AUDITING THEORY INTRODUCTION TO AUDITING

RED SIRUG
1. An independent audit is important to readers of financial statements because
it a. Provides a measure of management's stewardship function b. Measures and co
mmunicates the financial data included in financial statements c. Objectively ex
amines and reports on management's financial statements d. Reports on the accura
cy of information in the financial statements 2. An independent audit aids in th
e communication of economic data because the audit a. Confirms the accuracy of m
anagement's financial representation. b. Guarantees that financial data are fair
ly presented. c. Assures the readers of financial statements that any fraudulent
activity has been corrected. d. Lends credibility to the financial statements.
3. The purpose of an audit of financial statements is to a. Obtain an absolute l
evel of assurance that the financial statements as a whole are free from materia
l misstatement. b. Relieve management or those charged with governance of the re
sponsibility for the preparation and presentation of the financial statements in
accordance with the applicable financial reporting framework. c. Enhance the de
gree of confidence of intended users in the financial statements. d. Assure the
future viability of the entity by expressing an opinion on the entity's financia
l statements. 4. Independent auditing can best be described as a. A branch of ac
counting. b. A professional activity that measures and communicates financial an
d business data. c. A regulatory function that prevents the issuance of improper
financial information. d. A discipline which attests to the results of accounti
ng and other functional operations and data. 5. The primary purpose of an indepe
ndent financial statement audit is to: a. Provide a basis for assessing manageme
nt's performance b. Comply with government regulatory requirements c. Assure man
agement that the financial statements are unbiased and free from material error
d. Provide users with an unbiased opinion about the fairness of information repo
rted in the financial statements 6. The audit process is a. A special applicatio
n of the scientific method of inquiry. b. Regulated by the PICPA. c. The only se
rvice a CPA is allowed to perform by law. d. Performed only by CPAs. 7. The over
all objectives of the auditor in conducting an audit of financial statements are
: I. To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether caused by fraud or error. II.
To report on the financial statements. III. To obtain conclusive rather than pe
rsuasive evidence IV. To detect all misstatements, whether due to fraud or error
a. I and II only b. II and IV only c. I, II, and III only d. I, II, III and IV
8. Which of the following is not among the factors that result to limitations of
audit? a. Use of testing b. Going concern problem of the assurance client c. Hu
man error d. Evidence is basically persuasive rather than conclusive 9. The mark
et for auditing services is driven by a. The regulatory authority of the Securit
ies and Exchange Commission. b. A demand by external users of financial statemen
ts. c. Pronouncements issued by the Auditing and Assurance Standards Council.
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d. Congress. 10. The independent auditor of the past differs from the auditor of
today in that the past auditor was more concerned with the a. Validity of the i
ncome statement. b. Determination of fair presentation of financial statements.
c. Improvement of accounting system. d. Detection of fraud or irregularities. 11
. The criteria for evaluating quantitative information vary. For example, in the
case of an independent audit of financial statements by CPA firms, the criteria
are usually the: a. Philippine Standards on Auditing b. Philippine Financial Re
porting Standards c. National Internal Revenue Code d. Securities and Exchange C
ommission Regulations 12. An audit in accordance with PSAs is performed on the p
remise that management and, where appropriate, those charged with governance hav
e responsibilities that are fundamental to the conduct of the audit. Which of th
e following is not one of those responsibilities? a. To provide the auditor with
all information, such as records and documentation, and other matters that are
relevant to the preparation and presentation of the financial statements. b. To
provide unrestricted access to those within the entity from whom the auditor det
ermines it necessary to obtain audit evidence. c. To comply with all relevant PS
As in the preparation and presentation of the entity's financial statements. d.
To design, implement, and maintain internal control relevant to the preparation
and presentation of financial statements that are free from material misstate me
nt, whether caused by fraud or error. 13. The auditor is required to maintain pr
ofessional skepticism throughout the audit. Which of the following statements co
ncerning professional skepticism is false? a. A belief that management and those
charged with governance are honest and have integrity relieves the auditor of t
he need to maintain professional skepticism. b. Maintaining professional skeptic
ism throughout the audit reduces the risk of using inappropriate assumptions in
determining the nature, timing, and extent of the audit procedures and evaluatin
g the results thereof. c. Professional skepticism is necessary to the critical a
ssessment of audit evidence. d. Professional skepticism is an attitude that incl
udes questioning contradictory audit evidence obtained. 14. Professional judgmen
t: a. Is necessary in the evaluation of management's judgments in applying the e
ntity's applicable financial reporting framework. b. Should be exercised in plan
ning and performing an audit of financial statements but need not be documented.
c. Can be used as the justification for the decisions made by the auditor that
are not supported by the facts and circumstances of the engagement. d. Is not us
ed in making decisions about materiality and audit risk. 15. The primary respons
ibility for the adequacy of disclosure in the financial statements rests with th
e: a. Partner assigned to the audit engagement. b. Management of the company. c.
