Auditing Theory Question Bank

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TEST BANK 1
AUDITING THEORY
82102017
1. Under the PRC BOA Resolution No. 2-2016, which of the following shall be submitted by the
individual CPA, firms, and partnerships of CPAs engaged in the practice of public
accountancy to the Professional Regulation Commission thru the Standards and Inspection
Division?
A. Engagement Reports.
B. Engagement Budgets.
C. Engagement Letters.
D. Engagement Contracts.
2. The following information shall be included in the Engagement Report (ER), except
A. Type of engagement
B. Engagement fee
C. Start date and completion date of engagement.
D. Audit opinion rendered, if the type of engagement rendered is Compilation of Financial
Statements.
3. Which of the following shall be prepared and signed by the CPA who is tasked to assist
management in the preparation and presentation of financial information of an entity in
accordance with an applicable financial reporting framework?
A. Auditor’s Report.
B. Practitioner’s Review Report.
C. Certificate on the Compilation Services for Preparation of Financial Statements
D. Review Report
4. BOA Resolution No. 263 Series of 2015 approves the adoption of _________________
(subject to changes of certain provisions) as the Code of Ethics for Professional Accountants
in the Philippines.
A. IFAC 2010 Code of Ethics for Professional Accountants
B. IFAC 2012 Code of Ethics for Professional Accountants
C. IFAC 2013 Code of Ethics for Professional Accountants
D. IFAC 2015 Code of Ethics for Professional Accountants
5. When an audit client becomes a Public Interest Entity (PIE), the length of time the individual
has served the audit client as a key audit partner before the client becomes a PIE shall be
taken into account in determining the timing of the rotation. If the individual has served
the audit client as a key audit partner for five (5) years or less when the client becomes a
PIE, the number of years the individual may continue to serve the client in that capacity
before rotating off the engagement is
A. Seven (7) years
B. Seven (7) years less the number of years served
C. Maximum of two (2) additional years
D. Five (5) years
6. If the individual has served the audit client as a key audit partner for six (6) or more years
when the client becomes a PIE, the partner may continue to service in that capacity for
________________ before rotating off the engagement.
A. Seven (7) years
B. Seven (7) years less the number of years served
C. Maximum of two (2) additional years
D. Five (5) years
7. Professional Accountant refers to an individual who holds a valid Certificate of Registration

and current Professional Identification Card issued by the Board of Accountancy (i.e., CPA)
and the Professional Regulation Commission (PRC) if he/she is in
A. Public practice or education only.
B. Public practice or industry or commerce only.
C. Public practice or public sector only.
D. Public practice, industry or commerce, public sector, or education.
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8. PSA 700 (Revised) states that the first section of the auditor’s report shall have the heading
A. Opinion
B. Basis for Opinion
C. Responsibilities for the Financial Statements
D. Auditor’s Responsibilities for the Audit of the Financial Statements
9. PSA 700 (Revised) states that the Opinion section of the auditor’s report shall also identify
the entity whose financial statements have been audited and
A. State that the financial statements have been audited and identify the title of each
statement comprising the financial statements.
B. Specify the date of, or period covered by, each financial statement comprising the
financial statements.
C. Refer to the notes, including summary of significant accounting policies.
D. All of the above
10. PSA 700 (Revised) states that for audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate ______________ in the
auditor’s report.
A. Significant deficiencies in the entity’s internal control system.
B. Matters of interest to those charged with governance.
C. Other non-assurance services performed
D. Key audit matters
11. One common type of CAAT is the use of audit software to process data of audit significance
from the entity’s information system. An audit software that has widespread popularity
because it is easy to use and requires little computer background on the part of the auditor;
it can be used on both mainframe and PC systems; it allows the auditor to perform his/her
tests independent of the entity’s computer processing personnel; and it can be used to audit
the data in most file formats and structures is called a
A. Customized program
B. Purpose-written program
C. Utility program
D. Package or generalized audit software (GAS)
12. Which of the following factors is most relevant when an auditor considers the client's
organizational structure in the context of control risk?
A. Management's attitude toward information processing and accounting departments.
B. The organization's recruiting and hiring practices.
C. Physical proximity of the accounting function to upper management.
D. The suitability of the client's lines of reporting.
13. An auditor who uses the work of an expert may refer to the expert in the auditor's report if
the:
A. Auditor believes that the expert's findings are reasonable in the circumstances.
B. Expert's findings support the related assertions in the financial statements.
C. Auditor modifies the report because of the difference between the client's and the
expert's valuations of an asset.
D. Expert's findings provide the auditor with greater assurance of reliability about
management's representations.
14. In attribute sampling, a 25% change in which of the following factors will have the smallest
effect on the size of the sample?
A. Tolerable rate of deviation.
B. Number of items in the population.
C. Degree of assurance desired.
D. Planned assessed level of control risk.
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15. Which of the following is an analytical procedure that an auditor most likely would perform
during the final review stage of an audit?
A. Comparing each individual expense account balance with the relevant budgeted
amounts and investigating any significant variations.
B. Testing the effectiveness of internal control procedures that appear to be suitably
designed to prevent or detect material misstatements.
C. Reading the financial statements and considering whether there are any unusual or
unexpected balances that were not previously identified.
D. Calculating each individual expense account balance as a percentage of total entity
expenses and comparing the results with industry averages.
16. A CPA firm is completing the fieldwork for an audit of Sweden Co. for the current year ended
December 31. The manager in charge of the audit is performing the final steps in the
evidence accumulation phase of the audit and notes that there have been several changes
in Sweden during the year under audit. Which of the following items would indicate there
could be substantial doubt about Sweden's ability to continue as a going concern for a
reasonable period of time?
A. Cash infusion by a venture capital firm.
B. Recurring working capital shortages.
C. A lack of significant contracts with new customers.
D. Term debt refinanced with a new bank.
17. An accountant agrees to the client's request to change an engagement from a review to a
compilation of financial statements. The compilation report should include:
A. No reference to the original engagement.
B. Reference to a departure from PSAs.
C. Scope limitations that may have resulted in the change of engagement.
D. Information about review procedures already performed.
18. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’s conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the practitioner.
19. Which of the following fraudulent activities most likely could be perpetrated due to the lack
of effective internal controls in the revenue cycle?
A. Fictitious transactions may be recorded that cause an understatement of revenues and
overstatement of receivables.
B. Claims received from customers for goods returned may be intentionally recorded in
other customers’ accounts.
C. Authorization of credit memos by personnel who receive cash may permit the
misappropriation of cash.
D. The failure to prepare shipping documents may cause an overstatement of inventory
balances.
20. The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement
and a limited assurance engagement. Which of the following is the objective of a limited
assurance engagement?
A. A reduction in assurance engagement risk to a very low level in the circumstances of
the engagement as a basis for a disclaimer of the practitioner’s conclusion.
B. A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as a basis for a positive form of expression of the
practitioner’s conclusion.
C. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of the
D. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a modified form of expression of the
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21. A firm of CPAs may use policies and procedures such as notifying professional personnel as
to the names of audit clients having publicly held securities and confirming periodically with
such personnel that prohibited relations do not exist. This is done to achieve effective
quality control in which of the following areas?
A. Acceptance and continuance of clients.
B. Human resources.
C. Ethical requirements.
D. Leadership responsibilities for quality within the firm.
22. If the auditor believes that the financial statements are not fairly stated or is unable to reach
a conclusion because of insufficient evidence, the auditor
A. Should withdraw from the engagement.
B. Should request an increase in audit fees so that more resources can be used to conduct
the audit.
C. Has the responsibility of notifying financial statement users through the auditor’s report.
D. Should notify regulators of the circumstances.
23. Which of the following statements best describes the auditor’s responsibility regarding the
detection of fraud?
A. The auditor is responsible for the failure to detect fraud only when such failure clearly
results from non-performance of audit procedures specifically described in the
engagement letter.
B. The auditor is required to provide reasonable assurance that the financial statements
are free of both material errors and fraud.
C. The auditor may extend auditing procedures to actively search for evidence of fraud
where examination indicates that fraud may exist.
D. The auditor is responsible for the failure to detect fraud only when an unmodified opinion
is issued.
24. For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below is not correct regarding the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides the
auditor about the reliability of financial reporting by the client.
B. An auditor’s opinion to be economically useful and profitable to the auditing firm needs
to be formed within a reasonable time and based on evidence obtained that assures
profits for the auditing firm.
C. Evidence obtained from independent sources outside the entity is generally more reliable
than evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.
25. Which of the following is not a correct use of the terminology in relation to audit evidence?
A. Evidence obtained from an independent source outside the client organization is more
reliable than that obtained from within.
B. Documentary evidence is more reliable when it is received by the auditor indirectly rather
than directly.
C. Documents that originate outside the company are considered more reliable than those
that originate within the client’s organization.
D. External evidence, such as communications form banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.
26. The audit team gathers information about a new client’s business and industry in order to
obtain
A. An understanding of the client’s internal control system for financial reporting.
B. An understanding of how economic events and transactions have an effect on the
company’s financial statements.
C. Information about engagement risk.
D. Information regarding whether the company is engaging in financial statement fraud.
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27. When performing planning analytical procedures for a client, the auditor detected that the
gross profit percentage had declined by 50% from the previous year to the year currently
under audit. The auditor should
A. Investigate the possibility the client may have made an error in their cost of goods sold
computation.
B. Assist management in developing greater cost efficiencies in their product line.
C. Prepare a going concern opinion for the client.
D. Advise the client to have extensive disclosure to alleviate investor concerns.
28. The auditor’s primary purpose in auditing the client’s system of internal control over financial
reporting is
A. To prevent fraudulent financial statements from being issued to the public.
B. To evaluate the effectiveness of the company’s internal controls over all relevant
assertions in the financial statements.
C. To report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
D. To efficiently conduct the audit of financial statements.
29. A company is concerned with the theft of cash after the sale has been recorded. One way
in which fraudsters conceal the theft is by a process called “lapping.” Which of the following
best describes lapping?
A. Reduce the customer’s account by recording a sales return.
B. Write off the customer’s account.
C. Reduce the customer’s account by recording a sales allowance.
D. Apply the payment from another customer to the customer’s account.
30. An important characteristic of IT is uniformity of processing. Therefore, a risk exists that

A. Auditors will not be able to access data quickly.
B. Auditors will not be able to determine if data is processed consistently.
C. Erroneous processing can result in the accumulation of a great number of misstatements
in a short period of time.
D. All of the above.
31. Which of the following statements is not true?

