CHAPTER 1

1. Broadly defined, the subject matter of any audit consist of

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

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

a. Organization is operating efficiency and effectively
b. Auditee is following specific procedures or rules set down by some higher authority
c. Overall financial statement statements are stated in accordance with the applicable financial
reporting framework
d. Client’s internal control is functioning as intended

3. Most of the independent auditor’s work in formulating an opinion on financial statement consist of
a. Studying and evaluating internal control
b. Obtaining and examining evidential matter
c. Examining cash transaction
d. Comparing recorded accountability with assets

4. In financial statement audits, the audit process should be conducted in accordance with
a. The audit program
b. Philippine standard on auditing
c. Philippine accounting standards
d. Philippine Financial Reporting Standards

5. Which of the following best describe 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. In 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.

6. The auditor communicates the results of his or her work through the medium if the
a. Engagement letter
b. Audit report
c. Management letter
d. Financial statement

7. Which of the following types 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 auditing

8. Independent auditing can best be describe as a

a. Professional activity that measures and communicates financial accounting data
b. subset accounting
c. Professional activity that attest to the fair presentation of financial statement
d. Regulatory activity that prevents the issuance of improper financial information

9. 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 entity, 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 auditor’s span of coverage goes beyond financial auditing to encompass
operational and performance auditing.

10. Which of the following has the primary responsibility for the fairness of the representations made in
the financial statements?
a. Client’s management
b. Audit Committee
c. Independent auditor
d. Board of Accountancy

11. An audit of the financial statements of KIA Corporation is being conducted by an external auditor.
The external auditor is expected to
a. express an opinion as to the fairness of KIA’s financial statements.
b. express an opinion as to the attractiveness of KIA for investment purposes.
c. certify the correctness of KIA’s Financial Statements.
d. examine all evidence supporting KIA’s financial statements.

12. Which of the following statements about independent financial statements audit is correct?
a. The audit of financial statements relieves management of its responsibilities for the financial
statement
b. An audit is designed to provide limited assurance that the financial statements taken as a
whole are free from material misstatement
c. The procedures required to conduct an audit in accordance with PSAs should be determined
by the client who engaged the services of the auditor.
 d. The auditor’s opinion is not an assurance as to the future viability of the entity as well as the
effectiveness and efficiency with which management has conducted the affairs of the entity.

13. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management
d. Evaluate internal controls

14. An attitude that includes a questioning mind and critical assessment of audit evidence is referred to
as
a. Due professional care
b. Professional skepticism
c. Reasonable assurance
d. Supervision

15. Jack has been retained as auditor of EVC Company. The function of Jack’s opinion on financial
statements of EVC Company is to
a. Improve financial decisions of company management
b. Lend Credibility to management’s representation
c. Detect fraud and abuse in management operations
d. Serve requirements of BIR, SEC, or Central Bank

16. Which of the following is not one of the limitations of an audit?

a. The use of testing
b. Limitations imposed by client
c. Human error
d. Nature of evidence that the auditor obtains

17. 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. Some evidence supporting peso representation in the financial statement must be obtained
by oral or written representation of management.
c. Fatigue can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.

18. Which of the following is not one of the general principles governing the audit of financial
statements?
a. The auditor should plan and perform the audit with an attitude of professional skepticism.
b. The auditor should obtain sufficient appropriate evidence primarily through inquiry and
analytical procedure to be able to draw reasonable conclusions.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.
19. 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 consequence for a decision-maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.

20. Which of the following statements does not properly describe an element of theoretical framework
of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between mangers who prepare the data and auditors who
examine the data.
c. Auditors act on behalf of the management.
d. An audit benefits the public