Securities and Exchange Commission. d. Auditor in charge of the field work. 16.
Which of the following statements is correct concerning an auditor's responsibi
lities regarding financial statements? a. Making suggestions that are adopted ab
out the form and content of an entity's financial statements impairs an auditor'
s independence. b. An auditor's responsibilities for audited financial statement
s are confined to the expression of the auditor's opinion. c. The fair presentat
ion of audited financial statements in accordance with an applicable financial r
eporting framework is an implicit part of the auditor's responsibilities. d. The
auditor's report should provide an assurance as to the future viability of the
entity. 17. The auditor's judgment concerning the overall fairness of presentati
on of financial position, results of
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operation, and changes in cash flow is applied within the framework of a. Genera
lly accepted auditing standards which include the concept of materiality b. Gene
rally accepted accounting principles. c. Philippine Financial Reporting Standard
s d. Quality control 18. An independent audit is important to readers of financi
al statements because of the following except: a. Lends credibility to the finan
cial statements. b. Objectively examines and reports on management's financial s
tatements c. Measures and communicates the financial data included in financial
statements d. Provide users with an unbiased opinion about the fairn ess of info
rmation reported in the financial statements 19. The auditor's judgment concerni
ng the overall fairness of presentation of financial position, results of operat
ion, and changes in cash flow is applied within the framework of a. Generally ac
cepted auditing standards which include the concept of materiality b. Generally
accepted accounting principles. c. Philippine Financial Reporting Standards d. Q
uality control 20. In a. b. c. d. financial statement audits, the audit should b
e conducted in accordance with Philippine Accounting Standards / Philippine Fina
ncial Reporting Standards Generally accepted auditing standards Code of Ethics f
or CPAs in the Philippines Philippine Standards on Auditing
21. Which of the following statements does not properly describe an element of t
he theoretical framework of auditing? a. An audit benefits the public. b. The da
ta to be audited are verifiable. c. Auditor should maintain independence with re
spect to the audit client. d. Remoteness of users. 22. The auditor is required t
o obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to fraud or error. In all cases when reasona
ble assurance cannot be obtained, the auditor's report should contain a/an: a. U
nmodified opinion b. Qualified or disclaimer of opinion c. Qualified or adverse
opinion d. Disclaimer of opinion 23. The benefits of an operational audit genera
lly include all of the following except: a. Decreased costs. b. Increased revenu
e c. Increased reliability of the financial statements. d. Increased productivit
y. 24. The auditor is required to comply with all PSAs relevant to the audit of
an entity's financial statements. A PSA is relevant to the audit when: I. The PS
A is in effect. II. The circumstances addressed by the PSA exist. a. I only b. I
I only c. Either I or II d. Both I and II 25. One of the conditions that give ri
se to a demand for an external audit of financial statements is expertise. Which
of the following best describes the meaning of expertise as used in this contex
t? a. Auditors usually rely on the work of an expert as a basis for evaluating s
ome assertions embodied in the financial statements. b. Users usually lack the n
ecessary expertise to verify the reliability of the financial information. c. As
experts, auditors are expected to detect all material misstatements in the fina
ncial statements. d. The readers of the financial statements must possess the ne
cessary expertise to be able to understand the financial statements.
