditing is based on the assumption that the 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.

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