Auditing Theory Questions (Answer Keys 3)

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BS Accountancy (Eastern Visayas State University)
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AUDITING THEORY MCQ BY SALOSAGCOL
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?

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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.

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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.

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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
CHAPTER 2

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1. An intentional act by one more individuals among management, employees, or third parties which
results in misrepresentation of financial statement refers to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts
2. The responsibility for the detection and prevention of errors, fraud and noncompliance with laws
and regulations rests with
a. Auditor
b. Client’s legal counsel
c. Fraud
d. Illegal acts
3. The auditor’s best defense when material misstatements in the financial statements are not
uncovered in the audit is that
a. The audit was conducted in accordance with generally accepted accounting principles
b. Client is guilty of contributory negligence
c. The audit was conducted in accordance with PSAs
d. Issuing a representation letter to the auditor
4. The following statements relate to the auditor’s responsibility for the detection of errors and fraud.
Identify the correct statements.
I. Due to the inherent limitation of the audit, there is a possibility that material
misstatements in the financial statements may not be detected.
II. The subsequent discovery of material misstatement of the financial
information resulting from fraud or error does not, in itself, indicate that the
auditor failed to follow the basic principles and essential procedures of an
audit.
a. I only
b. Both Statements are true
c. II only
d. Both statements are false
5. What primarily differentiates fraud from an error

a. Materiality
b. Effect on misstatements
c. Intent
d. Frequency of occurrence
6. The term “error” refers to unintentional misrepresentation of financial information. Examples of

errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded

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III. Records and documents have been manipulated and falsified

IV. The effects of the transaction have been omitted from the records
a. all of the above statements are true
b. only statements I and III are true
c. all of the above statements are false
d. only statement II and IV are true
7. Which of the following best identifies the two types of fraud?
a. Theft of assets and employee fraud.

b. Misappropriation of asset and defalcation.
c. Management fraud and employee fraud.
d. Fraudulent financial reporting and management fraud.
8. Which of the following statements best describe an auditor’s responsibility to detect errors
and fraud?
a. An auditor should assess the risk that errors and fraud may cause the financial
statements to contain material misstatements and should design the audit to
provide reasonable assurance of detecting errors and fraud that are material to the
financial statements.
b. An auditor is responsible to detect material errors, but has no responsibility to
detect material fraud that are concealed through employee collusion or
management override of the internal control structure.
c. An auditor has no responsibility to detect errors and fraud unless analytical
procedures or tests of transactions identify conditions causing a reasonably prudent
auditor to suspect that the financial statements were materially misstated.
d. An auditor has no responsibility to detect errors and fraud because an auditor is not
an insurer and an audit does not constitute a guarantee.
9. “The auditor would ordinarily expect to find evidence to support management

representations and not assume that they necessarily correct”. This is an example of
a. Unprofessional behavior
b. An attitude of professional skepticism
c. Due diligence
d. A rule in code of professional conduct.
10. Which of the following statement is true?
a. It is usually easier for the auditor to uncover fraud than errors.

b. It is usually easier for the auditor to uncover errors than fraud.
c. It is usually equally difficult for the auditor to uncover errors or fraud.
d. Usually, the auditor does not design procedures to uncover fraud or errors.
11. The most difficult type of misstatement to detect is fraud based on

a. The over recording of transaction

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b. The non-recording of transactions

c. Recorded transactions in subsidiaries
d. Related party receivable
12. If an auditor was engaged to discover errors or fraud and the auditor performed extensive
detail work, which of the following could the auditor be expected to detect?
a. Misposting if recorded transactions

