MODULE 1

AUDITING CONCEPTS

1. 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 investors and users.
d. decisions are not time-sensitive.

2. Which of the following statements does not properly describe an

element of the theoretical framework of auditing?

a. The data to be audited can be verified.

b. Short-term conflicts may exist between managers who prepare
data and auditors who examine the data.
c. Auditors act on behalf of management.
d. An audit benefits the public.

3. An audit of financial statements is conducted to determine if the

a. organization is operating efficiently and effectively.

b. auditee is following specific procedures or rules set down by
some higher authority.
c. overall financial statements are stated in accordance with
specified criteria.
d. none of the above.

4. Which of the following statements does not describe a condition

that creates a demand for auditing?

a. Conflict between an information preparer 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.

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5. The primary purpose of an independent audit of financial
statements is to

a. provide a basis for assessing management’s performance.

b. comply with laws and regulations.
c. assure management that the financial statements are
unbiased and from material misstatements.
d. provide users with an unbiased opinion about the fairness of
information presented in the financial statements.

6. Why does a company choose to have an independent auditor

report on its financial statements?

a. Independent auditors will always detect management fraud.

b. The company preparing the statements may have a vested
interest in reporting certain results.
c. Independent auditors guarantee the accuracy of the financial
statements.
d. An independent audit is designed to search for deficiencies in
the company's internal controls.

7. Which of the following criteria is unique to the independent

auditor’s attest function?

a. general competence.
b. familiarity with the particular industry of each client.
c. due professional care.
d. independence.

8. Which of the following best describes the main reason why the
independent auditors report on management's financial
statements?

a. A management fraud may exist, and it is likely to be detected

by independent auditors.
b. The management that prepares the statements and the
persons who use the statements may have conflicting
interests.
c. Misstated account balances may be corrected as the result of
the independent audit work.
d. The management that prepares the statements may have a
poorly designed system of internal control

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9. Information risk refers to the risk that

a. the client's financial statements may be materially false and

misleading.
b. the auditor may express an unqualified opinion on financial
statements that are material misstated.
c. the client may not be able to remain in business.
d. errors and frauds would not be detected by the auditor's
procedures.

10. Which of the following is responsible for an entity's financial

statements?

a. the entity's management

b. the entity's audit committee
c. the entity's internal auditors
d. the entity's board of directors

11. A typical objective of an operational audit is for the auditor to

a. determine whether the financial statements fairly present the

entity’s operations.
b. evaluate the feasibility of attaining the entity’s operational
objectives.
c. make recommendation for improving performance.
d. report on the entity’s relative success in maximizing profits.

12. Which of the following types of audits is performed to determine

whether an entity’s financial statements are fairly stated in
conformity with generally accepted accounting principles?

a. Operational audit
b. Financial statement audit
c. Compliance audit
d. Performance audit

13. An independent audit is important to readers of financial

statements because it

a. provides a measure of management’s stewardship function

b. measures and communicates the financial data included in
financial statements

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 c. objectively examines and reports on management’s financial
statements
d. reports on the accuracy of information in the financial
statements

14. 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. d. Financial audit

15. Which of the following types of auditing is performed most

commonly by CPAs on a contractual basis?

a. Internal auditing
b. Government auditing
c. BSP bank audit
d. External auditing

16. The primary goal of the CPA in performing the attest function is to

a. Detect fraud.
b. Examine individual transactions so that the auditor may
certify as to their validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting
procedures.

17. An independent audit aids in the communication of economic

data because the audit

a. confirms the accuracy of management’s financial

representation.
b. lends credibility to the financial statements.
c. guarantees that financial data are fairly presented.
d. assures the readers of financial statements that any
fraudulent activity has been corrected.

18. Which one of the following best describes the attest process?

a. Proving the accuracy of the books and records.

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 b. Gathering evidence about specific and known assertions.
c. Assisting management in the successful operations of the
company.
d. Assembling and filing tax returns and related supplemental
information.

19. 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 cash dividends.
c. the general public in making investment decisions.
d. different groups for different purposes.