A. Analytical procedures emphasize the overall reasonableness of transactions and
balances.
B. Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical procedures.
C. Substantive tests of transactions emphasize the verification of transactions recorded in
the journals and then posted in the general ledger.
D. Tests of details of balances emphasize the ending balances in the general ledger.
32. Accepting an engagement to examine an entity’s financial projection most likely would be
appropriate if the projection were to be distributed to
A. All employees who work for the entity.
B. Potential stockholders who request a prospectus or a registration statement.
C. A bank with which the entity is negotiating for a loan.
D. All stockholders of record as of the report date.
33. In many audits of sales transactions, substantive tests of transactions can be reduced in
determining the completeness objective because
A. Understatements of assets and income are a greater concern than overstatements.
B. Overstatements of assets and income are a greater concern than understatements.
C. It doesn’t matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct.
D. The unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of
the two financial statements will not be misleading.
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34. To determine if a sample is truly representative of the population, an auditor would be

required to
A. Conduct multiple samples of the same population.
B. Never use sampling because of the expense involved.
C. Audit the entire population.
D. Use systematic sample selection.
35. The most important test of details of balances to determine the existence of recorded
accounts receivable is
A. Tracing details of sales invoices to shipping documents.
B. Tracing the credits in accounts receivable to bank deposits.
C. Tracing sales returns entries to credit memos issued and receiving room reports.
D. The confirmation of customers’ balances.
36. Which of the following is the most effective control procedure to detect vouchers that were
prepared for the payment of goods that were not received?
A. Count goods upon receipt in storeroom.
B. Match purchase order, receiving report, and vendor’s invoice for each voucher in
accounts payable department.
C. Compare goods received with goods requisitioned in receiving department.
D. Verify vouchers for accuracy and approval in internal audit department.
37. If the client fails to record disposals of property, plant, and equipment, both the original
cost of the asset account and the net book value will be incorrect. What will the effect be
of this misstatement on the original cost and the book value?
A. Both will be overstated indefinitely.
B. The original cost will overstated indefinitely, and the net book value will be overstated
until the asset is fully depreciated.
C. The original cost will be overstated indefinitely, and the net book value will be
understated indefinitely.
D. The original cost will be overstated indefinitely, and the net book value will be
understated until the asset is fully depreciated.
38. You are gathering evidence for the audit objective that existing inventory items are included
in the inventory listing schedule. The audit procedure that would provide you with the best
evidence to confirm this objective is
A. Trace from inventory tags to the inventory listing schedule and make sure the inventory
tag is included.
B. Trace the inventory totals to the general ledger.
C. Perform tests of lower-cost-or-net realizable value.
D. Account for unused tags shown in the auditor’s documentation to make sure no tags
have been added.
39. Which of the following is not an objective of the auditor’s examination of notes payable?
A. To determine whether internal controls are adequate.
B. To determine whether client’s financing arrangements are effective and efficient.
C. To determine whether transactions regarding the principal and interest of notes are
properly authorized.
D. To determine whether the liability for notes and related interest expense and accrued
liabilities are properly stated.
40. Which of the following errors would be least likely to be discovered during the tests of the
bank reconciliation?
A. Payment was made to an employee for more hours than he worked.
B. Cash received by the client subsequent to the balance sheet date was recorded as cash
receipts in the current year.
C. Payments on notes payable debited directly to the bank balance by the bank were not
entered in the client’s records.
D. Deposits were recorded in the cash receipts records near the end of the year, deposited
in the bank, and were included in the bank reconciliation as a deposit in transit.
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41. Assurance provided by a review is substantially less than an audit. Which of the following
statements is true regarding these services?
A. A review requires more substantive evidence than an audit.
B. An audit requires less evidence related to internal control than a review.
C. A review requires less evidence than an audit.
D. None of the above statements is true.
42. When expressing an unmodified opinion, the auditor who evaluates the audit findings should
be satisfied that the
A. Amount of known misstatement is documented in the management representation
letter.
B. Estimate of the total likely misstatement is less than a material amount.
C. Amount of known misstatement is acknowledged and recorded by the client.
D. Estimate of the total likely misstatement includes the adjusting entries already recorded
by the client.
43. Reyes Merchandising Co. maintains a staff of three full-time internal auditors. If the work
of the internal auditors is relevant to the audit, it is efficient to consider how that work may
affect the audit, and the internal auditors are found to be competent and objective, the
independent auditor most likely will
A. Nevertheless need to make direct tests of assertions about material financial statement
amounts for which the risk of material misstatement is high.
B. Decrease the extent of the tests of controls needed to restrict detection risk to the
acceptable level.
C. Increase the extent of the procedures needed to reduce control risk to an acceptable
level.
D. Not evaluate and test the work performed by the internal auditors.
44. A client who recently installed a new accounts payable system assigned employees a user
identification code (UIC) and a separate password. Each UIC is a person’s name, and the
individual’s password is the same as the UIC. Users are not required to change their
passwords at initial log-in nor do passwords ever expire. Which of the following statements
does not reflect a limitation of the client’s computer-access control?
A. Employees can easily guess fellow employees’ passwords.
B. Employees are not required to change passwords.
C. Employees can circumvent procedures to separate duties.
D. Employees are not required to take regular vacations.
45. On January 2, 2017, the TANYA CO. received a notice from its primary suppliers that
effective immediately all wholesale prices would be increased 10%. On the basis of the
notice, TANYA revalued its December 31, 2016, inventory to reflect the higher costs. As a
result, the statement of financial position reflects inventory stated at an amount higher than
its net realizable value. The inventory constituted a material proportion of total assets;
however, the effect of the revaluation was material to current assets but not to total assets
or net income. In reporting on the company’s financial statements for the year ended
December 31, 2016, in which inventory is valued at the adjusted amount, the auditor would
most likely
A. Express an unmodified opinion provided the nature of the adjustment and the amounts
involved are disclosed in notes to the financial statements.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.
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46. An auditor’s report on financial statements prepared in accordance with the financial
reporting provisions of a contract (that is, a special purpose framework) to comply with the
provisions of that contract should include all of the following except
A. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.
47. An auditor’s report on financial statements prepared in accordance with the financial
reporting provisions of a contract (that is, a special purpose framework) to comply with the
provisions of that contract should include all of the following, except
A. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.
48. When an auditor reports on financial statements prepared on an entity’s income tax basis,
the auditor’s report should
A. State the basis of presentation of the financial statements.
B. Disclaim an opinion on whether the statements were examined in accordance with
Philippine Standards on Auditing (PSAs).
C. Not express an opinion on whether the statements are presented in accordance with
the tax basis of accounting used.
D. Include an explanation of how the results of operations differ from the cash receipts and
disbursements basis of accounting.
49. When an auditor is requested to express an opinion on the rental and royalty income of an
entity, the auditor may
A. Accept the engagement provided the auditor will comply with relevant ethical
requirements, including those pertaining to independence, relating to financial
statement audit engagements and all PSAs relevant to the audit.
B. Accept the engagement provided distribution of the auditor’s report is limited to the
entity’s management.
C. Not accept the engagement unless also engaged to audit the full financial statements
of the entity.
D. Not accept the engagement because to do so would be tantamount to agreeing to
express a piecemeal opinion.
50. An auditor has identified the controller’s review of the bank reconciliation as a control to
test. In connection with this test, the auditor interviews the controller to understand the
specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank
reconciliation is properly prepared by the accountant and reviewed by the controller as
evidenced by their respective sign-offs. Which of the following types of audit procedures do
these actions illustrate?
A. Observation and inspection of records.
B. Confirmation and reperformance.
C. Inquiry and inspection of records.
D. Analytical procedures and reperformance.
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51. An auditor established a P180,000 tolerable misstatement for an asset with an account
balance of P3,000,000. The auditor selected a sample of every 20th item from the population
that represented the asset account balance and discovered a net overstatement of P10,500
(P11,100 overstatements minus P600 understatements). Under these circumstances, the
auditor most likely would conclude that
A. The asset account is fairly stated because the tolerable misstatement exceeds the net
of projected actual overstatements and understatements.
B. The asset account is fairly stated because the total projected misstatement is less than
the tolerable misstatement.
C. There is an unacceptably high risk that the actual misstatements in the population
exceed the tolerable misstatement because the total projected misstatement exceeds
the tolerable misstatement.
D. There is an unacceptably high risk that the tolerable misstatement is more than the sum
of actual overstatements and understatements.
52. In an audit of special purpose financial statements, the auditor shall obtain an understanding
of
I. The purpose for which the financial statements are prepared.
II. The intended users.
III. The steps taken by management to determine that the applicable financial reporting
framework is acceptable in the circumstances.
A. I and III only C. I, II, and III
B. II and III only D. I and II only
53. An auditor may express an opinion on an entity’s accounts receivable balance even if the
auditor has disclaimed an opinion on the financial statements taken as a whole provided
the
A. Report on the accounts receivable is presented separately from the disclaimer of opinion
on the financial statements.
B. Auditor also reports on the current asset portion of the entity’s balance sheet.
C. Use of the report on the accounts receivable is restricted.
D. Report on the accounts receivable discloses the reason for the disclaimer of opinion on
the financial statements.
54. An auditor may accept an engagement to report on summary financial statements in

accordance with PSA 810 only when
A. The auditor has been engaged to conduct an audit in accordance with PSAs of the
financial statements from which the summary financial statements are derived.
B. Summary financial statements are distributed only to management and the board of
directors.
C. Auditor describes the additional review procedures performed on the summary financial
statements.
D. Summary financial statements are presented in comparative form with the prior year’s
summary financial statements.
55. A successor auditor's inquiries of the predecessor auditor should include questions
regarding:
A. The predecessor's evaluation of audit risk and judgment about materiality.
B. Subsequent events that occurred since the predecessor's audit report was issued.
C. The predecessor's understanding as to the reasons for the change in auditors.
D. The predecessor's knowledge of accounting matters of continuing significance.
56. Which of the following most likely would cause an auditor to consider whether a client's
financial statements contain material misstatements?
A. Management did not disclose to the auditor that it consulted with other accountants
about significant accounting matters.
B. The chief financial officer will not sign the management representation letter until the
last day of the auditor's field work.
C. Audit trails of computer-generated transactions exist only for a short time.
D. The results of an analytical procedure disclose unexpected differences.
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57. Which of the following actions should the auditor take in response to discovering a deviation
from the prescribed control procedure?
A. Make inquiries to understand the potential consequence of the deviation.
B. Assume that the deviation is an isolated occurrence without audit significance.
C. Report the matter to the next higher level of authority within the entity.
D. Increase sample size of tests of controls.
58. The auditor should perform tests of controls when

A. Substantive procedures alone do not provide sufficient appropriate audit evidence at the
relevant assertion level.
B. Tests of details and substantive analytical procedures provide sufficient appropriate
audit evidence to support the assertion being evaluated.
C. The auditor is not able to obtain an understanding of internal controls.
D. The owner-manager performs virtually all the functions of internal control.
59. An auditor who has confirmed accounts receivable may discover that the sales journal was
held open past year end if
A. Positive confirmations sent o debtors are not returned.
B. Negative confirmations sent to debtors are not returned.
C. Most of the returned negative confirmations indicate that the debtor owes a larger
balance than the amount being confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a smaller
balance than the amount being confirmed.
60. Which of the following procedures would best detect a liability omission by management?
A. Inquiry of senior support staff and recently departed employees.
B. Review and check mathematical accuracy of financial statements.
C. Review articles of incorporation and corporate bylaws.
D. Review purchase contracts and other legal documents.
61. The risk of material misstatement refers to

A. Control risk and acceptable audit risk.
B. Inherent risk.
C. The combination of inherent risk and control risk.
D. Inherent risk and audit risk.
62. In a financial statement audit, inherent risk is evaluated to help an auditor assess which of
the following?
A. The internal audit department’s objectivity in reporting a material misstatement of a
financial statement assertion it detects to the audit committee.
B. The risk the internal control system will not detect a material misstatement of a financial
statement assertion.
C. The risk that the audit procedures implemented will not detect a material misstatement
of a financial statement assertion.
D. The susceptibility of a financial statement assertion to a material misstatement assuming
there are no related controls.
63. Related party transactions may be indicated when another company

A. Subsidizes certain operating expenses of the company.
B. Purchases its securities at their fair value.
C. Loans to company at market rates.
D. Has had a distributor relationship with the company for 10 years.
64. An auditor should examine minutes of the board of directors’ meetings

A. Through the date of the financial statements.
B. Through the date of the audit report.
C. Only at the beginning of the audit.
D. On a test basis.
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65. If the auditor were responsible for making certain that all of management’s assertions in
the financial statements were absolutely correct
A. Bankruptcies could no longer occur.
B. Bankruptcies would be reduced to a very small number.
C. Audits would be much easier to complete.
D. Audits would not be economically practical.
66. Which of the following statements is true?