b. Unrecorded transaction
c. Counterfeit signatures on paid checks
d. Collusive fraud
13. Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud and error rests with
management.
b. The auditor is not and cannot be held responsible for the detection of fraud or error.
c. In planning an audit, the auditor should assess the risk that fraud or error may cause
the financial statements to contain material misstatement.
d. The risk of not detecting material fraud is higher than the risk of not detecting a
material misstatement arising from error.
14. Which of the following statement about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the prevention of fraud and
error.
b. The responsibility for the prevention and detection of fraud and error rests with
management.
c. The auditor should plan and perform the audit with an attitude of professional
skepticism, recognizing that conditions or events may be found that fraud or error
may exist.
d. The likelihood of detecting fraud is ordinarily higher than that of detecting error.
15. Which of the following is not an assurance that the auditors give to the parties who rely on
the financial statements?
a. Auditors know how the amounts and disclosures in the financial statements were
produced.
b. Auditor’s give assurance that the financial statements are accurate.
c. Auditors gathered enough evidence to provide a reasonable basis for forming an
opinion.
d. If the evidence allows the auditors to do so, auditors give assurance in the form of
opinion, as to whether the financial statements as a whole are fairly presented in
conformity with GAAP.
16. Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property, plant and equipment
asset account.

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b. Improper revenue recognition

c. Improper interest expense accrual
d. Introduction of significant new products
17. Which of the following conditions or events would least likely increase risk of fraud or error?
a. Questions with respect to competence or integrity of management

b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail
18. Which of the following would be least likely to suggest to an auditor that the client’s financial
statement are materially misstated?
a. There are numerous delays in preparing timely internal financial reports.

b. Management does not correct internal control structure weaknesses that it knows
about.
c. Differences are reflected in the customer’s confirmation replies.
d. There have nee two new controllers this year.
19. Which of the following circumstances would least likely cause auditor to consider whether a
material misstatement exists?
a. The turnover of senior accounting personnel exceptionally low.

b. Management places substantial emphasis on meeting, earning projections.
c. There are significant unusual transactions near year-end.
d. Operating and financing decisions are dominated by one person.
20. Which of the following conditions would not normally cause the auditor to question whether
material errors or possible fraud exists?
a. The accounting department is overstaffed.

b. Differences exist between control accounts and supporting subsidiary records.
c. Transactions are not supported by proper documentation.
d. There are frequent changes of auditors lawyers.
CHAPTER 3:
1. The primary responsibility for establishing and maintaining an internal control rests with

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a. The external auditors

b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer
2. The fundamental purpose of an internal control is to

a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information
3. Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.
4. Which of the following internal control objectives would be most relevant to the audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
5. An act of two or more employee to steal assets and cover their theft by misstating the accounting
records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency
6. Which of the following is not one of the components of an entity’s internal control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
7. The overall attitude and awareness of an entity’s board of director concerning the importance of the
internal control usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguard over access of assets
8. In evaluating the design of the entity’s internal control environment, the auditor considers the
certain subcomponents of control environment and how they have been incorporated into the
entity’s processes. Subcomponents of control environment would include
a. Integrity and ethical values

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b. Commitment to competence
c. Organizational structure
d. Information and communications systems
9. Which of the following components of an entity’s internal control structure includes the
development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality control system
10. Which of the following subcomponents of the control environment define the existing lines of
responsibility and authority?
a. Organizational structure
b. Management philosophy and operating style
c. Human resource policies and practices
d. Management integrity and ethical values
11. Which of the following is not one of the subcomponents of the control environment?
a. Management philosophy and operating style
b. Organizational structure
c. Adequate separation of duties
d. Commitment to competence
12. Which of the following deal with ongoing or periodic assessment of quality of internal control by
management?
a. Quality control activities

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b. Monitoring activities
c. Oversight activities
d. Management activities
13. The policies and procedures that help ensure that management directives are carried out are
referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information systems
14. Which of the following is not one of the specific control activities that are relevant to financial
statement audit?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
15. Proper segregation of functional responsibilities in an effective structure of internal control calls for
separation of functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording
16. Which of the following best describes the purpose of the control activities?
a. The actions, policies and procedures that reflect the overall attitudes of the management

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b. The identification and analysis of risks and relevant to the preparation of the financial
statements
c. The policies and procedures that help ensure that necessary actions are taken in order to
achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal control by
management
17. When the auditor attempts to understand the operation of the accounting system by tracing a few
transactions through the accounting system, the auditor is said to be:
a. Tracing
b. Vouching
c. Performing a walk through
d. Testing controls
18. Which of the following is not a medium that can normally be used by an auditor to record
information concerning a client’s internal control policies and procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
19. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests

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20. Based on the requirement of PSA 3330, how frequently must an auditor test operating effectiveness
of controls that appear to functions as they have in past years and on which the auditor wishes to
rely in the current year?
a. Monthly
b. Each audit
c. At least every second audit
d. At least every third audit

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CHAPTER 4:
1. These are acts of omission or commission by the entity being audited, either intentional or
unintentional, which are contrary to the prevailing laws and regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
2. In order to achieve the objectives of the accountancy profession, professional accountants have to
observe a number of prerequisites or fundamental principles. The fundamental principles include
the following except
a. Objectivity
b. Professional competence and due care
c. Technical standards
d. Confidence
3. The principle of professional competence and due care imposes certain obligations on professional
accountants. Which of the following is not one of those obligations required by this principle?
a. To act diligently in accordance with applicable technical and professional standards
b. To be fair, intellectually honest and free of conflict of interest
c. To become aware and understand relevant technical, professional and business
developments
d. To obtain professional knowledge and experience to enable them to fulfil their
responsibilities
4. The phase of professional competence that requires a professional accountant to adopt a program
designed to ensure quality control in the performance of professional services consistent with
technical and professional standards is:
a. Attainment of professional competence
b. Maintenance of professional competence
c. Application of professional competence
d. Review of professional competence
5. The essence of the due care principle is that the auditor should not be guilty of:
a. Bias
b. Errors in judgement
c. Fraud
d. Negligence
6. The principle of confidentiality applies to:

a. Professional accountants in public practice
b. Professional accountants in commerce and industry
c. Professional accountants in government
d. All professional accountants
7. The principle of confidentiality imposes an obligation on professional accountants to refrain from:

a. Disclosing confidential information to another party even if client authorizes the disclosure

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b. Using confidential information acquired as a result of professional and business relationships

to their personal advantage or the advantage of the third parties
c. Disclosing information to defend themselves in case of litigation
d. Responding to an inquiry or investigation conducted by the Professional Regulatory Board of
Accountancy
8. A CPA should not disclose confidential information obtained during an audit engagement in which
one of the following situations?
a. When the security of the state requires
b. With the consent of the client
c. In defense of himself when sued by his client
d. To a successor auditor without the client’s permission
9. Which of the following is considered a violation of rules on confidentiality?

a. The CPA discloses information to protect his own interest in the course of legal proceedings
b. The CPA discloses information to a successor auditor after obtaining the client’s permission
c. The CPA discloses information to another CPA in compliance with a quality control review
conducted by the BOA
d. The CPA divulges information disclosed to him by a prospective client.
10. In which of the following circumstances would a CPA be bound by the ethics to refrain from
disclosing any confidential information obtained during course of a professional engagement?
a. The CPA is issued summon enforceable by the court order which orders the CPA to present
confidential information
b. A major stockholder of a client company seeks accounting information from CPA after the
management declined to disclose the requested information
c. Confidential client information is made available with the client’s permission
d. An inquiry by the PRC and the CPA needs the disclosure to defend himself
11. The principle of professional behaviour requires a professional accountant to

a. Be straightforward and honest in performing professional services
b. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to
override objectivity
c. Perform professional services with due care, competence and diligence
d. Act in a manner consistent with the good reputation of the profession and refrain from any
conduct which might bring discredit to profession
12. Which of the following most accurately states how objectivity has been defined by the Code of
Ethics?
a. Being honest and straight forward in all professional and business relationships.
b. A state of mind that permits the provision of an opinion without being affected by influences
that compromise professional judgement
c. A combination of impartiality, intellectual honesty and a freedom from conflict of interest
d. Avoiding facts and circumstances that could reduce the public confidence in the professional
accountant’s report
13. Which fundamental principle is seriously threatened by an engagement that is compensated based
on the net proceeds on loans received by the client from a commercials bank?

