MONTERON, Janien Mae S.

INTRODUCTION TO AUDITING

1. The auditor must a. Be qualified to understand the criteria used. b. Be competent to know the types and amount of evidence to accumulate. c. Have an independent mental attitude. d. Possess a, b, and c.

2. The independent auditor lends credibility to client financial statements by a. Stating in the auditors management letter that the examination was made in accordance with GAAS. b. Maintaining a clear-cut distinction between managements representations and the auditors representations. c. Attaching an auditors opinion to the clients financial statements. d. Testifying under oath about clients financial information.

3. Which of the following best describes the reason why an independent auditor reports on financial statements? a. A management fraud may exist and it is more likely to be detected by independent auditors. b. Different interests may exist between the company preparing the statements and the person using the statements. c. A misstatement of account balance may exist and is generally corrected as a result of the independent auditors work. d. A poorly designed internal control system may be in existence.

4. Independent auditors of financial statements perform audits that reduce and control: a. The business risks by investors. b. The information risk faced by investors. c. The complexity of financial statements. d. Quality reviews performed by other CPA firms.

5. The main way/s to reduce information risk is to have a. The user verifies the information. b. The user shares the information risk with management.

c. Audited financial statements provided. d. All of the above.

6. The most important benefit of having an annual audit by a CPA firm is to: a. Provide assurance to investors and other outsiders that the financial statements are dependable. b. Enable officers and directors to avoid personal responsibility for any misstatement in the financial statements. c. Meet the requirements of government agencies. d. Provide assurance that illegal acts, if any exist, will be brought to light. 7. Operational audits often have an objective of determining whether an entitys: a. Internal control is adequately operating as designed. b. Operational information is in accordance with generally accepted governmental auditing standards. c. Financial statements present fairly the results of operations. d. Specific operating units are functioning efficiently and effectively.

8. 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 of the board of directors.

9. Broadly defined, the subject matter of any audit consists of a. Financial statements b. Economic data c. Assertions d. Operating data

10. 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 Reporting Standards c. National Internal Revenue Code d. Regulations of the Security and Exchange Commission

11. Which of the following types of audit uses laws and regulations as its criteria? a. Operational audit b. Financial statements audit c. Compliance audit d. All of the above

12. In financial statement audits, the audit process should be conducted in accordance with a. The audit program b. Philippine Standards on Auditing c. Philippine Accounting Standards d. Philippine Financial Reporting Standards

13. The purpose of an audit is to a. Detect fraud, technical errors and errors of principle. b. Add credibility to the financial statements of a business organization. c. Both a and b d. Either a or b

14. The following are information risk, except a. Potential bias and motives of information provider b. Voluminous data c. Complex exchange transactions d. Allow users to verify information

15. Which of the following types of audit has recommendation or suggestion on how to improve operations in the auditors report? a. Operational audit b. Performance audit c. Management audit d. All of the above

16. 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.

17. 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 recognized accounting principle have been consistently

18. 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 19. 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

20. 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 auditors responsibility for detection and prevention of errors and frauds is similar. d. All statements are correct. 21. 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)

22. Which of the following is not a limitation of audit? a. Objectivity of auditors judgment b. Selective testing c. Persuasiveness of evidence d. Limitations of internal control system.

23. 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.

24. 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

25. 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

26. 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.

27. 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.

28. 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 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.

29. 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. 30. Which of the following is not likely to be a fraud risk factor relating to managements characteristics? a. Tax evasion b. Failure to correct known weakness in internal control system c. Adoption of conservative accounting principles d. High management turnover

31. 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

32. 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) Organization structure a. (i) and (ii) b. (ii) and (iii) c. (i) , (ii) and (iii) d. i) and (iii)

33. 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 auditors method of sample selection.

34. 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

35. 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 auditors 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)

36. 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 entitys business c. Inform management about it d. Take help of other auditors 37. The least important element in the evaluation of an audit firms system of quality control would relate toa. Assignment of audit assistants b. System of determining audit fees c. Consultation with experts d. Confidentiality of clients information

38. The primary purpose of establishing quality control policies and procedures for deciding on client evaluation is toa. 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

39. 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 auditors advice as to whether audit fees were paid promptly d. Review of audit work done by one partner by the other 40. An auditor obtains knowledge about a new clients business and its industry toa. Make constructive suggestions concerning improvements to the clients internal control system. b. Evaluate the appropriateness of audit evidence obtained c. Understand the events and transactions that may have an effect on clients financial statements. d. All of the above

ANSWERS:

1. d 2. c 3. b 4. b 5. d 6. a 7. d 8. a 9. c 10. b 11. c 12. b 13. b 14. d 15. d 16. d 17. c 18. b 19. a 20. b

21. d 22. a 23. b 24. d 25. b 26. a 27. d 28. b 29. a 30. c 31. b 32. a 33. d 34. c 35. d 36. b 37. b 38. b 39. c 40. c