AUDITING THEORY – QUIZ 1

PART I. MULTIPLE CHOICE – No erasures

1. A CPA firm’s personnel partner periodically studies the CPA firm’s personnel
advancement experience to ascertain whether individuals meeting stated criteria are
assigned increased degrees of responsibility. This is evidence of the CPA firm’s adherence
to prescribed standards of

a. Quality control. c. Supervision and review.

b. Due professional care. d. Fieldwork.

2. A basic objective of a CPA firm is to provide professional services that conform with
professional standards. Reasonable assurance of achieving this basic objective is provided
through
a. A system of peer review.
b. Continuing professional education.
c. A system of quality controls.
d. Compliance with generally accepted reporting standards.

3. The following factors affect the nature, timing and extent of an audit firm’s quality
control policies and procedures, except

A B C D
YES YES NO NO
YES YES YES NO
YES NO YES NO
YES YES NO NO

• Size and nature of practice

• Geographic dispersion
• Organization
• Appropriate cost/benefit considerations

4. The fourth standard of reporting requires the auditor’s report to contain either an
expression of opinion regarding the financial statements taken as a whole or an assertion
to the effect that an opinion cannot be expressed. The objective of the fourth standard is
to prevent
a. An auditor from expressing different opinions on each of the basic financial statements.
b. Restrictions on the scope of the examination, whether imposed by the client or by the
inability to obtain evidence.
c. Misinterpretations regarding the degree of responsibility the auditor is assuming
d. An auditor from reporting on one basic financial statement and not the others.

5. Generally Accepted Auditing Standards (GAAS) and Philippine Standards on Auditing

(PSA)
should be looked upon by practitioners as:

a. Ideals to work towards, but which are not achievable

b. Maximum standards which denote excellent work.
c. Minimum standards of performance which must be achieved on each audit engagement.
d. Benchmark to be used on all audits, reviews, and compilations.

6. The level of assurance provided by an audit detecting a material misstatement is

referred to as:
a. Reasonable Assurance
b. Moderate Assurance
c. Absolute Assurance
d. Negative Assurance

7. Which of the following is an appraisal activity established within an entity as a service

to the
entity?
a. External auditing c. Financial auditing
b. Internal auditing d. Compliance auditing

8. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter c. Management letter.
b. Audit report d. Financial statements

9. To operate effectively, an internal auditor must be independent of

a. The line functions of the organizations
b. The entity
c. The employer-employee relationship which exists for other employees in the
organization
d. All of the above
10. Material misstatements may emanent from all of the following except
a. fraud
b. error
c. noncompliance with laws and regulations
d. inadequacy of accounting records

11. An intentional act by one or more individuals among management, employees, or third
parties which results in misrepresentation of financial statements refers to
a. Error b. Noncompliance c. Fraud d. Illegal acts

12. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the
following is not a postulate of auditing?

a. No long-term conflict exists between the auditor and the management of the enterprise
under audit.
b. Economic assertions can be verified.
c. The auditor acts exclusively as an auditor.
d. An audit has a benefit only to the owners.

13. Which of the following is an incorrect phrase?

a. Auditing is a systematic process.
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.

14. The responsibility for the detection and prevention of errors, fraud, and noncompliance
with laws and regulations rests with
a. auditor b. client’s legal counsel c. client management d. internal auditor

15. 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.

16. In “auditing” accounting data, the 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.

17. Internal auditors cannot be independent

a. Since they do not possess the CPA license.
b. Because they don’t audit financial statements.
c. Unless their immediate supervisor is a CPA.
d. As long as an employer-employee relationship exists.

18. 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 c. Financial statement audit
b. Compliance audit d. Performance audit

19. The expertise that distinguishes auditors from accountants is in the

a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the Bachelor’s degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret ASC Statements.

20. Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit c. Financial statement audit
b. Compliance audit d. Financial audit

21. Which of the following best describes what is meant by Generally Accepted Auditing
Standards?
a. Pronouncements issued by the Auditing Standards and Practices Council.
b. Procedure to be used to gather evidence to support financial statements.
c. Rules acknowledged by the accounting profession because of their universal compliance.

22. In all cases, audit reports must

a. Be signed by the individual who performed the audit procedures.
b. Certify the accuracy of the quantitative information which was audited.
c. Communicate the auditor’s finding to the general public.
d. Inform readers of the degree of correspondence between the quantifiable information
and the established criteria.
PART II . ENUMERATION/ESSAY

1. Firm should establish policies and procedures design designed to provide it with
reasonable assurance that the firm and its personnel comply with ethical
requirements, what are these? (5 points)

2. Define auditing. (5 points)

3. Differentiate Accounting from Auditing. (5 points)

4. Why did you choose Accountancy? (3 points)