Compilation of Practice Set Questions with Answers on Audit in General

1. Which of the following is not one of the reasons that auditors provide reasonable, but not
absolute assurance on the financial statements?
a. The auditor commonly examines a sample, rather than the entire population of
transactions.
b. Accounting presentations contain complex estimates which inherently involve
uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

Answer: D

2. The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to
a. The auditor
b. Management
c. Both management and the auditor equally
d. Management for the statements and the auditor for the notes

Answer: B

3. Which of the following statements is true when the CPA has been engaged to do an audit
engagement?
a. The CPA firm is engaged and paid by the client; therefore, the firm has primary
responsibility to be an advocate for the client.
b. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the
audit are the statement users.
c. Should a situation arise where there is no convincing authoritative standard available,
and there is a choice of actions which could impact client’s financial statements either
positively or negatively, the CPA is free to endorse the choice which is in the client’s
interests.
d. As long as CPA firms are competent, it is not required that they remain unbiased.

Answer: B

4. The procedures deemed necessary in the circumstances to achieve the objective of a

financial statement audit shall be determined by the
a. Client management
b. Independent auditor
c. Internal auditor
d. Those charged with governance

Answer: B

5. Which of the following is an example of management expectations from the independent

auditors?
a. An active participant in management decision making
b. An internal source of expertise of financial and other matters
c. An expert providing a written communication as the product of the engagement
d. Individuals who perform day-to-day accounting functions on behalf of the company

Answer: C

6. One of the conditions that give rise 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
context?
 a. Auditors usually rely on the work of an expert as a basis for evaluating some assertions
embodied in the financial statements.
b. The readers of the financial statements must possess the necessary expertise to be able
to understand the financial statements.
c. Users usually lack the necessary expertise to verify the reliability of the financial
information.
d. Ass experts, auditors are expected to detect all material misstatements in the financial
statements.

Answer: C

7. Auditors accumulate evidence to

a. Defend themselves in the event of a lawsuit
b. Justify the conclusions they have otherwise reached
c. Satisfy the requirements of the Securities Acts of 1933 and 1934
d. Enable them to reach conclusions about the fairness of the financial statements and
issue an appropriate audit report.

Answer: D

8. The objective of the ordinary examination by the independent auditor is the expression of
an opinion on
a. The fairness of the financial statements
b. The accuracy of the financial statements
c. The accuracy of the annual report
d. The balance sheet and income statement

Answer: A

9. Which of the following is not one of the reasons why auditors provide only reasonable
assurance on the financial statements?
a. The auditor commonly examines a sample, rather than the entire population of
transactions.
b. Accounting presentations contain complex estimates which involve uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

Answer: D

10. Upon completion of a financial statement audit, the auditor has

a. No assurance that the financial statements are fairly presented
b. Absolute assurance that the financial statements are fairly presented
c. Reasonable assurance that all material errors and irregularities have been detected
d. A low level of assurance that all material errors and irregularities have been found

Answer: C

11. Recording, classifying, and summarizing economic events in a logical manner for the
purpose of providing financial information for decision making is commonly called:
a. Finance
b. Auditing
c. Accounting
d. Economics

Answer: C
12. 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. Philippine Standards on Auditing
b. International Accounting Standards
c. Authoritative Financial Reporting Framework
d. Accounting standards generally accepted in the Philippines

Answer: A

13. The subject matter of the financial statement audit is the

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

Answer: A

14. Whenever a CPA professional is engaged to perform an audit of financial statements

according to Philippine Standard on Auditing, he is required to comply with those
standards in order to
a. Eliminate audit risk
b. Meet the minimum requirement when providing audit services
c. To reduce the auditor’s responsibility
d. Eliminate the professional judgment in resolving audit issues

Answer: B

15. 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 Securities and Exchange Commission

Answer: B

16. In “auditing” financial accounting data, the primary concern is with

a. Determining whether recorded information properly reflects 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
requirements

Answer: A

17. 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 the applicable financial
reporting framework
d. Client’s internal control is functioning as intended