20. Which of the following is an example of an assertion made by

management in an entity’s financial statements?

a. the financial statements were prepared in an unbiased

manner.
b. reported inventory balances reflect all related transactions for
the period.
c. reported accounts receivable do not include any uncollectible
accounts.
d. the scope of the auditor’s investigation was not limited in any
way by management.

21. A CPA certificate is an evidence of

a. recognition of independence
b. basic competence at the time the certificate is granted
c. culmination of the education process.
d. membership in the PICPA.

22. The essence of the attest function is to

a. detect fraud.
b. examine individual transactions so that the auditor can certify
as to their validity.
c. determine whether the client’s financial statements are fairly
stated.
d. ensure the consistent application of correct accounting
procedures.

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23. An audit can have a significant effect on

a. information risk.
b. business risk.
c. the risk-free interest rate.
d. all of these.

24. Which of the following is a cause of 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.

25. The main way(s) to reduce information risk is to have

a. the user verify the information.

b. the user share the information risk with management.
c. audited financial statements provided.
d. all of the above.

26. The predominant type of attestation service performed by CPAs is

a. Audit.
b. Review.
c. Compilation.
d. management consulting.

27. Upon completion of a typical audit, the auditor has

a. total assurance that all material errors and irregularities have

been found.
b. high level of assurance that all material errors and
irregularities have been found.
c. a low level of assurance that all material errors and
irregularities have been found.
d. no assurance that all material errors and irregularities have
been found.

28. The single feature that most clearly distinguishes auditing,

attestation, and assurance is

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 a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPA’s approach to the service.

29. Which of the following services provides the highest level of

assurance to third parties about a company’s financial
statements?

a. Audit.
b. Review.
c. Compilation.
d. Each of the above provides the same level of assurance.

30. The most common type of audit report contains

a. the adverse opinion.

b. the disclaimer of opinion.
c. the qualified opinion.
d. the unqualified opinion.

31. The Philippine Standards on Auditing (PSA) require that a report

be issued whenever a CPA firm

a. performs an audit.
b. is engaged to perform any services of any nature.
c. is associated with financial statements.
d. does SEC regulated work.

32. The auditor’s judgment concerning the overall fairness of

presentation of financial position, results of operation, and
changes in cash flow is applied within the framework of

a. quality control
b. generally accepted auditing standards which include the
concept of materiality
c. the auditor’s evaluation of the audited company’s internal
control.
d. generally accepted accounting principles.

33. In “auditing” accounting data, the concern is with

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 a. determining whether recorded information properly reflect the
economic events that occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies
with government requirement.

34. In all cases, audit reports must

a. be signed by the individual who performed the audit

procedures.
b. certify the accuracy of the quantitative information which was
audited.
c. inform readers of the degree of correspondence between the
quantifiable information and the established criteria.
d. communicate the auditor’s findings to the general public.

35. Which one of the following is an example of 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 and other matters

36. When providing consulting services, the CPA acts primarily as

a(n):

a. independent accountant.
b. expert on compliance with industry standards.
c. technology specialist
d. objective advisor on the use of information.

37. In performing attestation services, a CPA will normally:

a. improve the quality of information, or its context, for decision

makers.
b. recommend uses for information.
c. perform market analyses and cost estimates.
d. states a conclusion about a written assertion.

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38. 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 financial and accounting
control in a newly organized company.
c. It attempts and is designed to verify the fair presentation of a
company's results of operations.
d. It concentrates on seeking out aspects of operations in which
waste would be reduced by the introduction of controls.

39. Evidence is defined as any information used by the auditor to

determine whether the quantifiable information being audited is
stated in accordance with the established criteria. Evidence takes
many different forms, including

a. oral representation (testimony) of the client management.

b. written communication (confirmation) with outsiders.
c. observation made by the auditor.
d. all of the above.

40. Because an external auditor is paid a fee by a client company, he

a. is absolutely independent and may conduct an audit.

b. may be sufficiently independent to conduct an audit.
c. is never considered to be independent.
d. must receive approval of the Securities and Exchange
Commission before conducting an audit.