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26. Which of the following statements does not properly describe a limitation of
an audit? a. Many audit conclusions are made on the basis of examining a sample
of evidence. b. Fatigue and human weaknesses can cause auditors to overlook per
tinent evidence. c. Many financial statement assertions cannot be audited. d. Th
e work, under taken by the auditor is permeated by judgment. 27. An audit design
ed to evaluate the efficiency and effectiveness of an organization or some or pa
rt thereof would not come under the title of a. Performance audit. b. Compliance
audit. c. Management audit. d. Operational audit. 28. Inherent limitations in a
n audit stem from the following factors except a. Incompetence of the auditor. b
. Most audit evidence is persuasive rather than conclusive. c. Internal control
limitation. d. Use of testing. 29. Auditing services may include which of the fo
llowing? a. Attesting to financial statements b. Evaluation of a divisions perfor
mance for management c. Examination of the economy and efficiency of governmenta
l operations d. All of the above 30. Which of the following represents the highe
st to lowest level of assurance provided by auditors in the performance of the e
ngagement? a. An audit; a compilation; a review. b. An audit; a review; a compil
ation. c. A review; an audit; a compilation. d. A compilation; a review; an audi
t. 31. The statement that the reviewer "is not aware of any material modificatio
n that should be made to the financial statements in order for them to be in con
formity with GAAP" is known as: a. Reasonable assurance. b. Positive assurance.
c. Negative assurance. d. Negligent performance. 32. Which of the following is a
major difference between a review and an audit of the financial statements? a.
The level of knowledge of professional standards needed to perform the procedure
s. b. The type of accounting used -reviews are typically on non-GAAP accounting,
while audits are based upon GAAP accounting. c. The scope of the procedures per
formed and the assurance provided. d. The type of company involved in reviews ma
y only be publicly-held. 33. The a. b. c. d. review of unaudited financial state
ments consists of: Inquiry of management and documentation of internal controls.
Inquiry of management and analytical procedures. Analytical procedures and comp
liance with laws and regulations. Internal control evaluation and management rep
resentation.
34. In an assurance engagement, this refers to the information obtained by the p
ractitioner in arriving at the conclusions on which the conclusion is based. a.
Generally accepted auditing standards b. Assertions c. Evidence d. Criteria 35.
If it is probable that the judgment of a reasonable person would have been chang
ed or influenced by the omission or misstatement of information, then the inform
ation is a. Significant. b. Material. c. Relevant. d. Pervasive.
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36. In performing a financial statement audit, which of the following would an a

uditor least likely consider? a. Compliance with GAAP. b. Quality of managements
business decisions. c. Internal control. d. Fairness of the financial statemen
t amounts. 37. The Philippine Standards on Auditing issued by AASC: a. Require t
hat in no circumstances would an auditor may judge it necessary to depart from a
PSA, even though such a departure may result to more effective achievement of t
he objective of an audit. b. Apply to independent examination of financial state
ments of any entity when such an examination is conducted for the purpose of exp
ressing an opinion. c. Need to be applied on all audit related. d. Must not appl
y to other related activities of auditors. 38. Which of the following is not an
assurance that the auditors give to the parties who rely on the financial statem
ents? a. Auditors know how the amounts and disclosures in the financial statemen
ts were produced. b. Auditors give assurance that the financial statements are a
ccurate. c. Auditors gathered enough evidence to provide a reasonable basis for
forming an opinion. d. If the evidence allows the auditors to do so, auditors gi
ve assurance in the form of opinion, as to whether the financial statements take
n as a whole are fairly presented in conformity with GAAP. 39. The term that des
cribes the role of persons entrusted with the supervision, control and direction
of an entity is a. Management. b. Administration. c. Governance. d. Government.
40. An audit involves ascertaining the degree of correspondence between asserti
ons and established criteria. In the case of an audit, of financial statements,
which of the following would not be a valid criterion? a. International Accounti
ng Standards b. Philippine Standards on Auditing c. Philippine Financial Reporti
ng Standards d. Philippine Accounting Standards 41. Which of the following state
ments about independent financial statement audit is correct? a. The audit of fi
nancial statements relieves management of its responsibilities for die financial
statements. b. The auditor s opinion is not an assurance as to the future viabi
lity of the entity as well as the effectiveness and efficiency with which manage
ment has conducted the affairs of the entity. c. An audit is designed to provide
limited assurance that the financial statements taken as a whole are free from
material misstatement. d. The procedures required to conduct an audit in accorda
nce with PSAs should be determined by the client who engaged the services of the
auditor. 42. The reason an independent auditor gathers evidence is to a. Detect
fraud b. Form an opinion on the financial statements c. Evaluate management d.
Evaluate internal controls 43. The auditor communicates the results of his or he
r work through the medium of the a. Engagement letter. b. Audit report. c. Manag
ement letter. d. Audited financial statements. 44. The auditor s judgment concer
ning the overall fairness of presentation of financial position, results of oper
ation, and changes in cash flow is applied within the framework of a. Quality co
ntrol b. Generally accepted auditing standards which include the concept of mate
riality c. The auditor s evaluation of the audited company s internal control.