Answer: C

18. In determining the primary responsibility of the external auditor for an audit of a
company’s financial statements, the auditor owes primary allegiance to
 a. Stockholders, creditors and the investing public
b. The management of the audit client because the auditor is hired and paid by
management
c. The Auditing and Assurance Standards Council, because it determines auditing
standards and auditor’s responsibility
d. The audit committee of the audit client because that committee is responsible for
coordinating and reviewing all audit activities within the company

Answer: A

19. 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

Answer: B

20. An audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity’s operating activities in relation to specified objectives is a(n):
a. External audit
b. Compliance audit
c. Operational audit
d. Financial statement audit

Answer: C

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

a. Efficiency and effectiveness of operations
b. Compliance with applicable government regulations
c. Presentation of financial statements in accordance with the applicable financial
reporting criteria
d. All the given criteria are equally difficult to evaluate objectively

Answer: A

22. Most of the independent auditor’s work in formulating an opinion on financial statements
consists of
a. Obtaining and examining evidence
b. Examining cash transactions
c. Comparing recorded accountability with assets
d. Studying and evaluating internal control

Answer: A

23. An audit involves ascertaining the degree of correspondence between assertions and
established criteria. In the case of an audit of financial statements, which of the following
would be a valid criterion?
a. International Standards on Auditing
b. Philippine Standards on Auditing
c. Generally Accepted Accounting Principles
d. Quality Control Standards

Answer: C

24. Internal auditors are expected to add value to the organization through improved
operational effectiveness. In addition, their responsibilities include all of the following
except:
 a. Reviewing the reliability and integrity of information
b. Ensuring compliance with the company’s accounting policies
c. Verifying accounting information for external users
d. Ensuring compliance with applicable governmental regulations

Answer: C

25. 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

Answer: C

26. Which of the following best describes an operational audit?

a. It attempts of verifying the fair presentation of a company’s results of operations.
b. It concentrates on implementing financial and accounting control in a newly organized
company.
c. It concentrates on seeking out aspects of operations in which waste could be reduced
by the introduction of controls.
d. It requires a constant review of the administrative controls by internal auditors as they
relate to operations of the company.

Answer: C

27. A typical objective of an operational audit is to determine whether an entity’s

a. Internal control structure is adequately operating as designed
b. Operational information is in accordance with generally accepted accounting principles
c. Specific operating units are functioning efficiently and effectively
d. Financial statements present fairly the results of operations

Answer: C

28. Which of the following types of auditing is performed most commonly by CPAs on a
contractual basis?
a. Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing

Answer: D

29. When performing an operational audit, the internal audit team must first determine that:
a. A financial audit has been performed by an independent auditor
b. A financial audit has been performed by an internal auditor
c. A review was performed by either an independent or an internal auditor
d. Specific criteria are developed to define effectiveness

Answer: D

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

Answer: B
31. An audit designed to provide reasonable assurance of detecting violations of a specific
provisions of contracts or grant agreements would be called a(n):
a. Performance audit
b. Management audit
c. Operational audit
d. Compliance audit

Answer: D

32. One objective of an operational audit is 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 recommendations for improving performance
d. Report on the entity’s relative success in attaining profit maximation

Answer: C

33. An examination of part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit?
a. Operational audit
b. Compliance audit
c. Financial statement audit
d. Production audit

Answer: A

34. Which of the following is not one of the major differences between financial and
operational auditing?
a. The financial audit is oriented to the past, but an operational audit concerns
performance for the future.
b. The financial audit report has widespread distribution, but the operational audit report
has limited distribution.
c. Financial audit deals with the information on the financial statements, but operational
audits are concerned with the information in the ledgers and journals.
d. Financial auditors are limited to matters that directly affect the fairness of the financial
statement presentation, but operational audits cover any aspect of efficiency and
effectiveness.