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a. Integrity
b. Objectivity
c. Confidentiality
d. Professional behaviour
14. Independence is required whenever a professional accountant performs:

a. Professional services
b. Assurance services
c. Non-assurance services
d. Tax consultancy services
15. It refers to the avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards applied,
would reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivity or
professional scepticism had been compromised.
a. Independence in fact
b. Independence in appearance
c. Independence in mind
d. Inherent independence
16. This occurs as a result of the financial or other interests of a professional accountant or of an
immediate or close family member.
a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat
17. Acting for an audit client in the resolution of a dispute or litigation would most likely create
b. Intimidation threat
c. Advocacy threat
18. The preparation of accounting records of financial statements for an audit client will most likely
create
c. Intimidation threat
19. Accepting gift or undue hospitality from an assurance client would create most likely create
a. Familiarity threat
c. Advocacy threat
d. Intimidation threat
20. Using the same senior personnel on an assurance engagement over a long period of time would
most likely create

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a. Intimidation threat
b. Advocacy threat
c. Familiarity threat
d. Self-interest threat

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CHAPTER 5
1. This consists of checking the mathematical accuracy of documents of records.
a. Reperformance
b. Confirmation
c. Recalculation
d. Inspection
2. Which of the following assertions does not relate to balances at period end?
a. Existence
b. Occurrence
c. Valuation or allocation
d. Rights and obligations
3. Which of the following assertions does not relate to classes of transactions and events for the
period?
a. Completeness
b. Valuation
c. Cut-off
d. Accuracy
4. An assertion that transactions are recorded in the proper accounting period is:
a. Classification
b. Occurrence
c. Accuracy
d. Cut-off

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5. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Making a preliminary estimate of materiality
6. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. A preliminary understanding of the prospective client’s industry and business
b. The prospective client’s signature to the engagement letter
c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client
7. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements
8. In an audit, communication between the predecessor and incoming auditor should be
a. Authorized in an engagement letter
b. Acknowledged in a representation letter
c. Either written or oral
d. Written and included in the working papers

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9. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Almar Corporation. Arnel plans to
consult Von and to review Von’s prior year working papers. Arnel may do so if
a. Von and Almar consent
b. Almar consents
c. Von consents
d. Von and Arnel consent
10. An incoming auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor’s
Engagement letter Working Paper
a. Yes Yes
b. Yes No
c. No Yes
d. No No
11. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client
a. Before the audit report is issued
b. After the audit report is issued
c. At the end of fieldwork
d. Before the commencement of the engagement
12. Which of the following is not one of the principal contents of an engagement letter?
a. Objective of the financial statements
b. Unrestricted access to records and documents
c. Limitations of the engagement
d. Management’s responsibility for the financial statements

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13. Arrangements concerning which of the following are least likely to be included in engagement letter?
a. Auditor’s responsibilities
b. Fees and billing
c. CPA investment in client securities
d. Other forms of reports to be issued in addition to the audit report
14. The audit engagement letter should generally include a reference to each of the following except
a. The expectation of receiving a written management representation letter
b. A request for the client to confirm the terms of engagement
c. A description of the auditor’s method of sample selection
d. The risk that material misstatements may remain undiscovered
15. Which of the following would be least likely to be included in the auditor’s engagement letter
a. Forms of the report
b. Extent of his responsibilities
c. Objectives and scope of the audit
d. Type of opinion to be issued
16. According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)
a. Memorandum to be placed in the permanent section of the auditing working papers
b. Engagement letter
c. Client representation letter
d. Comfort letter

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17. Which of the following factors most likely would influence an auditor’s determination of the
auditability of the entity’s financial statements
a. The complexity of the accounting systems
b. The existence of related party transactions
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures
18. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
a. An inadequate understanding of the entity’s interval control structure
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing control risk
19. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an
audit engagement
a. Analysis of balance short accounts
b. Analysis of income statements accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management
20. An incoming auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures

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CHAPTER 6:
1. Which of the following statements is most correct regarding the primary purpose of audit
procedures?
a. To detect all errors or fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions regarding the client’s
financial statements