A. Auditors have generally found that the most effective and efficient way to conduct an
audit is to obtain some assurance for each class of transaction and for the ending
balance of the related account.
B. Management’s assertion follow and are closely related to the audit objectives.
C. The auditor’s primary responsibility is to find and disclose fraudulent management
assertions.
D. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts.
67. Which of the following statements about the existence and completeness assertions is not
true?
A. The existence and completeness assertions emphasize different audit concerns.
B. Existence deals with overstatements and completeness deals with understatements.
C. Existence deals with understatements and completeness deals with overstatements.
D. The completeness assertion deals with unrecorded transactions.
68. In testing for cutoff, the objective is to determine

A. Whether all of the current period’s transactions are recorded.
B. Whether transactions are recorded in the correct accounting period.
C. The proper cutoff between capitalizing and expensing expenditures.
D. The proper cutoff between disclosing items in notes to the financial statements or in
account balances.
69. Determine which of the following is most correct regarding the reliability of audit evidence?
A. Information that is indirectly obtained from external sources is the most reliable audit
evidence.
B. Reliability of audit evidence is dependent upon the evidence being convincing.
C. Reliability of evidence refers to the amount of evidence obtained.
D. An effective internal control system provides more reliable audit evidence.
70. Which of the following is not a factor that relates to opportunities to misappropriate assets?
A. Inadequate internal controls over assets.
B. Presence of large amounts of cash on hand.
C. Inappropriate segregation of duties or independent checks on performance.
D. Adverse relationships between management and employees.
71. A control that relates to all parts of the IT system is called a/an
A. General control.
B. Systems control.
C. Universal control.
D. Applications control.
72. The auditor would design which of the following audit tests to detect possible monetary
errors in the financial statements?
A. Control tests.
B. Analytical procedures.
C. Risk assessment procedures.
D. Tests of operating effectiveness of controls over revenue and cash.
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73. A document that details what the auditor will do to gather sufficient, appropriate evidence
is the
A. Audit strategy.
B. Audit program.
C. Audit procedure.
D. Audit risk model.
74. An auditor noted that the accounts receivable department is separate from other accounting
activities. Credit is approved by a separate credit department. Control accounts and
subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The
accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a
bankruptcy or other unusual circumstances are involved. Credit memoranda are
prenumbered and must correlate with receiving reports. Which of the following areas could
be viewed as an internal control weakness of the above organization?
A. Write-offs of delinquent accounts.
B. Credit approvals.
C. Monthly aging of receivables.
D. Handling of credit memos.
75. A purchasing agent places an order for inventory whenever a requisition is received from
the warehouse. The warehouse clerk issues requisitions based on periodic physical counts
because no perpetual records are maintained. Numerous duplicate orders have been placed
for goods previously ordered but not received. To prevent this excess ordering, the firm
should
A. Keep an adequate record of open purchase orders and review it before ordering.
B. Count goods in the warehouse less often.
C. Use prenumbered purchase orders.
D. Not use purchase requisitions.
76. Which of the following is not a category of assertions that management makes about the
accounting information in the financial statements?
A. Assertions about classes of transactions for the period under audit.
B. Assertions about account balances at period end.
C. Assertions about the quality of source documents used to prepare the financial
statements.
D. Assertions about presentation and disclosure.
77. The refusal of a client’s lawyer to provide a representation on the legality of a particular act
committed by the client is ordinarily
A. Sufficient reason to issue a “subject to” opinion.
B. Considered to be a scope limitation.
C. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
confidentiality.
D. Proper grounds to withdraw from the engagement.
78. As a condition of obtaining a loan from Metro Manila Bank, Maasim Corp. is required to submit
an audited statement of financial position but not the related statements of income, changes in
equity, or cash flows. Maasim would like to engage a CPA to audit only its statement of financial
position. Under these circumstances, the CPA
A. May not audit only Maasim’s statement of financial position if the amount of the loan is
material to the financial statements taken as a whole.
B. May not audit only Maasim’s statement of financial position if Maasim is not a listed entity.
C. May audit only Maasim’s statement of financial position if the CPA disclaims an opinion on
the other financial statements.
D. May audit only Maasim’s statement of financial position if access to the information
underlying the basic financial statements is not limited.
79. In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would
be concerned about assumptions that are
A. Susceptible to bias. C. Insensitive to variations.
B. Consistent with prior periods. D. Similar to industry guidelines.
Page 13
80. When CPA firms do an audit of historical financial statements, part of the audit usually
consists of identifying operational problems and making recommendations that may benefit
the audit client. The recommendations can be made orally but they are typically made by
use of a
A. Letter of representations. C. Management letter.
B. Engagement letter. D. Client letter.
81. When the auditor issues an erroneous opinion as the result of an underlying failure to
comply with the requirements of standards on auditing, it results in
A. Business failure. C. Audit risk.
B. Audit failure. D. All of the above.
82. Which of the following statements is false?

A. The firm should obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent by the
Code of Ethics.
B. The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
C. The firm’s quality control policies and procedures need not be documented and
communicated to the firm’s personnel.
D. The firm should establish policies and procedures requiring appropriate documentation
to provide evidence of the operations of each element of its system of quality control.
83. Criteria need to be available to the intended users in an assurance engagement to allow
them to understand how the subject matter has been evaluated or measured. Which of the
following is not among the ways by which these criteria could be made available to the
intended users?
A. Publicly
B. Through inclusion in a clear manner in the presentation of the subject matter
information.
C. Through inclusion in the firm’s office policy manual.
D. Through inclusion in a clear manner in the assurance report.
84. An auditor concludes that the omission of a substantive procedure considered necessary at
the time of the examination may impair the auditor’s present ability to support the previously
expressed opinion. The auditor need not apply the omitted procedure if
A. The risk of adverse publicity litigation is low.
B. The results of other procedures that were applied tend to compensate for the procedure
omitted.
C. The auditor’s opinion was qualified because of a departure from financial reporting
standards.
D. The results of the subsequent period’s tests of controls make the omitted procedure less
important.
85. The auditor’s risk assessment procedures should always include the following, except
A. Inquiries of management and of others within the entity.
B. Analytical procedures.
C. Observation and inspection.
D. Substantive test procedures and tests of controls.
86. The auditor should obtain an understanding of the entity’s objectives and strategies, and
those business risks that may result in risks of material misstatement. Which of the
following statements concerning the entity’s business risk is incorrect?
A. Business risk is broader than the risk of material misstatement of the financial
statements, though it includes the latter.
B. An understanding of the business risks facing the entity increases the likelihood of
identifying risks of material misstatement.
C. The auditor has a responsibility to identify or assess all business risks.
D. Business risk may arise from the development of new products or services that may fail.
Page 14
87. Which of the following statements concerning audit risk and its components is incorrect?
A. Regardless of the assessed levels of inherent and control risks, the auditor should always
perform some substantive procedures for material account balances and classes of
transactions.
B. The higher the assessment of inherent and control risks, the more evidence the auditor
should obtain from the performance of substantive procedures.
C. The assessed level of inherent risk need not be considered in determining the nature,
timing, and extent of substantive procedures required to reduce audit risk to an
acceptably low level.
D. After obtaining an understanding of the accounting and internal control systems, the
auditor should make a preliminary assessment of control risk, at the assertion level, for
each material account balance or class of transactions.
88. When obtaining an understanding of controls that relevant to the audit, the auditor is
required to
A. Evaluate the design of those controls.
B. Determine whether those controls have been implemented.
C. Evaluate the design of those controls and determine whether they have been
implemented.
D. Evaluate the design of those controls and determine whether they have been
implemented by performing tests of controls.
89. Which of the following statements related to application controls is correct?

A. Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions.
B. Application controls relate to various aspects of the IT function including physical
security and the processing of transactions in various cycles.
C. Application controls relate to all aspects of the IT function.
D. Application controls relate to the processing of individual transactions.
90. An entity’s management is responsible for the preparation and fair presentation of the
financial statements. Its responsibility includes the following, except
A. Designing, implementing, and maintaining internal control relevant to the preparation
and presentation of financial statements.
B. Making accounting estimates that are reasonable in the circumstances.
C. Selecting and applying appropriate accounting policies.
D. Assessing the risks of material misstatement of the financial statements.
91. The following statements relate to the use of analytical procedures as substantive
procedures. Which is false?
A. Substantive analytical procedures are applicable when there is only a small volume of
transactions.
B. The application of substantive analytical procedures is based on the expectation that
relationships among data exist and continue in the absence of known conditions to the
contrary.
C. The presence of relationships among data provides evidence as to the completeness,
accuracy, and occurrence of transactions captured in the information produced by the
entity’s information system.
D. Reliance on the results of substantive analytical procedures will depend on the auditor’s
assessment of the risk that the analytical procedures may identify relationships as
expected when, in fact, a material misstatement exists.
92. The confirmation of customers’ accounts receivable rarely provides reliable evidence about
the valuation assertion because
A. Customers may not be inclined to report understatement errors in their accounts.
B. Auditors typically select many accounts with low recorded balances to be confirmed.
C. It is not practicable to ask the customer to confirm detailed information relating to its
ability to pay the account.
D. Recipients usually respond only if they disagree with the information on the request.
Page 15
93. Which of the following items is not requested on a standard bank account balance
confirmation form?
A. The principal amount paid on a direct liability.
B. Maturity date of a direct liability.
C. Description of collateral for a direct liability.
D. The interest rate of a direct liability.
94. An internal auditor would be concerned about the possibility of fraud if

A. Only one person has access to the petty cash fund.
B. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are
deposited in the bank daily.
C. The monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records.
D. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person.
95. When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely is
A. Amounts recorded in the accounts payable subsidiary ledger.
B. Vendors with whom the entity has previously done business.
C. Invoices filed in the entity’s open invoice file.
D. Payees of checks drawn in the month subsequent to the balance sheet date.
96. When outside firms of nonaccountants specializing in the taking of physical inventories are
used to count, list, price, and subsequently compute the total peso amount of inventory on
hand at the date of the physical count, the auditor will ordinarily
A. Consider the reduced audit effort with respect to the physical count of inventory as a
scope limitation.
B. Make or observe some physical counts of the inventory, recompute certain inventory
calculations, and test certain inventory transactions.
C. Consider the report of the outside inventory-taking firm to be an acceptable alternative
procedure to the observation of physical inventories.
D. Not reduce the extent of work on the physical count of inventory.
97. The following statements relate to the form and content of working papers. Which is false?
A. The auditor should prepare working papers which are sufficiently complete and detailed
to provide an overall understanding of the audit.
B. The auditor should include in the working papers information on planning the audit
work; the nature, timing, and extent of the audit procedures performed and the results
of such procedures; and the conclusions drawn from the audit evidence obtained.
C. Working papers should include documentation of every matter the auditor considers
during the audit.
D. Working papers should include the auditor’s reasoning on all significant matters which
require the exercise of judgment, together with his/her conclusion thereon.
98. The following are examples of special purpose frameworks, except