Answer: C

35. Which of the following is not a major difference between operational and financial
auditing?
a. Purpose of the audit
b. Distribution of the report
c. Testing the effectiveness of internal controls
d. Audits of non-financial areas

Answer: C

36. Independent external auditing can best be described as a

a. Professional activity that measures and communicates financial accounting data
b. Subset of accounting
c. Professional activity that attests to the fair presentation of financial statements
d. Regulatory activity that prevents the issuance of misleading financial information

Answer: C
37. The overall objective of internal auditing is to
a. Attest to the efficiency with which resources are employed
b. Ascertain that controls are costs justified
c. Provide assurance that financial data have been accurately recorded
d. Assist members of the organization in the effective discharge of their responsibility

Answer: D

38. Internal auditors report to

a. The audit committee of the board of directors
b. Management
c. External auditors
d. The government regulators

Answer: A

39. Which of the following is not a similarity between external and internal auditors?
a. Both must be independent of the company
b. Both must be competent
c. Both follow a similar methodology in performing their audits
d. Both consider risk and materiality deciding the extent of their tests and evaluating
results

Answer: A

40. Internal auditing is an independent appraisal function established within an organization

to examine and evaluate its activities. To that end, internal auditing provides assistance to
a. External auditors
b. Stockholders
c. Management and the board of directors
d. Government

Answer: C

41. Which of the following groups could not be involved in an operational audit?
a. External auditors
b. Internal auditors
c. Government auditors
d. All of the above could be involved

Answer: D

42. 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
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.

Answer: B

43. 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

Answer: A

44. An audit of the financial statements of JMV Corporation is being conducted by an

external auditor. The external auditor is expected to
a. Express an opinion as to the fairness of JMV’s financial statements
b. Express an opinion as to the attractiveness of JMV for investment purposes
c. Certify the correctness of JMV’s financial statements
d. Examine all evidence supporting JMV’s financial statements

Answer: A

45. The primary purpose of an independent financial statement audit is to

a. Provide a basis for assessing management’s performance
b. Comply with government regulatory requirements
c. Assure management that the financial statements are unbiased and free from material
error
d. Provide users with an unbiased opinion about the fairness of information reported in
the financial statements

Answer: D

46. Which of the following statements about independent financial statement audit is correct?
a. The audit of financial statements relieves management of its responsibilities for the
financial statements.
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.

Answer: D

47. By providing high level of assurance on audit reports on financial statements, the auditor
a. Guarantees the fair presentation of the financial statements
b. Confirms the accuracy of the financial statements
c. Enhances the credibility of the financial statements
d. Assures the readers that fraudulent activities of employees have been detected

Answer: C

48. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management’s performance
d. Evaluate the entity’s internal control

Answer: A

49. The trait that distinguishes auditors from accountants is the

a. Auditor’s ability to interpret accounting standards
b. Auditor’s education beyond Bachelor’s degree
c. Auditor’s ability to interpret PFRS
 d. Auditor’s accumulation and interpretation of evidence related to the company’s
financial statements

Answer: D

50. The level of assurance provided by an auditor on an audit report is

a. Low
b. High
c. Moderate
d. None

Answer: B

51. Theoretically, it is possible to provide an infinite range of assurance from a very low
level of assurance to an absolute level of assurance. In practice, the professional
accountants cannot provide absolute assurance because of the following except,
a. The internal control has its inherent limitations
b. The professional accountants employ testing process
c. The lack of expertise of the professional accountants in doing a systematic
engagement process
d. The use of judgment in gathering evidence and drawing conclusions based on that
evidence

Answer: C

52. 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

Answer: B

53. 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 statements 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.

Answer: D

54. Which of the following is one of the limitations of an audit?

a. The possibility that management may prevent the auditor from performing the
necessary audit procedures.
b. The likelihood that the auditor may not be able to detect material misstatements in the
financial statements because the auditor is engaged only after year-end.
c. The fact that most audit evidence is persuasive rather than conclusive in nature.
d. The risk that the auditor may not possess the training and proficiency required by the
engagement.

Answer: C

55. The independent audit is important to readers of financial statement because it

a. Determines the future stewardship of the management of the company whose
financial statements are audited.
b. Measures and communicates financial and business data involved in financial
statements.
 c. Involves the objective examination of and reporting on management prepared
statements.
d. Reports on the accuracy of all information in the financial statements.