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d. To determine the amount of errors in the balance sheet accounts in order to adjust the
accounts to actual
2. A procedure designed to test for monetary misstatements directly affecting the validity of the
financial statement balances is a:
a. Test of controls
b. Substantive test
c. Test of attributes
d. Monetary-unit sampling test
3. You are auditing the company’s purchasing process for goods and services. You are primarily
concerned with the company not recording all purchase transactions. Which audit procedure below
would be the most effective audit procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices.
b. Tracing vendor invoices to recorded amounts in the accounts payable account.
c. Confirmation of accounts payable recorded amounts.
d. Reconciling the accounts payable subsidiary ledger to the accounts payable account.
4. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is
based is called:
a. Audit working papers
b. Audit assertions
c. Audit evidence
d. Audit standards
5. The major 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 control.
6. Which of the following is the best example of a corroborating evidence?

a. General journal
b. Worksheet cost allocation
c. Vendor’s invoice
d. Cash receipts journal
7. Which of the following statements about audit evidence is correct?

a. Appropriateness is the measure of the quantity of audit evidence.
b. Sufficiency is the measure of the quality of audit evidence and its relevance to a particular
assertion and its reliability.
c. Audit evidence is more persuasive when items of evidence from different sources or of
different nature are consistent.
d. There should be a one-to-one relationship between audit objective and audit procedure.

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8. Evidence is generally considered appropriate when:

a. it has been obtained by random selection.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it consists of written statements made by managers of the enterprise under audit.
9. Evidence are generally considered sufficient when:

a. it is appropriate.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective and free from unknown bias.
d. it has been obtained by random selection.
10. Appropriateness of evidence is a measure of the:

a. quantity of evidence.
b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.
11. The sufficiency and appropriateness of evidential matter ultimately is based on the
a. availability of corroborating data.
b. Philippine Standard on Auditing.
c. pertinence of the evidence.
d. judgment of the auditor.
12. An example of an external document that provides reliable information for the auditor is:
a. employees time reports.
b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.
13. An example of a document that the auditor receives from the client, but which was prepared by
someone outside the client’s organization, is a:
a. confirmation.
b. sales invoice.
c. vendor invoice.
d. bank reconciliation.
14. To be considered reliable evidence, confirmations must be controlled by:
a. a client employee responsible for accounts receivable.
b. a financial statement auditor.
c. a client’s internal audit department.
d. a client’s controller or CFO.

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15. Given the economic and time constraints in which auditors can collect evidence about management
assertions about the financial statements, the auditor normally gathers evidence that is:
a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.
16. It refers to the material (working papers) prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit.
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence
17. Which of the following best describes one of the primary objectives of audit documentation?
a. Defend against claims of a deficient audit.
b. Provide a principal support for the income taxation return.
c. Provide documentation that the audit was conducted in accordance with auditing standards.
d. Provide additional support or recorded amounts to the client.
18. Which of the following is not an expert upon whose work an auditor may relay?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer
19. An expert whose expertise is used by the entity in preparing financial statements is called a(n):
a. Financial expert
b. Management expert
c. Auditor’s expert
d. Specialist
20. External auditors must obtain evidence regarding what attributes of an internal audit department if
the external auditors intend to rely on internal auditor’s work?
a. Integrity
b. Objectivity
c. Competence
d. All of the above

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CHAPTER 7
1. This involves developing an overall strategy for the expected conduct and scope of the examination;
the nature, extent, and timing of which vary with the size and complexity, and experience with and
knowledge of the entity.
a. Audit planning

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b. Audit procedure
c. Audit program
d. Audit working papers
2. Initial planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
c. Schedule engagement staff and audit specialists
d. Identify the client’s reason for the audit
3. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce
the audit work by consulting with the predecessor auditor and reviewing the predecessor’s working
papers. This procedure is
a. Acceptable if the client and the predecessor auditor agree to it.
b. Acceptable if the CPA refers in the audit report to reliance upon the predecessor
auditor’s work.
c. Required if the CPA is to render an unmodified opinion.
d. Unacceptable because the CPA should bring an independent viewpoint to a new
engagement.
4. The preliminary judgment about materiality and the amount of audit evidence accumulated are
related.
a. directly
b. indirectly
c. not
d. inversely
5. According to PSA 320, materiality should be considered by the auditor when:

Determining the nature, timing Evaluating the effects
and extent of audit procedures. of misstatements
a. YES YES
b. YES NO

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c. NO NO
d. NO YES
6. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with the applicable financial reporting
framework, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate
level of misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the
needs of a reasonable person who will rely on the financial statements.
7. “Performance materiality” is the term used to indicate materiality at the:

a. balance sheet level
b. account balance level
c. income statement level
d. company-wide level
8. When comparing level of materiality used for planning purposes and the level of materiality used for
evaluating evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be similar.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on total assets while the level
of materiality for evaluating purposes to be based on net income.
9. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following
qualitative factors could influence the assessment of materiality?
I. Misstatements that are otherwise immaterial may be material if affect earnings trends.
II. Minor misstatements resulting from the consequences of contractual obligations.
a. I only

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b. II only
c. I and II
d. neither I or II
10. Auditors frequently refer to the terms audit assurance, overall assurance, ad level of assurance to
refer to .
a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk
11. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
12. When planning a financial statement audit, the auditor should assess inherent risk at the
Financial statement level Account balance or transaction class level
a. YES YES
b. YES NO
c. NO NO
d. NO YES
13. Which of the following is an incorrect statement?

a. Detection risk cannot be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears an inverse relationship to
inherent and control risk.
c. The greater the inherent and control risk the auditor believes exist, the less detection
risk that can be accepted.

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d. The auditor might make separate or combines assessments of inherent risk and control
risk.
14. Relationship between control risk and detection risk is ordinarily

a. Parallel
b. Direct
c. Inverse
d. Equal
15. Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit
risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced staff
d. Review of audit documentation is performed by personnel not assigned to the
engagement
16. These consist of the analysis of significant ratios and trends including the resulting investigation of
fluctuations and relationship that are inconsistent with other relevant information or deviate from
predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis
17. Which of the following statements about analytical procedures is incorrect?

a. Analytical procedures are required to be performed in the planning phase of the audit.
b. Analytical procedures are required to be done during the testing phase of the audit.
c. Analytical procedures are required to be done during the completion phase of the audit.
d. Analytical procedures may be performed in the planning, testing and completion phases
of the audit.

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18. In developing the overall audit plan and audit program, the auditor should assess inherent risk at
the:
Audit plan Audit program
a. Financial statement level Accounting balance level
b. Account balance level Financial statement level
c. Account balance level Account balance level
d. Financial statement level Financial statement level
19. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of
transactions.
20. Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing certain procedures.
d. Documentation of the accounting and internal control systems being reviewed.
CHAPTER 8
1. This involves the application of the procedures to less than 100% of the items within an account
balance or class of transactions. This enables the auditor to obtain and evaluate audit evidence

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about some characteristics of the selected items in order to form an opinion about the
characteristics of all items supporting an account balance or transaction class.
a. Audit techniques
b. Selective testing
c. Audit sampling
d. Specific identification
2. Audit sampling for substantive tests is appropriate when
a. Analytical procedures are used
b. The auditor wants to eliminate sampling risks
c. A population contains small number of large value items
d. Tests of details are performed
3. Audit sampling for test of control is generally appropriate when
a. Control leaves evidence of performance
b. Control leaves no evidence of performance
c. 100% of the transactions is tested
d. Examining specific high value items in the population
4. In a sampling application, the group of items about which the auditor wants to estimate some
characteristic is called the
a. Population c. Attribute of interest
b. Sample d. Sampling unit
5. Non-sampling error occur when the audit tests do not uncover existing exceptions in the
a. Population
b. Planning stage

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c. Sample
d. Financial statement
6. PSA 530 identifies two general approaches to audit sampling. They are
a. Random & nonrandom
b. Statistical & nonstatistical
c. Precision & reliability
d. Risk and nonrisk
7. The relationship between sample size and the allowable sampling risks is
a. Direct
b. Inverse
c. Sample deviation rate
d. Expected deviation rate
8. Principal methods of sampling selection include all of the following except
a. Haphazard
b. Random number
c. Systematic
d. Statistical
9. A sample in which every possible combination of items in the population has a chance of
constituting the sample is a
a. Representative sample
b. Random sample
c. Statistical sample