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d. Generally accepted accounting principles. 45. The expertise that distinguishe

s auditors from accountants is in the a. Ability to interpret generally accepted
accounting principles. b. Requirement to possess education beyond the bachelor
s degree. c. Accumulation and interpretation of evidence. d. Ability to interpre
t PAS/PFRS. 46. The need for independent audits of financial statements can be a
ttributed to all of the following conditions except: a. Validity b. Remoteness c
. Consequence d. Complexity of subject matter 47. The underlying conditions that
create demand by users for reliable information include the following except: a
. Transactions that are numerous and complex. b. Users separated from accounting
records by distance and time. c. Financial decisions that are important to inve
stors and users. d. Decisions are not time-sensitive. 48. Why does a company cho
ose to have an independent auditor report on its financial statements? a. Indepe
ndent auditors will always detect management fraud. b. The company preparing the
statements may have a vested interest in reporting certain results. c. Independ
ent auditors guarantee the accuracy of the financial statements. d. An independe
nt audit is designed to search for deficiencies in the company s internal contro
ls. 49. Which of the following statements does not describe a condition that cre
ates a demand for auditing? a. Information can have substantial economic consequ
ences for a decision maker. b. Expertise is often required for information prepa
ration and verification. c. Users can directly assess the quality of information
. d. Conflict between an information preparer and a user can result in biased in
formation. 50. Information risk refers to the risk that a. The auditor may expre
ss an unqualified opinion on financial statements that are material misstated. b
. The client may not be able to remain in business. c. The client s financial st
atements may be materially false and misleading. d. Errors and frauds would not
be detected by the auditor s procedures. 51. Which of the following is a cause o
f information risk? a. Voluminous data. b. Biases and motives of the provider of
information. c. Remoteness of the information. d. Each of the above is a cause
of information risk. 52. In a. b. c. d. financial statement audits, the audit pr
ocess should be conducted in accordance with Philippine Accounting Standards The
audit program Philippine Standards on Auditing Philippine Financial Reporting S
tandards
53. Which of the following is not one of the general principles governing the au
dit of financial statements? a. The auditor should obtain sufficient appropriate
evidence primarily through inquiry and analytical procedures to be able to draw
reasonable conclusions. b. The auditor should plan and perform the audit with a
n attitude of professional skepticism. c. The auditor should conduct the audit i
n accordance with PSA. d. The auditor should comply with the Philippine Code of
Professional Ethics. 54. Which of the following statements does not properly des
cribe an element of the theoretical framework of auditing? a. The data to be aud
ited can be verified. b. Short-term conflicts may exist between managers who pre
pare data and auditors who examine the data. c. Auditors act on behalf of manage
ment.
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d. An audit benefits the public. 55. Which of the following criteria is unique t
o the independent auditor s attest function? a. General competence. b. Familiari
ty with the particular industry of each client. c. Due professional care. d. Ind
ependence. 56. Auditing is based on the assumption that financial data are verif
iable. Data are verifiable when two or more qualified individuals, a. Working to
gether, can prove, beyond doubt, the accuracy of the data. b. Working independen
tly, can prove, beyond reasonable doubt, the truthfulness of the data. c. Workin
g independently, each reach essentially similar conclusions. d. Working together
, can agree upon the accuracy of the data. 57. The level of assurance provided b
y a professional accountant on an audit report is: a. Low b. Reasonable c. Moder
ate d. None 58. Reasonable assurance means: a. Gathering of all available corrob
orating evidence for the auditor to conclude that there are no material misstate
ments in the financial statements, taken as a whole. b. Gathering of the audit e
vidence necessary for the auditor to conclude that the financial statements, tak
en as a whole, are free from any misstatements. c. Gathering of the audit eviden
ce necessary for the auditor to conclude that the financial statements are free
of material unintentional misstatements. d. Gathering of the audit evidence nece
ssary for the auditor to conclude that there are no material misstatements in th
e financial statements, taken as a whole. 59. Which of the following is one of t
he limitations of an audit? a. Nature of evidence obtained b. Inadequacy of the
accounting records c. Confidentiality of information d. Scope limitations impose
d by the entity 60. Which of the following is not one of the limitations of an a
udit? a. The use of testing b. Limitations imposed by client c. Human error d. N
ature of evidence that the auditor obtains 61. Which of the following terms does
not belong to the group a. Financial audit b. Internal audit c. External audit
d. Independent audit 62. The overall objective of forensic auditing is to a. Att
est to the efficiency with which resources are employed b. Assist members of the
organization in the effective discharge of their responsibilities c. Unearth th
e truth and provide evidence in legal and financial disputes d. Provide assuranc
e that financial data have been accurately recorded 63. Which of the following t
ypes of auditing is performed most commonly by CPA s on a contractual basis? a.
