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LA CONSOLACION COLLEGE TANAUAN

Accountancy Department

AUDITING THEORY

Audit An Overview

Quiz No. ___

NAME: _________________________ DATE: ________________


SECTION: ______________________ SCORE: ______________

Direction: Read and answer the following questions.

___1. The following are the objectives of operational or management audit, except
a. It measures and assesses the entitys performance in meeting organizational goals.
b. It determines whether the financial statements of an entity are fairly presented in accordance with
identified financial reporting framework.
c. It identifies areas in an entity which requires improvements and makes recommendation to improve
performance.
d. It desires to improve the efficient use of the companys resources and the effectiveness in
accomplishing its objectives.
___2. What is the responsibility of an auditor who is engaged to audit the financial statements of a
government entity?
a. Assess control risk with respect to each component of internal control.
b. Assume responsibility for assuring that the entity complies with applicable 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 statements are free of material
misstatements resulting from illegal acts having direct or indirect effects.
___3. The following are the reasons for the need for an independent financial statement audit, except
a. The presence of conflict of interest between management and users of financial statements.
b. Financial information has substantial economic consequences for a decision maker.
c. Users of financial information are usually precluded from directly assessing the reliability of the
information.
d. Financial statements, accounting and auditing principles are simple and easily understandable by
ordinary users.
___4. The following are the general principles governing the audit of financial statements, except
a. The auditor should conduct the audit in accordance with Philippine Accounting Standards.
b. The auditor should comply with the Code of Professional Ethics for Certified Public Accountants
promulgated by the Board of Accountancy.
c. The auditor should plan and perform the audit with an attitude of professional skepticism
recognizing that circumstances may exist which may cause the financial statements to be
materially misstated.
d. The auditor shall exercise professional judgment in planning and performing an audit of financial
statements.
e. The auditor should obtain sufficient appropriate evidence to reduce audit risk to an acceptably low
level to enable to express an opinion on the financial statements.
___5. Which of the following is incorrect as regards to the functions and importance of an independent
audit?
a. It lends credibility to the financial statements of an entity.
b. It enhances the value and usefulness of financial statements of an entity.
c. By attaching a report to the financial statements, the auditor provides guarantees the accuracy of
the financial statements.
d. The financial statement auditor only provides reasonable assurance that the financial statements
are free from material misstatements.
___6. What is the objective of financial statement audit?
a. To enable the auditor to express an opinion whether the financial statements are prepared, in all
materials respects, in accordance with the applicable financial reporting framework.

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b. to determine whether the organization has adhered to specific procedures, rules or regulations.
c. To assess the entitys performance, identify areas for improvements and make recommendations to
improve performance.
d. To assure and guarantee the accuracy of the financial statements prepared by an entity.
___7. Who is responsible for the preparation and presentation of financial statements in accordance with
applicable financial reporting framework?
a. External auditor
b. Shareholders of the entity
c. Government agency
d. Management of the entity
___8. What level of assurance is provided by financial statement audit?
a. Limited
b. Moderate
c. Absolute
d. Reasonable
___9. The following are the inherent limitations of an audit, except
a. Auditors do not examine all evidence available and many audit conclusions are made by examining
only sample of evidence.
b. Evidence obtained by the auditor is generally conclusive rather than persuasive in nature.
c. Some evidence supporting the financial statements must be obtained by obtaining oral or written
representations from the management.
d. Human weaknesses can cause auditors to commit mistakes in the application of audit procedures
and application of evidence considering that the auditors use professional judgment.
___10. The following are postulates, assumptions or ideas that form part of theoretical framework of
auditing, except
a. The auditor should always maintain independence with respect to the financial statements under
audit.
b. Consistent compliance with applicable financial reporting framework results in fair presentation of
financial statements.
c. Effective internal control eliminates the possibility of errors and fraud affecting the financial
statements.
d. Audit function operates on the assumption that all financial data are verifiable.
___11. Which of the following statements is not a distinction between independent auditors and internal
auditors?
a. Independent auditors represent third party users external to the auditee company, whereas internal
auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors
are concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent
contractors.
d. The internal auditors span of coverage goes beyond financial auditing to encompass operational
and performance auditing whereas independent auditors are normally concerned with financial
statements audit.
___12. Which of the following statements concerning professional skepticism is incorrect?
a. In planning and performing an audit, the auditor assumes that the management is always
dishonest.
b. The auditor shall recognize that circumstances may exist which may cause the financial statements
to be materially misstated.
c. It means the auditor makes a critical assessment, with a questioning mind, of the validity of audit
evidence obtained and is alert to audit evidence that contradicts or bring into questions the
reliability of documents or managements representation.
d. Representations from management are not a substitute for obtaining sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit opinion.
___13. Which of the following statements concerning professional judgment is correct?
a. It should be exercise in planning and performing an audit of financial statements but need not be
documented.
b. It 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.
c. It is necessary in the evaluation of managements judgments in applying the entitys applicable
financial reporting framework.