A. A tax basis of accounting for a set of financial statements that accompany an entity’s
tax return.
B. The cash receipts and disbursements basis of accounting for cash flow information that
an entity may be requested to prepare for creditors.
C. Philippine Financial Reporting Standards (PFRS) promulgated by the Financial Reporting
Standards Council (FRSC).
D. The financial reporting provisions of a contract (for example, a financing agreement).
Page 16
99. Which of the following statements is correct with respect to an auditor’s report expressing
an opinion on a specific element on a financial statement?
A. The auditor who has expressed an adverse opinion on the financial statements as a
whole can never express an unmodified opinion on a specific element in these financial
statements.
B. The materiality determined for a specific element of a financial statement may be lower
than the materiality determined for the entity’s complete set of financial statements.
C. Such a report can only be issued if the auditor is also engaged to audit the entire set of
financial statements.
D. The attention devoted to the specific element is usually less than it would be if the
financial statements as a whole were audited.
100. Which of the following statements concerning the auditor’s use of assertions is correct?
A. The auditor may combine the assertions about transactions and events with the
assertions about account balances.
B. In every audit engagement, the auditor should use the assertions as described in PSA
500, i.e., the assertions should always fall into three categories: assertions about classes
of transactions and events, account balances, and presentation and disclosure.
C. There should always be a separate assertion related to cutoff of transactions and events.
D. The completeness assertion deals only with whether all transactions and events that
should have been recorded have been recorded.
--- END ---

Commerce Pk - QUALITY EDUCATION BEYOND YOUR
IMAGINATION
MCQ‛S QUESTION BANK - AUDITING

INTRODUCTION TO AUDITING
1. The main object of an audit is ___
a) Expression of opinion b) Detection and Prevention of fraud and error
c) Both (a) and (b) d) Depends on the type of audit.
2. The title of AAS-2 issued by Council of ICAI is ___

a) Objective and Scope of the Financial Statements
b) Objective and Scope of the Audit of Financial Statements
c) Objective and Scope of Business of an Entity
d) Objective and Scope of Financial Statements Audit
3. Which of the following is not true about opinion on financial statements?

a) The auditor should express an opinion on financial statements.
b) His opinion is no guarantee to future viability of business
c) He is responsible for detection and prevention of frauds and errors in financial statements
d) He should examine whether recognised accounting principle have been consistently
4. A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _

a) Error of omission b) Error of commission c) Compensating error d) Error of principle
5. ‘Goods sent on approval basis’ have been recorded as ‘Credit sales’. This is an example of _
a) Error of principle b) Error of commission c) Error of omission d) Error of duplication
6. Which of the following statements is not true?

a) Management fraud is more difficult to detect than employee fraud
b) Internal control system reduces the possibility of occurrence of employee fraud and
management fraud
c) The auditor’s responsibility for detection and prevention of errors and frauds is similar.
d) All statements are correct.
7. As per AAS-4 if auditor detects an error then –

a) He should inform the management.
b) He should communicate it to the management if it is material
c) The auditor should ensure financial statements are adjusted for detected errors.
d) Both (b) and (c)
8. Which of the following is not a limitation of audit as per AAS-4?

a) Objectivity of auditor’s judgment b) Selective testing
c) Persuasiveness of evidence d) Limitations of internal control system.
9. How many principles are listed in AAS1 which govern auditor’s professional obligation?
a) Nine b) Fourteen c) Seven d) Eight
10. Both auditing and accounting are concerned with financial statements. Which of the
following
a) Auditing uses the theory of evidence to verify the financial information made available by
Accountancy
b) Auditing lends credibility dimension and quality dimension to the financial statements
prepared by the accountant.
c) Auditor should have through knowledge of accounting concepts and convention to enable
him to express an opinion on financial statements
d) All of the above.
11. The risk of management fraud increases in the presence of :
a) Frequent changes in supplies b) Improved internal control system c) Substantial
increases in sales
d) Management incentive system based on sales done in a quarter
AUDITING MCQS________________________1
www.commercepk.com
12.Auditing standards differ from audit procedures in that procedures relate to

a) Audit assumptions b) acts to be performed c) quality criterion d) methods of work
13. Which of the following factors likely to be identified as a fraud factor by the auditor?
a) The company is planning a initial public offer of quality shares to raise additional capital
for expansion.
b) Bank reconciliation statement includes deposits-in-transit.
c) Plant and machinery is sold at a loss.
d) The company has made political contributions.
14.The most difficult type of misstatement to detect fraud is based on:

a) Related party purchases b) Related party sales
c) The restatement of sales d) Omission of a sales transaction from being recorded.
15. Which of the following statements is correct concerning the required documentation in
working papers of fraud risk assessment undertaken by the auditor?
a) All risk factors as mentioned in AAS-4, should be considered and documented along with
response to them.
b) Document the identification of fraud risk factors along with response to them.
c) Document material fraud, risk factors and response to them.
d) No documentation in required.
16. Which of the following is the most appropriate potential reaction of the auditor to his
assessment that the risk of material misstatement due to fraud is high in relation to
existence of inventory?
a) Visit location on surprise basis to observe test counts
b) Request inventory count at a date close to year-end
c) Vouch goods sent on approval very carefully
d) Perform analytical procedures.
17. Which of the following is not likely to be a fraud risk factor relating to management’s
characteristics
a) Tax evasion b) Failure to correct known weakness in internal control system c)
Adoption of conservative accounting principles
d) High management turnover
18. Professional skepticism requires that the auditor assume that management is
a) reasonably honest b) Neither honest nor dishonest
c) Not necessarily honest d) Dishonest unless proved otherwise
19. Which of the following information should a successor auditor obtain during the inquiry of
the predecessor auditor before accepting engagement?
i) Information about integrity of management
ii) Disagreement with management concerning auditing procedures
iii) Review of internal control system.
iv) Organisation structure
a) (i) and (ii) b) (ii) and (iii) c) (i) , (ii) and (iii) d) i) and (iii)
20.The audit engagement letter, generally, should include a reference to each of the following
except
a) limitations of auditing b) responsibilities of management with respect to audit work
c) expectation of receiving a written management representation letter.
d) a description of the auditor’s method of sample selection.
21. The use of an audit engagement letter is the best method of assuring the auditor will have
which of the following?
a) Auditor will obtain sufficient appropriate audit evidence.
b) Management representation letter
c) Access to all books, accounts and vouchers required for audit purpose
d) Cooperation from other auditors
AUDITING MCQS_______________________2
www.commercepk.com
22. The use of an audit engagement letter is the best method of documenting
i) the required communication of significant deficiencies in internal control
ii) significantly higher control risk than that assessed in prior audit.
iii) Objective and scope of auditor’s work
iv) Notification of any changes in the original arrangements of the audit.
a) (i) and (ii) b) (i) and (iii) c) ii and (iv) d) (iii and (iv)
23. An auditor who accepts an audit but does not possess the industry expertise of the business
entity should
a) engage experts
b) obtain knowledge of matters that relate to the nature of entity’s
business c) inform management about it d) take help of other auditors
24. The least important element in the evaluation of an audit firm’s system of quality control
would relate to-
a) assignment of audit assistants b) system of determining audit fees
c) consultation with experts d) confidentiality of client’s information
25. The primary purpose of establishing quality control policies and procedures for deciding on
client evaluation is to-
a) ensure adherence to generally accepted auditing standards
b) acceptance or retention of clients whose management does not lack integrity
c) ensure audit fees is charged according to the type of audit work assigned
d) all of the above
26. Which of the following is not a quality control consideration on accepting a new client?
a) Availability of audit assistants with necessary skill and competence.
b) Provision of other services to the client which may impair independence
c) Predecessor auditor’s advice as to whether audit fees were paid promptly
d) Review of audit work done by one partner by the other
27. An auditor obtains knowledge about a new client’s business and its industry to
a) Make constructive suggestions concerning improvements to the client’s internal control
system.
b) Evaluate the appropriateness of audit evidence obtained
c) Under stand the events and transactions that may have an effect on client’s financial
statements.
d) All of the above
CONCEPTS OF AUDITING
1. Audit of banks is an example of –
a) Statutory audit b) Balance sheet audit c) Concurrent audit
d) Both (a) and (b) e) All of the above
2. Concurrent audit is a part of-

a) Internal check system b) Continuous audit c) Internal audit system d) None
3. In India, balance sheet audit is synonymous to-

a) Annual audit b) Continuous audit c) Detailed audit d) Statutory audit
4. Audit in depth is synonymous for-

a) Complete audit b) Completed audit c) Final audit d) Detailed audit
5. Balance sheet audit includes verification of_

a) Assets b) Liabilities
c) Income and expense accounts where appropriate d) All of the above
AUDITING MCQS________________________3
WWW.COMMERCEPK.COM
6. Which of the following statements is not true about continuous audit?

a) It is conducted at regular interval b) It may be carried out on daily basis c) It is needed
when the organization has a good internal control system
d) It is expensive
7. Which of the following is not a fact of EPA?

a) Economic audit b) Efficiency audit c) Expenditure audit d) Effectiveness audit
8. The Delhi Government had constructed six bungalows for its ministers. They are lying
unoccupied for last three years. This would be a matter of concern for-
a) Propriety Auditor b) Performance Auditor c) Financial Auditor d) None of the above
9. Financial auditor is not concerned with propriety of business transactions. However, the
exceptions to this rule are contained for audit of limited companies in_
a) Section 227 (IA) of the Companies Act, 1956
b) Section 227 (IA) and section 227(4A) of the Act
c) CARO, 2003 d) Section 227 (IA) and CARO, 2003
10. Balance sheet does not include-

a) Verification of assets and liabilities
b) Vouching of income and expense accounts related to assets and liabilities
c) Examination of adjusting and closing entries d) Routine checks
11. Which of the following statements is not correct about materiality?

a) Materiality is a relative concept
b) Materiality judgments involve both quantitative and qualitative judgments
c) Auditor’s consideration of materiality is influenced by the auditor’s perception of the
needs of an informed decision maker who will rely on the financial statements
d) At the planning state, the auditor considers materiality at the financial statement level
only
12. …..the audit risk,….. the materiality and ……the audit effort
a) Lower, Higher, Lower b) Lower, Lower, Higher
c) Higher, Lower, Lower d) Lower, Higher, Higher
13. When issuing unqualified opinion, the auditor who evaluates the audit findings should be
satisfied that the
a) Amount of known misstatement is documented in working papers
b) Estimates of the total likely misstatement is less than materiality level c)
Estimate of the total likely misstatement is more than materially level
d) Estimates of the total likely misstatement cannot be made
14. In determining the level of materiality for an audit, what should not be considered?
a) Prior year’s errors b) The auditor’s remuneration
c) Adjusted interim financial statements d) Prior year’s financial statements
15. Analytical procedures issued in the planning stage of an audit, generally

a) helps to determine the nature, timing and extent of other audit procedures
b) directs attention to potential risk areas
c) indicates important aspects of business d) All of the above
16. Which of the following statements is most closely associated with analytical procedure
applied at substantive stage?
a) It helps to study relationship among balance sheet accounts
b) It helps to discover material misstatements in the financial statements
c) It helps to identify possible oversights
d) It helps to accumulate evidence supporting the validity of a specific account balance
AUDITING MCQS_______________________4
COMMERCE PK- QUALITY EDUCATION BEYOND YOUR IMAGINATION
17. For all audits of financial statements made in accordance with AAS-14, the use of analytical
procedures is at the discretion of the auditor in which stage?
a) Substantive testing b) Planning stage c) Overall review stage d) All of the above
18.The basic assumption underlying the use of analytical procedures is :

a) It helps the auditor to study relationship among elements of financial information
b) Relationship among data exist and continue in the absence of known condition to the
contrary
c) Analytical procedures will not be able to detect unusual relationships
d) None of the above.
19. What are analytical procedures?