Answer: C

56. Which one of the following is not among the conditions that give rise to a demand by
external users for independent audits of financial statements?
a. Remoteness of users
b. Complexity of making economic decisions
c. Potential conflict of interest between users and preparers of the statements
d. Consequence for making decisions

Answer: B

57. Financial statement users often receive unreliable financial information from companies.
Which of the following is not a common reason for this?
a. Complex exchange transactions
b. Voluminous data
c. Bias in the preparation of financial statements
d. Each of these choices is a common reason for unreliable financial information

Answer: D

58. 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 procedures 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.

Answer: B

59. The primary reason for an audit by an external audit firm is

a. To satisfy governmental regulatory requirements.
b. To guarantee that there are no misstatements in the financial statements.
c. To provide increased assurance to users as to the fairness of the financial statements.
d. To ensure that any fraud will be discovered.

Answer: C

60. Which of the following would not represent one of the primary problems that would lead
the users to demand for independent audits of a company’s financial statements?
a. The downsizing of business and financial markets.
b. Management bias in preparing financial statements.
c. The complexity of transactions affecting financial statements.
d. The remoteness of the user to directly obtain financial information from the company.

Answer: A

61. The need for independent audits of financial statements can be attributed to all of the
following conditions except:
a. Remoteness
b. Consequence
c. Complexity of subject matter
d. Validity
 Answer: D

62. 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
persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as the result
of the independent auditor’s work.
d. A poorly designed internal control system may be in existence.

Answer: B

63. 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.

Answer: D

64. There are four conditions that 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 actions.
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 decisions.

Answer: D

65. 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 managers who prepare the data and auditors
who examine the data.
c. Auditors act on behalf of the management
d. An audit benefits the public

Answer: C

66. Auditing is based on the assumption that financial data are verifiable. Data are verifiable
when two or more qualified individuals,
a. Working together, can prove, beyond doubt, the accuracy of the data.
b. Working independently, each reach essentially similar conclusions.
c. Working independently, can prove, beyond reasonable doubt, the truthfulness of the
data.
d. Working together, can agree upon the accuracy of the data.

Answer: B

67. Which of the following one of the assumptions when auditing financial statements?
a. The data in the financial statements are verifiable.
b. Compliance to PFRS results in fair presentation of financial statements.
 c. Effective internal control system contributes little to the reliability of financial
information.
d. The auditor should be independent.

Answer: C

68. Which of the following is incorrect about responsibility for financial statements?
a. Management is responsible for fair presentation of the financial statements.
b. Auditor is responsible for expressing an opinion on the financial statements.
c. Audit of financial statements does not reduce management’s responsibility.
d. Fair presentation of financial statements is an implicit part of the auditor’s
responsibility.

Answer: D

69. The best statement of the responsibility of the auditor with respect to audited financial
statement is:
a. The auditor’s responsibility on fair presentation 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 financial
statements audited.
c. The responsibility over the financial statements rests with the management and the
auditor assumes responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unmodified opinion but not for any types of
opinion.

Answer: B

70. Which of the following statements about independent financial statement audit is
incorrect?
a. Scope of the audit refers to audit procedures deemed necessary in the circumstances
to achieve the objective of the audit.
b. The auditor’s opinion enhances the credibility of the financial statements.
c. The phrase used to express the auditor’s opinion is “present fairly, in all material
respects”.
d. The risk that the auditor will fail to uncover material misstatement is eliminated when
the auditor conducts the audit in accordance with PSAs.

Answer: D

71. 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. The work undertaken by the auditor is permeated by judgment.
c. The auditor might misinterpret the evidence obtained.
d. Most of the items in the financial statements do not have supporting evidence.

Answer: D

72. Which of the following is one of the limitations of an audit?

a. Nature of evidence obtained
b. Inadequacy of the accounting records
c. Confidentiality of information
d. Scope limitations imposed by the entity

Answer: A

73. The assumption underlying an audit of financial statements is that they will be used by
a. Different groups for different purposes.
b. The general public in making investment decisions.
c. The board of directors as basis of declaring cash dividends.
d. The regulatory agencies to verify information that is relevant to their supervisory
functions.

Answer: A

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