41. Which of the following statements best describes review services?

a. Review engagements focus on providing assurance on the

assertions contained in the financial statements of a public
company.
b. Review engagements focus on providing assurance on the
internal controls of a public company.
c. Review engagements focus on providing limited assurance on
financial statements of a private company.
d. Review engagements focus on providing advice in a three-
party contract.

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42. A typical objective of an operational audit is to determine whether
an entity's

a. financial statements fairly present financial position and cash

flows.
b. financial statements present fairly the results of
operations.
c. financial statements fairly present financial position, results of
operations, and cash flows.
d. Specific operating units are functioning efficiently and
effectively.

43. Which of the following is more difficult to evaluate objectively?

a. Efficiency and effectiveness of operations.

b. Compliance with government regulations.
c. Presentation of financial statements in accordance with
generally accepted accounting principles.
d. All three of the above are equally difficult.

44. An audit which is undertaken in order to determine whether the

auditee is following specific procedures or rules set down by some
higher authority is classified as a(n)

a. audit of financial statements.

b. compliance audit.
c. operational audit.
d. production audit.

45. Assurance services involve which of the following?

a. Relevance as well as reliability.

b. Nonfinancial information as well as traditional financial
statements.
c. Electronic databases as well as printed reports.
d. All of the above.

46. An expectation of the public is that the auditor will recognize that
the primary users of audit services are:

a. the employees
b. the Securities and Exchange Commission

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 c. the investors and creditors
d. the board of directors

47. Which of the following is a difference between attestation

standards and auditing standards?

a. Attestation standards cover attest engagements other than

those involving GAAP financial statements.
b. Attestation standards do not require independence in mental
attitude.
c. Auditing standards apply only to CPAs while attestation
standards apply to all accountants.
d. Attestation standards do not include standards of reporting.

48. Which of the following pertains to the reliability of audit evidence?

a. The independence of the source of evidence.

b. The experience level of the auditor who obtains the evidence.
c. Whether the audit client uses a manual or computerized
accounting system.
d. The quantity of the evidence obtained.

49. Professional skepticism dictates that when management makes a

statement to the auditors, the auditors 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.
d. Believe the statement in order to maintain the professional
client-auditor relationship.

50. The audit committee of the board of directors of a company is

responsible for:

a. hiring the auditor

b. preparing the financial statements
c. the audit workpapers
d. independence and obtaining evidence

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51. Which of the following statements is true concerning a compliance
audit?

a. Compliance audits are only performed by government

auditors.
b. Risks such as inherent risk, control risk, and detection risk
are not appropriate in the planning and performance of a
compliance audit.
c. Materiality is difficult to measure in a compliance audit.
d. A report on compliance can only include negative assurance.

52. The form of attestation that provides the highest form of

assurance is a(n):

a. Assembly
b. Review.
c. Compilation.
d. Examination.

53. Audits of financial statements include an expression of a

conclusion about which of the following financial statement
characteristics?

a. Governance.
b. Reliability.
c. Relevance.
d. Timeliness.

54. A review of a company's financial statements by a CPA firm:

a. Is significantly less in scope than an audit and results in a

report which provides positive assurance, although not
absolute assurance.
b. Is similar in scope to an audit and adds similar credibility to
the statements.
c. Concludes with the issuance of a report expressing the CPA's
opinion as to the fairness of the statements.
d. Is designed to provide only limited or moderate assurance.

55. In performing a financial statement audit, which of the following

would an auditor least likely consider?

a. Internal control.

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 b. Compliance with GAAP.
c. Quality of managements' business decisions.
d. Fairness of the financial statement amounts.

56. Which of the following is not considered a type of audit?

a. Operational audit.
b. Sufficiency audit.
c. Compliance audit.
d. Financial statement audit.

57. The attest function:

a. Is an essential part of every engagement performed by a CPA.

b. Requires a complete review of all transactions during the
period under examination.
c. Requires a review of a sample of transactions during the
period under examination.
d. Includes the preparation of a written report of the CPA's
conclusion.

58. The level of assurance provided by an audit of detecting a material

misstatement is referred to as:

a. Absolute assurance.
b. High assurance.
c. Negative assurance.
d. Reasonable assurance.