Internal auditing b. Income tax auditing c. Government auditing d. External audi
ting 64. Which of the following types of audits is performed to determine whethe
r an entity s financial statements are fairly stated in conformity with generall
y accepted accounting principles? a. Operational audit b. Financial statement au
dit c. Compliance audit
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d. Performance audit 65. Which of the following has the primary responsibility f
or the fairness of the representations made in the financial statements? a. Clie
nt s management b. Audit committee c. Independent auditor d. Board of Accountanc
y 66. The best statement of the responsibility of the auditor with respect to au
dited financial statement is: a. The auditor s responsibility on fair presentati
on of financial statements is limited only up to the date of the audit report. b
. The auditor s responsibility is confined to the expression of opinion on the f
inancial statements audited. c. The responsibility over the financial statements
rests with the management and the auditor assumes responsibility with respect t
o the notes of financial statements. d. The auditor is responsible only to his q
ualified opinion but not for any other type of opinion. 67. An a. b. c. audit of
financial statements is conducted to determine if the Organization is operating
efficiently and effectively Auditee is following specific procedures or rules s
et down by some higher authority Overall financial statements are stated in acco
rdance with an identified financial reporting framework. d. Client s internal co
ntrol is functioning as intended. providing high level of assurance on audit rep
orts on financial statements, the auditor Guarantees the fair presentation of th
e financial statements. Confirms the accuracy of the financial statements. Enhan
ces the credibility of the financial statements. Assures the readers that fraudu
lent activities of employees have been detected.
68. By a. b. c. d.
69. Most of the independent auditor s work in formulating an opinion on financia
l statements consists of a. Studying and evaluating internal control b. Obtainin
g and examining evidential matter c. Examining cash transactions d. Comparing re
corded accountability with assets 70. Audits of financial statements include an
expression of a conclusion about which of the following financial statement char
acteristics? a. Governance. b. Reliability. c. Relevance. d. Timeliness. 71. The
essence of the attest function is to a. Detect fraud. b. Examine individual tra
nsactions so that the auditor can certify as to their validity. c. Determine whe
ther the client s financial statements are fairly stated. d. Ensure the consiste
nt application of correct accounting procedures. 72. There are four conditions t
hat give rise to the need for independent audits of financial statements. One of
these conditions is consequence. In this context, consequence means that the: a
. Users of the statements may not fully understand the consequences of their act
ions. b. Auditor must anticipate all possible consequences of the report issued.
c. Impact of using different accounting methods may not be fully understood by
the users of the statements. d. Financial statements are used for important deci
sions. 73. One of the conditions that give rise to a demand for an external audi
t of financial statements is expertise. Which of the following best describes th
e meaning of expertise as used in this context? a. Auditors usually rely on the
work of an expert as a basis for evaluating some assertions embodied in the fina
ncial statements. b. The readers of the financial statements must possess the ne
cessary expertise to be able to understand the financial statements. c. Users us
ually lack the necessary expertise to verify the reliability of the financial
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information. d. As experts, auditors are expected to detect all material misstat

ements in the financial statements. 74. An a. b. c. d. audit can have a signific
ant effect on Information risk. Business risk. The risk-free interest rate. All
of these.