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d. It can never be used in making decisions about materiality, audit risk and sampling methods.
___14. Independent auditing can best be described as
a. A branch of accounting like financial accounting, management accounting and cost accounting.
b. A professional activity that measures and communicates financial and business data.
c. A discipline which attests to the results of accounting and other functional operations and data.
d. A regulatory function that prevents the issuance of improper financial information.
___15. What is the proper organizational role of internal auditing?
a. To serve as an independent, objective assurance and consulting activity that adds value to
operations.
b. To assist the external auditor in order to reduce external audit fees.
c. To perform studies to assist in the attainment of more efficient operations.
d. To serve as the investigative arm of the audit committee and the board of directors.
___16. In conducting an appraisal of the economy and efficiency with which company resources are used,
an internal auditors responsibility is to
a. Verify the accuracy of asset valuation.
b. Review the reliability of operating information.
c. Verify the existence of assets.
d. Determine whether operating standards have been established.
___17. Which of the following statements is a standard applicable to financial statements audits in
accordance with Government Accounting Standards?
a. An auditor should determine the extent to which the entitys programs achieve the desired level of
results.
b. An auditor should asses whether the entity has reportable measures of economy and efficiency that
are valid and reliable.
c. An auditor should report on the scope of the auditors testing of internal control.
d. An auditor should briefly describe in the auditors report the method of statistical sampling used in
performing tests of controls and substantive tests.
___18. Which of the following best describes why an independent auditor is asked to express an opinion on
the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a companys financial position,
cash flow and operations without the expertise of an independent auditor.
b. It is managements responsibility to seek available independent aid in the appraisal of the
financial information shown in its financial statements.
c. The opinion of an independent party is needed because a company may not be objective with
respect to its own financial statements.
d. It is a customary courtesy that all stockholders of a company receive an independent report on
managements stewardship in managing the affairs of the business.
___19. Internal auditing is a dynamic profession. Which of the following best describes the scope of internal
auditing as it has developed to date?
a. It involves appraising the economy and efficiency with which resources are employed.
b. It involves evaluation compliance with policies, plans, procedures, laws and regulations.
c. It has evolved to verifying the existence of assets and reviewing the means of safeguarding assets.
d. It has evolved to more of an operational orientation from a strictly financial orientation.
___20. Which of the following ultimately determines the specific audit procedures necessary to provide an
independent auditor with a reasonable basis for the expression of an opinion?
a. Philippine standards on auditing
b. The auditors program and working paper
c. The auditors professional judgment
d. The Code of Ethics for CPAs
___21. The primary reasons for a financial statement audit by an independent auditor/CPA is to
a. Provide an increased assurance to users as to the fairness of the financial statements.
b. Guarantee that there are no material misstatements in the financial statements and ensure that
any fraud will be discovered.
c. Satisfy government regulatory requirements.
d. Relieve management of responsibility for the financial statements.
___22. Professional skepticism dictates that when management makes a statement to the auditors, the
auditor should
a. Disregard the statement because it ranks low of the evidence quality scale.
b. Corroborate the evidence with other supporting documentation whenever possible.
c. Require that the statement be put in writing.

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d. Believe the statement in order to maintain the professional client-auditor relationship.
___23. Which of the following would not present one of the primary reasons that would lead to the demand
for the independent audits of a companys financial statements?
a. Management bias in preparing the financial statements.
b. The downsizing of business and financial markets.
c. The complexity of transactions affecting the financial statements.
d. The remoteness of the user from the organization and thus inability of the user to directly obtain
financial information from the company.
___24. Which of the following best describes an operational audit?
a. It requires a constant revenue by internal auditors of the administrative controls as they relate to
operations of the company.
b. It concentrates on implementing financial and accounting control in a newly organized company.
c. It attempts and is designed to verify the fair presentation of a companys results of operations.
d. It concentrates on seeking out aspects of operations in which waste would be reduced by the
introduction of controls.
___25. Which one of the following is an example of proper management expectations for independent
auditors?
a. An expert providing a written communication as the product of the engagement.
b. Individuals who perform day to day accounting functions on behalf of the company.
c. An active participant in management decision-making.
d. An internal source of expertise on financial, accounting and other matters.
___26. Which of the following does not describe a condition that creates a demand for auditing?
a. Conflict between an information provider and a user can result in biased information.
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
___27. Which of the following types of audit uses laws and regulations as its criteria?
a. Operational audit
b. Financial statement audit
c. Compliance audit
d. Performance audit
___28. Most of the independent auditors work in formulating an opinion on financial statements consists of
a. Studying and evaluation internal control
b. Obtaining and examining evidential matter
c. Examining cash transactions
d. Comparing recorded accountability with assets
___29. Which of the following is not considered an inherent limitations of a financial statements audit?
a. The use of sampling/testing in examining evidence.
b. The limitations imposed by the client on the scope of the audit.
c. The possibility of human error due to use of professional judgment.
d. The persuasive nature of evidence rather than being conclusive.
___30. Which of the following statements does not properly describe an element of theoretical framework
of financial statement auditing?
a. The financial data to be audited can be verified.
b. Short-term conflicts may exist between managers who prepare the data and auditors who examine
the data.
c. Auditors can act on behalf of management and may even provide recommendations.
d. An audit benefits the public.

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