a) Substantive tests designed to assess control risk
b) Substantive tests designed to evaluate the validity of management’s representation letter
c) Substantive tests designed to study relationships between financial and non-financial
d) All of the above
20. Which of the following is not an analytical procedure?

a) Tracing of purchases recurred in the purchase book to purchase invoices.
b) Comparing aggregate wages paid to number of employees
c) Comparing the actual costs with standard costs
d) All of them are analytical procedure
21. When applying analytical procedures, an auditor could develop independent estimate of an
account balance to compare it to-
a) client’s unedited account balance
b) client’s unedited account balance adjusted for trends in the industry
c) Prior year audited balance
d) Prior year audited balance adjusted for trends in the industry
22. What is the primary objective of analytical procedures used in the overall review stage of an
audit?
a) To help to corroborate the conclusions drawn from individual components of financial
statements
b) To reduce specific detection risk
c) To direct attention to potential risk areas
d) To satisfy doubts when questions arise about a client’s ability to continue
AUDIT EVIDENCE
1. Of the following, which is the least persuasive type of audit evidence?
a) Bank statements obtained from the client
b) Documents obtained by auditor from third parties directly.
c) Carbon copies of sales invoices inspected by the auditor
d) Computations made by the auditor
2. Which of the following statements is, generally, correct about the reliability of audit
evidence?
a) To be reliable, evidence should conclusive rather than persuasive
b) Effective internal control system provides reliable audit evidence
c) Evidence obtained from outside sources routed through the client
d) All are correct.
3. In an audit of financial statements, substantive tests are audit procedures that __

a) may be eliminated for an account balance under certain conditions
b) are designed to discover significant subsequent events
c) will increase proportionately when the auditor decreases the assessed level of control risk
d) may be test of transactions, test of balance and analytical procedures
AUDITING MCQS________________________5
WWW.COMMERCEPK.COM
4. The nature, timing and extent of substantive procedures is related to assessed level of
control risk
a) randomly b) disproportionately c) directly d) inversely
5. Which of the following factors is most important in determining the appropriations of audit
evidence?
a) The reliability of audit evidence and its relevance in meeting the audit objective
b) The objectivity and integrity of the auditor
c) The quantity of audit evidence d) The independence of the source of evidence
6. When is evidential matter, generally, considered sufficient?

a) When it constitutes entire population
b) When it is enough to provide a basis for giving reasonable assurance regarding
truthfulness
c) When it is objective and relevant
d) When auditor collects and evaluates it independently
7. Which of the following is not a corroborative evidence?

a) Minutes of meetings b) Confirmations from debtors c) Information gathered
by auditor through observation
d) Worksheet supporting consolidated financial statements
8. Which of the following statements is not true with respect to management representations
obtained as per AAS-11?
a) Authenticated copy of relevant minutes of meetings may be regarded as management
representation
b) It should always be in working
c) It may be dated prior to the report date d) It should be addressed to the auditor
9. What would most appropriately describe the risk of incorrect rejection in terms of
substantive testing?
a) The auditor concludes balance is materially correct when in actual fact it is not
b) The auditor concludes that the balance is materially misstated when in actual fact it not
c) The auditor has rejected an item for sample which was material
d) None of the above
10.Which of the following affects audit effectiveness?

a) Risk of over reliance b) Risk of incorrect rejection
c) Risk of incorrect acceptance d) Both (a) and (c)
11. What would most effectively describe the risk of incorrect acceptance in terms of substantive
audit testing?
a) The auditor has ascertained that the balance is materially correct when in actual fact it is
not
b) The auditor concludes the balance is materially misstated when in actual fact is not
c) The auditor has rejected an item from sample which was not supported by documentary
evidence
d) He applies random sampling on data which is inaccurate and inconsistent
AUDIT PREPARATION
1. Which of the following Auditing Assurance Standard deals with Audit Planning?
a) AAS-7 b) AAS-8 c) AAS-9 d) AAS-3
2. Audit programme is prepared by-

a) the auditor b) the client c) the audit assistants
d) the auditor and his audit assistants
AUDITING MCQS_______________________6
3. The working papers which auditor prepares for financial statements audit are : _
a) evidence for audit conclusions b) owned by the client
c) owned by the auditor d) retained in auditor’s office until a change in auditors
4. The quantity of audit working papers complied on engagement would most be affected by-
a) management’s integrity b) auditor’s experience and professional judgment
c) auditor’s qualification d) control risk
5. Which of the following best describes the primary purpose of audit programme preparation?
a) To detect errors or fraud. b) To comply with GAAP
c) To gather sufficient appropriate evidence d) To assess audit risk
6. Which of the following is not an advantage of the preparation of working paper?

a) To provide a basis for review of audit work
b) To provide a basis for subsequent audits
c) To ensure audit work is being carried out as per programme
d) To provide a guide for advising another client on similar issues
7. The auditor’s permanent working paper file should not normally, include
a) extracts from client’s bank statements b) past year’s financial statements
c) attorney’s letters b) debt agreements
8. For what minimum period should audit working papers be retained by audit firm?
a) For the time period the entity remains a client of the audit firm.
b) For a period of ten years
c) For a period auditor opines them to be useful in servicing the client
d) For the period the audit firm is in existence.
9. Which of the following factors would least likely affect the quantity and content of an
auditor’s working papers
a) The assessed level of control risk b) The possibility of peer review
c) The nature of auditor’s report d) The content of management representation letter
10. Which of the following statement is true regarding an auditor’s working

papers? a) They document the level of independence maintained by the auditor
b) They should be considered as the principle support for the auditor’s report
c) They should not contain details regarding weaknesses in the internal control system
d) They help the auditor to monitor the effectiveness of the audit firm’s quality control
11. Which of the following statement best describes the understanding with respect to
ownership and custody of working papers prepared by an auditor?
a) The working papers may be obtained by third parties when they appear to be relevant to
issues raised in litigation
b) The safe custody of working papers is the responsibility of client, if kept at his premises
c) The working papers must be retained by an audit firm for a period of 10 years
d) Successor auditors may have access to working papers of the predecessor auditors. The
approval of client is not required.
12. The current file of the auditor’s working papers, generally, should include
a) a flowchart of the internal controls b) Organisation charts
c) a copy of financial statements d) copies of bond and debentures
13.Knowledge of the entity’s business does not help the auditor to-
a) reduce inherent risk b) identify problem areas
c) evaluate reasonableness of estimates d) evaluate appropriates of GAAP.
14.The main advantage of using statistical sampling techniques is that such techniques:
a) mathematically measure risk b) eliminate the need for judgmental sampling
c) defines the values of tolerable error d) all of the them.
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15. Which of the following methods of sample selection is least suitable for extrapolating results
to the population?
a) Systematic sampling b) Random sampling c) Haphazard sampling d) None
16. Which of the following statements is correct?

a) Lower the sampling risk greater the sample size
b) Smaller the tolerable error, greater the sample size
c) Lower the expected error, smaller the sample size d) All are correct
17. Which of the following features is most important for random-based selection?
a) Sample should be drawn form population
b) Every strata of population should be represented in the sample
c) Every item in the population has an equal chance of being selected in the sample
d) Items should be selected at ‘n’ th interval
18. Risk of under reliance is the risk that the sample selected to test controls___
a) Does not support the auditor’s planned assessed level of control risk when the true
operating effectiveness of the control structure justifies such an assessment
b) Supports the auditor’s planned assessed level of control risk when the actual position
does not warrant such reliance
c) Is not supported by adequate documents d) both (a) & (c)
19. Which of the following factors is (are) considered in determining the sample size for tests of
control?
a) Projected error b) Tolerable error c) Expected error d) Both (b) and (c)
20.Tolerable error, is the maximum monetary error that the auditor is prepared to accept in the
population and still conclude that audit objective has been achieved, is directly related to
a) Sample size b) Audit risk c) Materiality d) Expected error
CAPTIAL AND REVENUE EXPENDITURE

1. Which of the following expenses should not be treated as capital expenditure?
a) Expenses paid on installation of a plant.
b) Cost of dismantling a building in case a new building is to be constructed on the land
c) Legal expenses incurred to defend a suit related to title of patent. The suit has been lost
d) The fees paid to engineer who constructed the plant.
2. Which of the following is not a revenue expense?

a) Cost of raising a loan
b) Cost of accessories of motor vehicles spent at the time of purchase
c) Expenses incurred for laying of sewers on land purchased
d) Insurance premium paid at the time of registration of the ship
3. Depreciation does not arise form _______

a) effluxion of time b) use
c) obsolescence through technology be market changes d) remarket expectation
4. Which of the following Schedule of the Companies Act, 1956 deals with depreciations?
a) Schedule XIV b) Schedule V c) Schedule XIII d) Schedule X
5. Schedule XIV has prescribed rates of depreciation for double shift and triple shift working
for which one of the following assets?
a) Building b) Plant and Machinery c) Furniture and fittings d) Ships
6. If the book value of an asset stands at ……..per cent of the original cost, a company need not
provide depreciation on it.
a) two b) fifteen c) five d) ten
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7. A company has bought patents. Which of the following methods is most suitable for
providing depreciation on them?
a) SLM b) WDV c) Sum-of year digits d) Any of the above
8. Which of the following is a revenue reserve?

a) Capital redemption reserve b) Security premium account
c) Debenture redemption reserve d) Capital reserve
9. Which of the following will not lead to creation of secret reserve?

a) Undervaluation of closing stock b) Charging capital expenditure to revenue
c) Goods sent on consignment being shown as actual sales
d) Charging higher rates of depreciation on fixed assets than actually required
COMPANY AUDITOR
1. Who is responsible for the appointment of statutory auditor of a limited company ?
a) Directors of the company b) Members of the company
c) The Central Government d) All of the above
2. Which of the following sections deal with qualifications of the auditor ?

a) Section 226 (1) and section 226(2) b) Section 224 (1) and section 224 (2)
c) Section 226 (3) and section 226(4) d) Section 224(3) & Sec.224
3. Which of the following statement is not true?