75. The assumption underlying an audit of financial statements is that they will
be used by a. The regulatory agencies to verify information that is relevant to
their supervisory functions. b. The board of directors as basis of declaring ca
sh dividends. c. The general public in making investment decisions. d. Different
groups for different purposes. 76. Which of the following statements does not p
roperly describe a limitation of an audit? a. Many audit conclusions are made on
the basis of examining a sample of evidence. b. The work, under taken by the au
ditor is permeated by judgment. c. Fatigue and human weaknesses can cause audito
rs to overlook pertinent evidence. d. Many financial statement assertions cannot
be audited. 77. Financial statements audits: a. Reduce the cost of capital b. R
eport on compliance with laws and regulations c. Assess management s efficiency
d. Overlook information risk 78. In relation to auditing, which of the following
is an incorrect phrase? a. Auditing is a systematic process. b. Auditing subjec
tively obtains and evaluates evidence. c. Auditing evaluates evidence regarding
assertions. d. Auditing communicates results to interested users. 79. Broadly de
fined, the subject matter of any audit consists of a. Economic data b. Financial
statements c. Assertions about economic actions and events d. Operating data 80
. As a. b. c. d. used in auditing, which of the following statements best descri
bes "assertions? Assertions are the auditor s findings to be communicated in his
audit report. Assertions are found only in the notes to the financial statements
. Assertions are the representations of management as to the reliability of the
information system. Assertions are the representations of management as to the f
airness of presentation of the financial statements.
81. Users of financial statements demand independent audit because a. Users dema
nd assurance that fraud does not exist. b. Management may not be objective in re
porting. c. Users expect auditors to correct management errors. d. Management re
lies on the auditor to improve internal control. 82. Because an external auditor
is paid a fee by a client company, he a. Is absolutely independent and may cond
uct an audit. b. May be sufficiently independent to conduct an audit. c. Is neve
r considered to be independent. d. Must receive approval of the Securities and E
xchange Commission before conducting an audit. 83. Auditing is based on the assu
mption that financial data and statements are a. Verifiable b. In conformity wit
h the identified applicable financial reporting framework c. Presented fairly d.
Consistently applied 84. Independent auditors of financial statements perform a
udits that reduce and control a. Business risk faced by investors
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b. Information risk faced by investors c. Complexity of financial statements d.

Timeliness of financial statements 85. Which of the following is an incorrect st
atement relating to the theoretical framework of auditing? a. Effective internal
control structure reduces the probability of fraud or irregularities in an orga
nization. b. Application of generally accepted accounting principles results in
a fair presentation of financial statements. c. When examining financial data fo
r the purpose of expressing an independent opinion thereon, the auditor acts exc
lusively in the capacity of an auditor. d. In collecting evidence, auditors shou
ld maintain an attitude of trust about their clients assertions. 86. Which of t
he following statements is true? a. The degree or level of assurance that may be
provided by the practitioner is inversely related to the scope of procedures pe
rformed and their results. b. Assurance engagements do not require independence.
c. The term auditor is broader in scope compared to the term practitioner. d. Assur
ance engagements performed by professional accountants are intended to enhance t
he credibility of information. 87. Which of the following statements is true? a.
Professional standards prohibit CPAs from performing non-assurance engagements.
b. Absolute assurance is attainable owing to the fact that much of the evidence
available to the CPA is persuasive rather than conclusive. c. The CPAs conclusio
n provides a level of assurance about the subject matter. d. The responsible par
ty expresses a conclusion that provides a level of assurance as to whether the s
ubject matter conforms, in all material respects, with the identified suitable c
riteria. 88. Which of the following statements is true? a. An audit, if properly
conducted, ensures that fraud is prevented. b. An independent auditor must be a
CPA. c. After conducting an audit and release of the auditors report, the primar
y responsibility on the fairness of the financial statements is shifted to the a
uditor. d. Compliance audits are conducted to determine adherence to rules and r
egulations set by the auditor. 89. Which of the following best describes the pri
mary purpose of audit procedures? a. To detect errors or fraud b. To comply with
generally accepted auditing standards c. To gather sufficient, appropriate evid
ence d. To verify the accuracy of account balances 90. Which of the following en
gagements is covered by the Framework for Assurance Engagements? a. Consulting e
ngagements b. Preparation of tax returns c. Agreed-upon procedures d. Independen
t financial statements audit 91. Which of the following is least likely an appli
cation of maintaining an attitude of professional skepticism? a. The auditor doe
s not consider representations from management as substitute for obtaining suffi
cient appropriate audit evidence to be able to draw reasonable conclusions on wh
ich to base the audit opinion. b. In planning and performing an audit, the audit
or assumes that management is dishonest. c. The auditor is alert to audit eviden
ce that contradicts or brings into question the reliability of documents or mana
gement representations. d. The auditor makes a critical assessment, with a quest
ioning mind, of the validity of audit evidence obtained. 92. Which of the follow
ing types of audits are most similar? a. Internal audits and independent financi
al statement audits. b. Operational audits and compliance audit. c. Compliance a
udits and independent financial statement audits. d. Independent financial state
ment audits and operational audits. 93. Which of the following types of audits w
ould be intended to determine whether a governmental entity is following sound p
rocurement practices?