59. Broadly defined, the subject matter of any audit consists of

a. Assertions.
b. operating data.
c. Financial statements.
d. Economic data.

60. The expertise the distinguishes auditors from accountants is in

the

a. ability to interpret generally accepted accounting principles.

b. requirement to possess education beyond the Bachelor’s
degree.
c. accumulation and interpretation of evidence.

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 d. ability to interpret SFAS Statements.

61. An audit involves ascertaining the degree of correspondence

between assertions and established criteria. In the case of
financial statement audit, which of the following is not a valid
criterion?

a. Accounting standards generally accepted in the Philippines.

b. International Accounting Standards.
c. Authoritative financial reporting framework.
d. Philippine Standards on Auditing.

62. Most of the independent auditor’s work in formulating an opinion

on financial statements consists of

a. Studying and evaluating internal control.

b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with physical existence of
property.

63. The audit process is

a. a special application of the scientific method of inquiry

b. regulated by the PICPA
c. the only service a CPA is allowed to perform by law
d. performed only by CPAs

64. The audit of historical financial statements should be conducted

by the CPA professionals in accordance with

a. Generally accepted accounting principles.

b. Philippine Standards on Auditing.
c. The auditor’s judgment.
d. The audit program.

65. Every CPA professional is required to perform the audit of

financial statements according to generally accepted auditing
standards in order to

a. Eliminate audit risk.

b. Eliminate the professional judgment in resolving audit issues.
c. Have a measure of the quality of audit performance.

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 d. To reduce the audit program to be prepared by the auditor.

66. What is the overall objective of internal auditing?

a. To attest to the efficiency with which resources are used.

b. Ascertain that the cost of internal control is justified.
c. To ascertain that financial statements present accurately the
financial position, operating results, and changes in cash and
stockholders’ equity.
d. To help members of the organization to effectively discharge
their responsibilities.

67. The auditor gathers evidential matter in order to

a. detect fraud and irregularity.

b. evaluate management’s stewardship.
c. eliminate detection risk.
d. form an opinion with respect to financial assertions.

68. In determining the primary responsibility of the external auditor

for a company’s financial statements, the auditor owes primary
allegiance to:

a. The management of the audit client because the auditor is

hired and paid by management.
b. The audit committee of the audit client because that
committee is responsible for coordinating and reviewing all
audit activities within the company.
c. Stockholders, creditors, and the investing public.
d. The Auditing and Assurance Standards Council, because it
determines auditing standards and auditor responsibility.

69. Which of the following would not represent one of the primary
problems that would lead to the demand for independent audits of
a company’s financial statements?

a. Management bias in preparing financial statements.

b. The downsizing of business and financial markets.
c. The complexity of transactions affecting financial statements.
d. The remoteness of the user from the organization and thus
the inability of the user to directly obtain financial information
from the company.

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70. Assurance services involve all the following except:

a. Improving the quality of information for decision purposes.

b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of
information.

71. Which of the following statements is (are) true regarding the

provision of assurance services?

I. The third party who receives the assurance generally pays

for the assurance received.
II. Assurance services always involve a report by one person to
a third party on which an independent organization
provides assurance.
III. Assurance services can be provided either on information or
processes.

a. I and II.
b. II and III.
c. III only.
d. I, II, and III.

72. Which of the following is the broadest concept?

a. Audits of financial statements.

b. Internal control audit.
c. Assurance services.
d. Attestation services.

73. Which of the following is a correct statement?

a. An audit provides limited assurance by attesting to the

fairness of the client’s assertions.
b. A review provides positive assurance by attesting the
reliability of the client’s assertions.
c. Management consulting services provide attestation in all
cases.
d. Accounting services do not provide attestation.

74. Unlike consulting services, assurance services:

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 a. Make recommendation to management
b. Report on how to use information
c. Report on the quality of information
d. Are two-party contracts.

75. Financial statements audits:

a. Reduce the cost of capital

b. Report on compliance with laws and regulations
c. assess management‘s efficiency
d. overlook information risk

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