a) A partnership firm can be appointed as a statutory auditor of limited company
b) Appointment can be made in the name of the firm
c) Majority of the partners should be practicing in India
d) All partners should be chartered accountants
4. As per the requirements of section 226(3) and 226(4) a person is disqualified from being
appointed as a statutory auditor if he holds-
a) Equity shares or debentures of the company
b) Equity shares carrying voting of the company
c) Shares carrying voting rights of the company
d) Security carrying voting rights of the company
5. The board of directors shall appoint first auditor of a company

a) With in one month of completion of capital subscription state of the company
b) With in one month of the promotion of the company
c) With in one month of the commencement of the business of the company
d) With in one month of incorporation of the company
6. The term of the auditor ship of first auditor would be from the date of appointment till__
a) the conclusion of statutory meeting
b) the conclusion of first annual general meeting
c) the conclusion of next annual general meeting d) the date of removal
7. In case the directions fail to appoint first auditor (s), the shareholders shall appoint them
at…..by passing a resolution
a) a general meeting b) first annual general meeting
c) statutory meeting d) annual general meeting
8. Life Insurance Corporation of India holds twenty five percent of subscribed capital of XYZ
Ltd. The appointment of statutory auditor in XYZ Ltd. Would be by__
a) ordinary resolution b) special resolution c) (a) or (b) d) none of the above
9. ICICI prudential, a life insurance company, holds thirty-two percent of subscribed share
capital of Delta Ltd. The statutory auditor of Delta Ltd. would be appointed by__
a) ordinary resolution b) Special resolution c) either of the above d) none
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10. Which of the following statement is not true regarding appointment of statutory auditor by
the Central Government?
a) Such powers have been conferred upon it by section 224(3)
b) If a company fails to appoint an auditor at a general meeting
c) If an auditor refuses to accept appointment, the powers of the Central Government can be
exercised.
d) None of the above
11. If a casual vacancy in the office of auditor arises by his resignation it should only be filled by
the company in a……..
a) Board meeting b) extraordinary general meeting
c) General meeting d) annual general meeting
12. For the purposes of section 224(IB) the number of partners of a firm which shall be taken
into account would be as on the date of _
a) completion of audit b) auditor’s report
c) acceptance of audit d) Starting of audit work
13. Which of the following is counted for the purposes of section 224(IB) the number of partners
of a firm which shall be taken into account would be as on the data of ___
a) Joint audit b) Audit to non-profit companies
c) Audit of unlimited companies d) All of the above e) (a) and (b) only
14. Mr. Narayan, a Charted Accountant, has nineteen audits, Out of following audits which
audits should he accept to ensure he doesn’t violate provisions of section 224(IB) __
a) Audit of Zeba Ltd. a private company
b) Audit of branch of Pointec Ltd. a foreign company
c) Audit of two branches of Virtue Ltd. an Indian company d) All of them
15.Which audit out of the following would not be regarded as one audit for the purposes of
section 224(IB)?
a) Audit of one branch each of two different companies
b) Joint audit c) Audit head office & branches
d) Audit of one or more branches of a company
16. The auditor of a Government company is appointed by the C & AG. His remuneration is
fixed by__
a) the C & AG b) the shareholders
c) the shareholders at an annual general meeting d) the board of directors
17.The section which contains provisions regarding remuneration of the auditor is_
a) Section 224(9) b) Section224(7) c) Section224(8) d) Section224(6)
18.The authority to remove the first auditor before the expiry of term is with_
a) the shareholders in a general meeting
b) the shareholders in the first annual General meeting
c) the board of directors d) the Central Government
19. Which of the following statements is not correct regarding removal of first auditor before
expiry of the term?
a) He is removed at a general meeting
b) The shareholders are authorized to do so
c) The approval of the Central Government is required for such removal
d) The provisions for such removal are contained in section 224(7)
20. The retiring auditor does not have a right to___

a) make written representations b) get his representations circulated.
c) be heard at the meeting d) speak as a member of the company
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21.Who out of the following cannot be appointed as a statutory auditor of the company?
a) Erstwhile director b) Internal auditor c) Relative of a director d) Only (b) and (c)
22.A statutory auditor has a right of access at all times to

a) Books and accounts of a company b) Books, accounts and documents of the company c)
Books, accounts and vouchers of the company
d) Notices and documents of the company
23. The auditor has a right to-

a) Obtain information and explanation
b) Obtain information and explanation from the employees and officers
c) Obtain information and explanation necessary for the purpose of audit
d) Both (b) and (c)
24. The principal auditor, as per clarification issued by the ICAI, does not have any right to-
a) Inspect working papers of the branch auditor b) Visit branches
c) Seek information necessary for audit purposes
d) Incorporate the branch audit report in his audit report
25. Under which of the following section auditor has a duty to enquire into six specified matters
and report by exception?
a) Section 227(4A) b) Section 227 (IA) c) Section 227 (2) d) Section 227(3)
26. The auditor has to enquire, under section 227 (IA) into different aspects, related to shares
allotted for cash for the purpose of auditor include-
a) Shares against whose allotment cash has actually been received
b) Shares allotted for consideration other than cash
c) Shares allotted against a debt payable d) All of them
27.Right to visit branches has been given to the auditor under which section?
a) Section 222(3) b) Section 228(2) c) Section 228(4) d) Section 228(3)
28. Which of the following statements with regard to rules regarding exemption from branch
audit is not true?
a) A branch office of a company can be granted exemption on the basis of quantum of
activity criterion
b) If a satisfactory arrangement of scrutiny check of the books of account of a branch office
of a manufacturing company has been made, it can be exempted form branch audit
c) Cost consideration should be considered as an important factor/ground for exemption
from branch audit
d) The auditor should state in his audit report that branch office is exempted by virtue of
quantum of activity or any other basis
29. The branch auditor is appointed by –

a) Shareholders in an annual general meeting b) Shareholders in general meeting
c) Board of directors in board meeting d) Any of the above
30.Auditor of a ……company does not have right to visit foreign branches of the company
a) Unlimited liability b) Manufacturing c) Banking d) Non-profit making
31.Special audit is conducted at the order of the Central Government. Which section gives such
powers?
a) Section 233(A) b) Section 233A c) Section 242(A) d) Section 242A
32.Who among the following can be appointed as special auditor by the Central Government?
a) The statutory auditor b) chartered accountant in practice
c) Any chartered accounted who is not in practice d) Both (a) and (b)
33. The scope of the audit including reference to the pronouncements of the ICAI, which the
auditor adheres to, generally is communicated to the client in the ____
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i) auditor’s report ii) engagement letter iii) representation letter

a) i) only b) Both (i) and (ii) c) Both (i) and (iii) d) All the above
34. If any director is disqualified from being appointed under section 274(1) (g), the auditor
should mention this fact in his audit report. For this purpose, how does he determine their
eligibility :
a) He obtains a representation from each director
b) He obtains a management representation
c) He enquiries from Registrar of Companies d) Any one of the above
35. As per the ‘Statement on Qualification in Auditor’s Report’s issued by the ICAI, the auditor,
Under section 227(3) has to gave a statement of fact on_
a) proper books of account b) accounting standards
c) cess payable under section 441A d) None of the above
36. The date on auditor’s report should not be__

a) the data of AGM
b) later than the date on which the accounts are approved in board’s meeting
c) earlier than the date on which the accounts are approved by the management
d) Both (a) and (b)
37. Section 227(2) of the Companies Act, requires the auditor to give his report to the members
of the company on certain matters. Which of the following is not included in the above?
a) Accounts examined by him
b) Every balance sheet and profit and loss account laid before a general meeting during his
tenure
c) Every document that is a part of or ‘annexed to’ the balance sheet
d) Every document which is attached to the profit and loss account
38.When restrictions that significantly affect the scope of the audit are imposed by the client,
the auditor generally should issue which of the following opinion?
a) Qualified opinion b) Disclaimer of opinion c) Adverse opinion
d) Unqualified report with ‘an emphasis of matter’ paragraph;
39. Which of the following report not result in qualification of the auditor’s opinion due to a
scope limitation?
a) Restrictions the client imposed b) Reliance on the report of other auditor
c) Inability to obtain sufficient appropriate evidential matter
d) Inadequacy of accounting records
40. The inventory consists of about one per cent of all assets. The client has imposed restriction
on auditor to prohibit observation of stock take. The auditor cannot apply alternate audit
procedures.
a) unqualified opinion b) qualified opinion c) disclaimer of opinion d) adverse opinion
41.If in the above question, the inventory consisted of about ten per cent of total assets, other
conditions remaining same, the auditor should issue __
a) unqualified opinion b) qualified opinion c) disclaimer of opinion d) adverse opinion
42. The auditor has serious concern about the going concern of the company. It is dependent on
company’s obtaining a working capital loan from a bank which has been applied for. The
management of the company has made full disclosure of these facts in the notes to the
balance sheet. The auditor is satisfied with the level of disclosure. He should issue_
a) unqualified opinion b) unqualified opinion with reference to notes to the accounts
c) qualified opinion d) disclaimer of opinion
43.Which of the following is true about explanatory notes?

a) These are given by the directors of the company
b) These are given to adhere to requirements of section 211.
c) These are given by auditors of the company in auditor’s report d) All of the above
AUDITING MCQS_______________________12
44. The client changed method of depreciation from straight line to written down value method.
This has been disclosed as a note to the financial statements. It has an immaterial effect on
the current financial statements. It is expected, however, that the change will have a
significant effect on future periods. Which of the following option should the auditor
express?
a) Unqualified opinion b) Qualified opinion c) Disclaimer of opinion d) Adverse opinion
45. Which of the following is not true regarding requirements under section 227(3) (f) of the
Companies Act, 1956?
a) The auditor has to satisfy himself whether any of the directors of the company, whether
public or private, are disqualified from being appointed as directors as per section 274(1) (g).
b) Section 274(1) (g) is applicable to appointment of directors both in public and private
companies but reporting is limited to only those directors of a company who are also
directors of a public company
c) The auditor requires every director to submit a written representation in respect of each
public company, of which the is a director, as to whether such company has defaulted in
terms of provisions of sections 274(1) (g)
d) The disqualification should be considered on the date of audit report.
46. The management of a company, to which AS-3. is not applicable, does not include statement
of cash flows in its annual report. The auditor should express-
a) Unqualified opinion b) Qualified opinion c) Adverse opinion
d) Any of these depending upon materiality and pervasiveness and adequacy of disclosure
47. In case the auditor gives a disclaimer of opinion in the audit report which of the following
paragraph(s) of a standard unqualified audit report are modified?
a) Scope paragraph b) Opinion paragraph
c) Scope and opinion paragraphs d) Introductory, scope and opinion paragraph
48.A departure from recognized accounting principle is disclosed in a note to the financial
statements. The auditor should
a) issue a standard unqualified audit report b) issue a qualified report
c) issue an unqualified report with ‘emphasis of matter’ paragraph d) disclaim opinion
49. AB & Co, chartered accountant, have been requested by their client XYZ Ltd. not to confirm
accounts receivables because of concerns about creasing conflicts with customers over
amounts owed. The auditors were satisfied concerning receivables after applying alternative
audit procedures AB & Co.’s auditors report likely contained
a) Qualified opinion b) Disclaimer of opinion
c) Unqualified I opinion with an explanatory paragraph d) Unqualified opinion
50.The auditor should state the reasons for his reservations in audit report and should try to
quantify the effect on them. This should be done in case he has expressed _
i) a qualified opinion ii) an unqualified opinion with emphasis of matter paragraph
iii) an adverse opinion iv) a disclaimer of opinion
a) i) only b) i) and (iv) only c) i), iii) and (iv) only d) All of the above
51.Companies exempted from application of CARO, 2003 does not include_

a) a banking company b) an insurance company
c) a private limited company with paid up capital and reserves not more than fifty five lakh
d) a licensed company
52. Under CARO, 2003, the auditor’s report should include report about maintenance of proper
recording relating to____
a) Fixed assets and cost b) Fixed assets, cost and investments
c) Fixed assets , cost investments and inventories d) Fixed assets, cost and inventory
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53. Under CARO, 2003 the auditor is required to report on __

a) arrears of cumulative preference dividends
b) Preferential allotment of shares to related party
c) disposal of fixed assets and its effect on going concern.
d) unsecured loans granted to related party.
GOVERNMENT AUDIT
1. As per C & AG Act, 1971 the tenure of the Comptroller and Auditor General is …….Years
a) Four b) five c) six d) seven
2. The part of Government Audit which is concerned with examining whether the money has
been spent for the purpose specified in Appropriation Act is called.
a) audit of sanctions b) audit of provision of funds
c) audit of rules and orders d) audit of financial propriety
3. Audit of transaction does not include –

a) Propriety audit b) efficiency –cum performance audit
c) audit of receipts d) audit of expenditure
4. The income Tax Department has sent Mr. X double refund of advance tax. The Government
Auditor detected this while conducting
a) audit of expenditure b) performance audit
c) audit of stores and stock d) audit of receipts
5. Audit of debt, deposits and remittances does not cover-

a) audit of borrowings b) audit of amortization of debt
c) audit of sanctions d) remittance audit
6. A state Government spent rupees fifty lakhs on renovation of Raj Bhavan’ for its Governor.
In the C & AG’s opinion, this expenditure was more than what occasion demanded? It is an
exampled of –
a) Propriety audit b) Performance audit
c) Audit against provision of funds d) None of the above
7. Audit reports on PSU are

a) submitted to the President/Governor for being laid before the parliament
b) sent to concerned ministries/departments
c) Submitted to BOD of concerned PSU d) Any of the above
8. The C & AG, some years ago, gave adverse comments on expenditure incurred on buying
coffins for soldiers killed in a war. In his opinion, the coffins cases imported could have been
replace with less expensive, domestically produced ones. This is an aspect of –
a) Audit of sanctions b) Audit of stores and stocks c) Propriety audit d) Both (b) and (c)
9. Who among the following is eligible to be appointed as an audit of Government Company?