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a. b. c. d.
Program audit Compliance audit Financial statement audit Operational audit
94. In government auditing, the three elements of expanded scope auditing are a.
Pre-audit, post-audit, internal audit. b. Goal analysis, audits of operations,
audit of systems. c. Financial and compliance, economy and efficiency, program r
esults. d. National government audit, local government audit, corporation audit.
95. Which of the following best describes the operational audit? a. It requires
the constant review by internal auditors of the administrative controls as they
relate to operations of the company. b. It concentrates on implementing financi
al and accounting control in a newly organized company. c. It concentrates on se
eking out aspects of operations in which waste would be reduced by the introduct
ion of controls. d. It attempts and is designed to verify the fair presentation
of a company s results of operations. 96. What is the proper organizational role
of internal auditing? a. To serve as an independent, objective assurance and co
nsulting activity that adds value to operations. b. To assist the external audit
or in order to reduce external audit fees. c. To perform studies to assist in th
e attainment of more efficient operations. d. To serve as the investigative arm
of the audit committee of the board of directors. 97. The overall objective of i
nternal auditing is to a. Attest to the efficiency with which resources are empl
oyed. b. Ascertain that controls are costs justified. c. Provide assurance that
financial data have been accurately recorded. d. Assist members of the organizat
ion in the effective discharge of their responsibilities. 98. Internal auditing
is an independent appraisal function established within an organization to exami
ne and evaluate its activities. To that end, internal auditing provides assistan
ce to a. External auditors b. Stockholders c. Management and the board of direct
ors d. Government 99. An audit which is undertaken in order to determine whether
the auditee is following specific procedures or rules set down by some higher a
uthority is classified as a(n) a. Audit of financial statements. b. Compliance a
udit. c. Operational audit. d. Production audit. 100. a. b. c. What is the overa
ll objective of internal auditing? To attest to the efficiency with which resour
ces are used. Ascertain that the cost of internal control is justified. To ascer
tain that financial statements present accurately the financial position, operat
ing results, and changes in cash and stockholders equity. d. To help members of
the organization to effectively discharge their responsibilities. Which of the
following types of audit uses laws and regulations as its criteria? Operational
audit Financial statement audit Compliance audit Performance audit
101. a. b. c. d.
102. An audit that involves obtaining and evaluating evidence about the efficien
cy and effectiveness of an entity s operating activities in relation to specifie
d objectives is a(n): a. External audit b. Compliance audit c. Operational audit
d. Financial statement audit
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103. a. b. c. d. 104. a. b. c. d.
A operational audit is primarily oriented toward Future improvements to accompli
sh managements goals. Past protection provided by existing internal control. Oper
ational information is in accordance with generally accepted accounting principl
es. Financial statements are fairly presented. The most important function of op
erational audit report is to: Direct management to take specified actions. State
the auditors opinion or conclusion. Report findings and recommendations. Report
the objective of the audit.
105. Operational audit differs in many ways from an audit of financial statement
s. Which of the following is the best example of one of these differences? a. Th
e usual audit of the financial statement covers four basic statements, whereas o
perational audit is usually limited either the statement of financial position o
r the income statement. b. Operational audit do not necessarily result in the pr
eparation of a report. c. The operational audit deals with pre-tax income. d. Th
e boundaries of an operational audit are often drawn from an organization chart
and are not limited to a single accounting period. 106. Which of the following b
est describes the scope of internal auditing as it has developed to date? a. Int
ernal auditing has evolved to verifying the existence of assets and reviewing th
e means of safeguarding assets. b. Internal auditing has evolved to more of an o
perational orientation from a strictly financial orientation. c. Internal auditi
ng involves appraising the economy and efficiency with which resources are emplo
yed. d. Internal auditing involves evaluating compliance with policies, plans, p
rocedures, laws, and regulations. 107. Which of the following actions would be a
n appropriate response by companies to improve the public s perception of their
financial reporting? a. Requiring internal auditors to report all significant fi
ndings of fraud and illegal activity to the company president. b. Increased adop
tion of audit committees. c. Keeping external and internal auditing work separat
ed to maintain independence. d. None of the above. 108. a. b. c. Which of the fo
llowing is considered a primary reason for creating an internal audit department
? To safeguard resources entrusted to the organization. To evaluate and improve
the effectiveness of control processes. To ensure the accuracy, reliability, and
timeliness of financial and operating data used in management s decision making
. d. To relieve management of the responsibility for establishing effective cont
rols. The internal auditing profession has advanced primarily as a result of Inc
reased interest by Bachelor of Science in Accountancy (BSA) graduates and experi
enced auditors. The limitation of financial statement audit scope. Job qualifica
tion specifications that include added emphasis on background knowledge and skil
ls. Increased complexity and sophistication of business operations. The internal
auditing department s responsibility for deterring fraud is to Exercise operati
ng authority over fraud prevention activities. Establish an effective internal c
ontrol system. Maintain internal control. Examine and evaluate the system of int
ernal control.
109. a. b. c. d. 110. a. b. c. d. 111. a. b. c.
Internal auditors review the adequacy of the company s internal control system p
rimarily to Help determine the nature, timing, and extent of tests necessary to
achieve audit objectives. Determine whether the internal control system ensures
that financial statements are fairly presented. Determine whether the internal c
ontrol system provides reasonable assurance that the company s objectives and go
als are met efficiently and economically. d. Ensure that material weaknesses in
the system of internal control are corrected.
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112. a. b. c. d. 113. a. b. c. d. 114. a. b. c. d. 115. a. b. c. d.

Internal auditors should review the means of physically safeguarding assets from
losses arising from Procedures that are not cost justified. Exposure to the ele
ments. Underusage of physical facilities. Misapplication of accounting principle
s. A typical objective of an operational audit is for the auditor to Determine w
hether the financial statements fairly present the entity s operations. Evaluate
the feasibility of attaining the entity s operational objectives. Make recommen
dation for improving performance. Report on the entity s relative success in max
imizing profits. An objective of a performance audit is to determine whether an
entity s Operational information is in accordance with government auditing stand
ards. Specific operating units are functioning economically and efficiently. Fin
ancial statements present fairly the results of operations. Internal control is
adequately operating as designed. A typical objective of an operational audit is
to determine whether an entity s Internal control structure is adequately opera
ting as designed Operational information is in accordance with generally accepte
d accounting principles. Specific operating units are functioning efficiently an
d effectively Financial statements present fairly the results of operations
116. Operational audits generally have been conducted by internal and COA audito
rs, but may be performed by certified public accountants. A primary purpose of a
n operational audit is to provide: a. A measure of management performance in mee
ting organizational goals. b. The results of internal examinations of financial
and accounting matters to a company s top-level management. c. Aid to the indepe
ndent-auditor, who is conducting the examination of the financial statements. d.
A means of assurance that internal accounting controls are functioning as plann
ed. 117. G ove rn m e n ta l a u d itin g ofte n e xte n d s b e yon d examinati
ons leading to the expression of opinion on the fairness of financial presentati
on and includes audits of efficiency, economy, effectiveness, and also: a. Accur
acy b. Evaluation c. Compliance d. Internal control 118. What is the responsibil
ity of an auditor who is engaged to audit the financial statements of a governme
nt entity? a. Assess control risk with respect to each component of internal con
trol. b. Assume responsibility for assuring that the entity complies with applic
able laws and regulations. c. Obtain an understanding of the possible financial
statement effects of laws and regulations having direct and material effects on
amounts reported. d. Design the audit to provide reasonable assurance that the s
tatements are free of material misstatements resulting from illegal acts having
direct or indirect effects. 119. The objective of governmental effectiveness or
program auditing is to determine if the desired results of a program are being a
chieved. What is the first step in conducting such an audit? a. Identify the leg
islative intent of the program being audited. b. Collect quantifiable data on th
e program s success or failure. c. Determine the time frame to be audited. d. Ev
aluate the system used to measure results. 120. Which of the following statement
s is a standard applicable to financial statement audits in accordance with Gove
rnment Auditing Standards? a. An auditor should briefly describe in the auditor
s report the method of statistical sampling used in per forming tests of control
s and substantive tests. b. An auditor should report on the scope of the auditor
s testing of internal control. c. An auditor should determine the extent to whi
ch the entity s programs achieve the desired level of results. d. An auditor sho
uld assess whether the entity has reportable measures of economy and efficiency
that are valid and reliable.
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