a) A chartered accountant in practice b) A chartered accountant whether in practice or not
c) An auditor appointed by the C & AG d) Any of the above
10.The statutory auditor of a Government Company submits his report to_

a) the BODs of the company b) the C & AG
c) the Legislature d) the company secretary
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EDP AUDIT
1. Which of the following statement is not distinguishing feature for computer based processing
and manual processing?
a) Errors in a CIS environment are less systemic as compared to errors in manual
processing
b) The potential for human error in the CIS environment is greater as compared to manual
system
c) In a computer based accounting system, audit trail is in electronic form
d) Computer processing offers management a variety of analytical tools.
2. To avoid invalid data input, a bank added an extra number at the end of each account
number and subjected the new number to an algoritham. This techniques is known as
a) Dual read b) Test for reasonableness c) Check digit d) Occurrence correction
3. When computer programme or files can be accessed from terminals, access can be limited to
authorized individuals by__
a) appointing a librarian b) controlling passwords
c) appointing EDP auditor d) Both (a) and (b)
4. Erroneous data has been detected by computer program controls. It has been excluded from
processing and printed separately “Error Report”. Who should most probability by review
and follow up on this report?
a) system, analyst b) Data control group c) Programmer d) Computer operator
5. General controls will be ineffective when EDP department-

a) Participates in computer software acquisition decisions
b) Design Documentation for computerized operations.
c) Originate changes in master files. d) Provide physical security for programme files.
6. Which of the following activities would most likely be performed by EDP department?
a) Authorising transactions b) Parity checks
c) Distributing output d) Correction of transactional errors
7. The completeness of “wages” figure can be tested by comparing the number of time cards to
be processed with transaction on wages sheet. This type of control technique is called
a) check total b) control total c) occurrence correction d) check digit
8. Which of following will not affect audit in a CIS environment?

a) The objective of expression of opinion on financial statements
b) Compliance procedures adopted by the auditor
c) Performance of substantive procedures
d) Evaluation of inherent risk and control risk
9. Which of the following statements is not true of the test data approach in a test of
computerised accounting system?
a) Test data tests only those controls which the auditor wishes to rely
b) Test data should consist of data related to all controls prevalent in the organization
c) The result of test data indicates that all the application and general controls are
functioning properly
d) Test data processed by the client’s computer programme under the auditor’s control
10. Which of the following CAATs allow fictitious transactions planted by the auditor to be
processed along with real ones on client’s system?
a) Integrated test facility b) Test data approach
c) Generalised audit software d) Parallel simulation
11.An auditor is least likely to use computer software to-
a) access client data files b) assess control risk
c) performing analytical producers d) None of the above
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AUDIT OF CASH TRANSACTION

1. Which of the following documents is not relevant for vouching cash sales?
a) Daily cash sales summary b) Salesmen’s summary
c) Monthly statements sent to customers d) Bank statement
2. The auditor should examine subsequent realization of revenue such as dividends, interest,
commission, etc to-
a) identify cases of unrecorded revenue
b) ensure proper disclosure in the balance sheet
c) recompute accrued income on the data of balance sheet d) Any of these
3. To test whether sales have been recorded, the auditor should draw a sample from a file of
a) purchase orders b) sales orders c) sales invoices d) bill of loading
4. For vouching of which item, the auditor is most likely to examine cost records?
a) Commission earned b) Bad debts recorded c) Credit sales d) Sale of scrap
5. The “Guidance Note on Revenue” issued by the ICAI does not deal with
a) Sales revenue b) Revenue rendering service
c) Revenue from sale of fixed assets d) Income from interest, dividend
6. An auditor conducts a surprise check on the pay day (i.e) the day wages and salaries are
paid. The primary purpose of this audit procedures is
a) to ensure that there are no ghost workers
b) to ensure the casual workers employed are authorized by the supervisor
c) to test procedures for distributing pay cheques
d) to obtain understanding of internal control system
7. Which of the following would prevent double payment of the same voucher?
a) The person signing the cheque should cancel the supporting documents
b) Cheques should be signed by at best two persons
c) The data of payment of vouchers of similar nature should be the same or close to each
other
d) All of the above
8. In case of unclaimed wages, the auditor should examine whether-

a) the amount has been deposited in a separate bank account
b) deposited with the cashier c) held in a safe deposit box d) All of these
9. While vouching wages, auditor should examine whether there is proper segregation of
duties. Which of the following activities should not be done by same department?
a) Maintaining personnel records and approving changing in wages rates
b) Proposing pay roll summary and disbursement of wages
c) Making salary statements and filing tax returns
d) Comparing time clock records with time reports prepared by supervisors and preparing
list of workers employed along with the units of production for each one of them
10. In order to vouch, which of the expenses, the auditor will examine Bill of Entry?
a) Custom b) Excise duties c) Sales tax d) Income tax
11. While vouching, how will the auditor ensure himself that all credit sales transactions have
been recorded by the entity?
a) Examining cut-off points
b) Matching entries in the sales book against renumbered sales invoices and goods outward notes
c) Counting the number of invoices and matching the number with entries on sales book
d) Both (a) and (b)
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12. In case of sales return, the auditor should examine which documents?
a) Credit notes, advice notes and inward return notes
b) Debit notes, advice notes and inward return notes
c) Purchase invoices, advice notes and inward return notes
d) Credit notes, inspection report and inward return notes
13. An internal auditor discovered that fictitious purchases have been recorded by the purchase
clerk. This indicates absence of which control?
a) Purchase invoices are independently matched with purchase orders and goods received
notes
b) Goods received notes requires the signature of individual who authorized the purchase
c) Routine checks are performed by internal auditor fortnightly.
d) Purchase function and production function are clubbed in one department
14. Which of the following is most crucial to a purchase department?

a) Reducing the cost of acquisition b) Selecting supplies
c) Authorizing the acquisition of goods d) Assuring the quality of goods
15. The auditor is most likely to examine related party transactions very carefully while
vouching
a) credit sales b) sales returns c) credit purchases d) cash purchases
16. In order to vouch bought ledger, the auditor obtain confirmations from creditors. The
principal reason for the auditor to examine suppliers statements at balance sheet date is to
obtain evidence that
a) the supplier exist b) there are no unrecorded liabilities
c) recorded purchases actually occurred d) to link creditors with cash book entries
17.The creditors accounts, generally, have credit balance. Debit balance may be due to-
a) advance paid against an order b) goods returned
c) wrong debit to supplier account d) Any of these
18.In case of vouching, the auditor is least likely to examine authorization by appropriate
authority in case of –
a) bad bads written off b) sales return c) purchase return d) discount
allowed to customers as per organizational policy
19. Vendors should be approved by Management before purchase department executes an

order. If this is not done, then which of the following situations may arise-
a) purchases could be made from vendors whose product quality may not be good
b) Purchases may be made from related parties without management’s knowledge
c) Purchases could be made from vendors who may have offered price to vice-president
purchases d) Any of these
VERIFICATION & VALUATION OF ASSETS

1. Which of the following is not true with regard to verification of assets?
a) It invoices substantiation of occurrence of transactions
b) Its objective is to establish existence, ownership, possession, valuation and disclosure of
assets
c) The auditor has to form an opinion on different aspects d) All are true
2. Which of the following statements is not true ?

a) Valuation of assets is the responsibility of management
b) The auditor can rely on a certificate issued by an authorized valuationer as to the
valuation of assets in the balance sheet
c) The auditor should value the asset as per generally accepted accounting principle
d) Valuation is no part of auditor’s duty
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3. An auditor is verifying valuation of building which has been self-constructed by the client.
Which of the following documents is least relevant to the auditor for verification purposes?
a) Bills of contractor b) Minutes of meeting of board of directors
c) Certificates of engineer and architect d) Loan agreement
4. Which of the following assets is least likely to be subjected to lien?

a) Freehold land b) Plant and machinery c) Leasehold property d) Motor vehicles
5. An analysis of fixed assets account has revealed possibility of unrecorded sale of plant and
machinery. Which of the following audit procedures may be adopted to discover it?
a) Examination of property tax files b) Inquiry of plant manager
c) Examination of debits to accumulated depreciation d) All of the above
6. The auditor has noticed existence of recurring losses sale of fixed assets this
indicates a) Depreciation charges are insufficient
b) Policy of sale or disposal of fixed assets needs to be reviewed
c) The sale of assets have not been properly authorized d) Accounting errors
7. Which of the following financial statements assertions are addressed by testing the cut off
for plant asset addition
a) Existence and ownership b) Valuation and disclosure
c) Possession and ownership d) Completeness and valuation
8. The auditor while verifying prepaid insurance has concluded that there is inadequate
insurance of building He should__
a) Modify his audit report
b) Insist it should be disclosed in the notes to financial statements
c) Write it in letter of weakness d) Both (b) and (c)
9. While verifying intangible assets, an auditor would recompute amortization charges and
determine whether amortization period is reasonable. The auditor tries to establish ….by
doing it
a) valuation b) existence c) disclosure d) possession
10. When auditing prepaid insurance, an auditor discovers that the insurance policy bond on
building is not available for inspection. This may indicate__
a) No insurance has been undertaken for building b) Lien on building
c) Insurance premium has not been paid d) Insurance premium paid but not recorded
11. Equity shares of XY Ltd. held by ABC Ltd. are in the custody of Stock Holding Corporation of
India Limited. The auditor many verify this investment by -
a) Reviewing last year’s working papers.
b) Obtaining a certificate from a responsible official of the ABC Ltd.
c) Obtaining a certificate from SHCIL d) Obtaining a certificate from xy ltd.
12. Which of the following controls would ensure that securities are not lost, stolen or diverted?
a) Establish physical barriers over investment securities
b) Maintain files of authorized signatures
c) Segregate investment approval form accounting and from custody of securities
d) All of the above
13.Which of the following is not a proper third party to hold investments on behalf of the client?
a) Regional level custodian b) National level custodian
c) India trills – National level stock broking firm d) AEZ Securities Ltd. a stock broking firm
14. Which of the following would give the assurance that debtors mentioned on the date of
balance sheet actually exist?
a) Sending debtor’s confirmation letters b) Reviewing subsequent collection
c) Verify debtors against sales document d) Both (a) and (b)
AUDITING MCQS_______________________18
15.Analytical procedures are least likely to be use in the audit of –

a) cash balance b) investments c) bills receivables d) debtors
16. Which of the following statements is not true with regard to teeming and lading ?
a) It results in the deliberate misappropriation of cash receipts
b) It is associated with cash receipts
c) If same individual maintains cash receipts and cash payments teeming and lading is likely
to exist
d) To conceal the shortage, the defraud, usually, tries to keep bank and book amounts in
daily agreement so that a bank reconciliation will not detect the irregularity.
17. The balance of cash in often between one to five percent of total assets. Tick the most
appropriate statement with regard to verification of cash in context of this
a) Cash in always material as materiality is qualitative concept
b) No audit of cash is needed when, in auditor’s opinion, cash is immaterial. Materiality is a
relative concept
c) The cash balance need only be audited if the balance is in overdraft
d) Cash is to be verified if control risk is assessed as high
18. When counting cash on hand the auditor should ___

a) ensure presence of somebody from management
b) obtain a receipt from custodian as to its return
c) ensure postage and revenue stamps are not counted in physical count
d) temporary advances to employees are counted to calculate balance of cash in hand
19. Which of the following statement is not true regard to auditor’s attendance at stock taking?
a) Auditor should attend physical stock taking only if inventory is material
b) Auditor may not attend physical verification of stock by management, if he does not find it
appropriate to rely on it
c) If inventory is material, even when the auditor is not placing reliance on the physical
verification by the management, he should attend it
d) The primary objective of an auditor’s observation of an entity’s observation of an entity’s
stock take is to obtain direct knowledge that the stock and has been property counted
20. While observing a client’s annual physical inventory, an auditor conducted test counts for
certain test counts were higher than the recorded quantities in the client’s perpetual
records. This situation could be the result of the client’s failure to record –
a) purchase returns b) sales returns c) goods with consignor d) purchase discounts
21.Inspection report/receiving report supports entries in

a) sales book and sales return book b) purchase book and sales return book
c) cash book and purchase book d) Sales book and purchase return book
INTERNAL CONTROL
1. Tests of control are not concerned with_
a) Existence of controls b) Effectiveness of controls
c) Continuity of controls d) Designing of controls
2. The sequence of steps in the auditor’s consideration of internal control is as follows –

a) Obtain an understanding, design substantive test, perform tests of control, make a
preliminary assessment of control risk
b) Design substantive tests, obtain an understanding, perform tests of control, make a
preliminary assessment of control risk
c) Obtain an understanding, make a preliminary assessment of control risk, perform tests of
control, design substantive procedures.
d) Perform tests of control, obtain and understanding, make a preliminary assessment of
control risk, design
AUDITING MCQS________________________19
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3. Which of the following is not an inherent limitation of internal control system?

a) Management override b) Collusion among employees
c) Inefficiency of internal auditor d) Abuse of authority
4. An auditor should study and evaluate internal controls to-

a) determine whether assets are safeguarded b) Suggest improvements in internal control
c) Plan audit procedures d) express and opinion
5. XYZ Ltd. Conducts quarterly review of operations. It discovers that unrest in a south east
Asian country may affect the supply of raw materials to it the next quarter. This is an
example of :
a) risk assessment b) control procedure c) supervision d) control environment
6. The primary purpose of performing tests of control is to provide reasonable assurance that_
a) there are no material misstatements due to fraud or error in financial statement
b) accounting system is well documented
c) Written evidence is there to support transactions
d) if internal control is effective
7. If the auditor assesses control risk as high….

a) Document the conclusions b) documents the reasons along with conclusions
c) perform tests of control d) perform walk through tests
8. The overall attitude and awareness of an entity’s board of directors concerning the
importance of internal control is reflected in-
a) accounting controls b) control environment c) control procedures d) supervision
9. Which of the following are included in test of control?

a) Reperformance and observation b) Inquiry and analytical procedures
c) Comparison and conformation d) Inspection and verification
10.Control risk is assessed at-

a) Overall financial statements level b) Fraud risk factor level
c) Financial statement assertion level d) Control environment level
11. Which of the following is not an example of a circumstance, in which additional tests of
control will not be performed after obtaining an understanding to plan the audit?
a) Controls are known to be cost ineffective
b) Controls are effective but auditor opines that performing tests of control and reduced
substantive tests would not be cost effective
c) Controls are effective and evidence already obtained is adequate to support a planned
assessed level of control risk which is less than high
d) Performing extensive substantive testing would not lead to efficiency
12. An auditor assesses control risk because it-

a) affects the audit risk b) affects the level of detection risk that auditor may accept c) helps
him to fix materiality level for each financial assertion
d) is directly related to inherent risk
13. A flow chart, made by the auditor, of an entity’s internal control system is a graphic
representation that depicts the auditor’s.
a) understanding of the system b) understanding of fraud risk factors
c) documentation of assessment of control risk d) Both (a) and (c)
14.The performance of tests of control is documented in-

a) audit programme b) flow charts c) working papers d) any of the above
15. Which of the following statements is not correct?

a) Intern risk and control risk cannot be controlled by the management i.e are
uncontrollable
AUDITING MCQS_______________________20
b) Detection risk is related directly to they effectiveness of the auditor prosecutor

c) Detection risk related inversely to control risk
d) Internet risk and control risk are highly interrelated
16.The independence of an internal auditor will most likely be assured if he reports to the
a) President Finance b) President System c) Managing Director d) CEO
17. In comparison to the independent auditor, an internal auditor is more likely to be concerned with-
a) cost accounting system b) internal control system
c) legal compliance d) accounting system
18. When an independent auditor decides that the work performed by internal auditors may
have bearing on the nature, timing and extent of planned audit procedures, the independent
auditor should evaluate objectivity of the internal auditor. The most important factor
influencing it would be-
a) organizational level to which he reports b) qualification of internal auditor
c) system of quality control of his work d) all of the above
19. When an independent auditor relies on the work of an internal auditor, he or she should-
a) examine the scope of internal auditor’s work
b) examine the system of supervising review and documentation of internal auditor’s work
c) adequacy of related audit programme d) all of the above
20.Proper segregation of duties reduces the opportunities in which a person would both-
a) establish controls and executes them b) records cash receipts and cash payments c)
perpetuate errors and frauds and conceals them
d) record the transaction in journal and ledger.
INTRODUCTION TO AUDITING
1. d 2. b 3. c 4. b 5. a
6. b 7. d 8. a 9. a 10. b
11. d 12. b 13. a 14. d 15. b
16. a 17. c 18. b 19. a 20. d
21. c 22. d 23. b 24. b 25. b
26. c 27. c
CONCEPTS OF AUDITING
1. e 2. c 3. a 4. d 5. d
6. c 7. c 8. d 9. d 10. d
11. d 12. a 13. b 14. b 15. d
16. d 17. a 18. b 19. c 20. a
21. d 22. a
AUDIT EVIDENCE
1. c 2. b 3. d 4. c 5. a
6. b 7. d 8. b 9. b 10. d
11. a
AUDIT PREPARATION
1. b 2. d 3. c 4. b 5. c
6. d 7. a 8. c 9. d 10. b
11. a 12. c 13. a 14. a 15. c
16. d 17. c 18. a 19. d 20. c
AUDITING MCQS________________________21
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CAPTIAL AND REVENUE EXPENDITURE
1. b 2. d 3. c 4. b 5. c
6. d 7. a 8. c 9. d 10. b
COMPANY AUDITOR
1. b 2. a 3. c 4. d 5. d
6. b 7. a 8. b 9. a 10. b
11. c 12. c 13. e 14. d 15. a
16. b 17. c 18. a 19. c 20. d
21. b 22. c 23. d 24. a 25. b
26. d 27. c 28. b 29. b 30. b
31. c 32. b 33. b 34. a 35. c
36. c 37. d 38. a 39. b 40. a
41. c 42. b 43. a 44. a 45. d
46. a 47. c 48. b 49. c 50. a
51. c 52. c 53. a
GOVERNMENT AUDIT
1. c 2. b 3. b 4. d 5. c
6. a 7. b 8. d 9. a 10. b
EDP AUDIT
1. a 2. c 3. d 4. a 5. c
6. c 7. d 8. a
9. b 10. a 11. d
AUDIT OF CASHTRANSACTION
1. c 2. a 3. c 4. d 5. c
6. c 7. a 8. a 9. b 10. a
11. d 12. d 13. a 14. c 15. c
16. b 17. d 18. d 19. d
VERIFICATION AND VALUATION OF ASSETS
1. a 2. c 3. b 4. c 5. d
6. a 7. d 8. d 9. a 10. b
11. c 12. d 13. c 14. d 15. a
16. c 17. a 18. c 19. c 20. B
21. B
INTERNAL CONTROL
1. d 2. c 3. c 4. c 5. a
6. d 7. a 8. b 9. a 10. c
11. c 12. b 13. a 14. c 15. a
16. c 17. b 18. a 19. d 20. c
AUDITING MCQS_______________________22

Auditing Theory Question Bank

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Page 1

7. Professional Accountant refers to an individual who holds a valid Certificate of Registration

18. A practitioner should accept an assurance engagement only if

30. An important characteristic of IT is uniformity of processing. Therefore, a risk exists that

31. Which of the following statements is not true?

34. To determine if a sample is truly representative of the population, an auditor would be

54. An auditor may accept an engagement to report on summary financial statements in

58. The auditor should perform tests of controls when

61. The risk of material misstatement refers to

63. Related party transactions may be indicated when another company

64. An auditor should examine minutes of the board of directors’ meetings

66. Which of the following statements is true?

68. In testing for cutoff, the objective is to determine

82. Which of the following statements is false?

89. Which of the following statements related to application controls is correct?

94. An internal auditor would be concerned about the possibility of fraud if

98. The following are examples of special purpose frameworks, except

--- END ---

MCQ‛S QUESTION BANK - AUDITING

2. The title of AAS-2 issued by Council of ICAI is ___

3. Which of the following is not true about opinion on financial statements?

4. A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _

6. Which of the following statements is not true?

7. As per AAS-4 if auditor detects an error then –

8. Which of the following is not a limitation of audit as per AAS-4?

12.Auditing standards differ from audit procedures in that procedures relate to

14.The most difficult type of misstatement to detect fraud is based on:

2. Concurrent audit is a part of-

3. In India, balance sheet audit is synonymous to-

4. Audit in depth is synonymous for-

5. Balance sheet audit includes verification of_

6. Which of the following statements is not true about continuous audit?

7. Which of the following is not a fact of EPA?

10. Balance sheet does not include-

11. Which of the following statements is not correct about materiality?

15. Analytical procedures issued in the planning stage of an audit, generally

18.The basic assumption underlying the use of analytical procedures is :

19. What are analytical procedures?

20. Which of the following is not an analytical procedure?

3. In an audit of financial statements, substantive tests are audit procedures that __

6. When is evidential matter, generally, considered sufficient?

7. Which of the following is not a corroborative evidence?

10.Which of the following affects audit effectiveness?

2. Audit programme is prepared by-

6. Which of the following is not an advantage of the preparation of working paper?

10. Which of the following statement is true regarding an auditor’s working

16. Which of the following statements is correct?

CAPTIAL AND REVENUE EXPENDITURE

2. Which of the following is not a revenue expense?

3. Depreciation does not arise form _______

8. Which of the following is a revenue reserve?

9. Which of the following will not lead to creation of secret reserve?

2. Which of the following sections deal with qualifications of the auditor ?

3. Which of the following statement is not true?

5. The board of directors shall appoint first auditor of a company

20. The retiring auditor does not have a right to___

22.A statutory auditor has a right of access at all times to

23. The auditor has a right to-

29. The branch auditor is appointed by –

i) auditor’s report ii) engagement letter iii) representation letter

36. The date on auditor’s report should not be__

43.Which of the following is true about explanatory notes?

51.Companies exempted from application of CARO, 2003 does not include_