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d. Judgment sample
10. The process which requires the calculation of an interval and them selects the items based on the
size of the interval is
a. Statistical sampling
b. Systematic selection
c. Random selection
d. Computerized selection
11. A method of sampling in which all the items in the population are divided into two or more sub-
population is
a. Variable sampling
b. Stratified sampling
c. Attribute sampling
d. Divisible sampling
12. If the auditor is concerned that a population may contain exceptions, the determination of a sample
size sufficient to include at least one such exception is a characteristic of
a. Discovery sampling
b. Random sampling
c. Variables sampling
d. Peso-unit sampling
13. Which of the following statistical sampling plans does not use a fixed sample size for tests of
controls?
a. PPS sampling
b. Value-weighted sampling

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c. Sequential sampling
d. Variables sampling
14. Value weighted sampling is most appropriate when the auditor
a. Anticipates understatement errors
b. Expects no errors
c. Anticipate overstatement errors
d. Has assessed control risk at high level
15. The maximum amount of error in a population that the auditor is willing to accept is referred to as
the
a. Acceptable risk
b. Tolerable error
c. Expected error
d. Tolerable materiality
16. The deviation rate the auditor expects to find in the population, before testing begins, is called the
a. Tolerable deviation rate
b. Computer upper deviation rate
c. Sample deviation rate
d. Expected deviation rate
17. Which of the following sampling methods would be most appropriate in performing tests of controls
over authorization of cash disbursements
a. Attributes
b. Variables
c. Ratio

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d. Stratified
18. In assessing sample risk, alpha risk relate to the
a. Efficiency of the audit
b. Selection of the sample
c. Effectiveness of the audit
d. Audit quality controls
19. Which of the following sampling plans would be designed to estimate a numerical measurement of a
population such as peso value?
a. Numerical sampling
b. Sampling attributes
c. Discovery sampling
d. Sampling for variables
20. Statistical samples do not allow
a. A. more efficient samples
b. Measurement of sample reliability
c. Replacement of the auditor’s professional judgment
d. Measurement of sample risk

Auditing Theory Questions (Answer Keys 3)

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AUDITING THEORY MCQ BY SALOSAGCOL

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

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

5. Which of the following best describe the operational audit?

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AUDITING THEORY MCQ BY SALOSAGCOL

8. Independent auditing can best be describe as a

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AUDITING THEORY MCQ BY SALOSAGCOL

13. The reason an independent auditor gathers evidence is to

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

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AUDITING THEORY MCQ BY SALOSAGCOL

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AUDITING THEORY MCQ BY SALOSAGCOL

5. What primarily differentiates fraud from an error

6. The term “error” refers to unintentional misrepresentation of financial information. Examples of

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AUDITING THEORY MCQ BY SALOSAGCOL

III. Records and documents have been manipulated and falsified

7. Which of the following best identifies the two types of fraud?

a. Theft of assets and employee fraud.

9. “The auditor would ordinarily expect to find evidence to support management

10. Which of the following statement is true?

a. It is usually easier for the auditor to uncover fraud than errors.

11. The most difficult type of misstatement to detect is fraud based on

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AUDITING THEORY MCQ BY SALOSAGCOL

b. The non-recording of transactions

a. Misposting if recorded transactions

13. Which of the following statements is incorrect?

14. Which of the following statement about fraud or error is incorrect?

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AUDITING THEORY MCQ BY SALOSAGCOL

b. Improper revenue recognition

a. Questions with respect to competence or integrity of management

a. There are numerous delays in preparing timely internal financial reports.

a. The turnover of senior accounting personnel exceptionally low.

a. The accounting department is overstaffed.

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AUDITING THEORY MCQ BY SALOSAGCOL

a. The external auditors

2. The fundamental purpose of an internal control is to

a. Integrity and ethical values

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AUDITING THEORY MCQ BY SALOSAGCOL

d. Information and communications systems

c. Information and communication

d. Quality control system

b. Management philosophy and operating style

c. Human resource policies and practices

d. Management integrity and ethical values

a. Management philosophy and operating style

c. Adequate separation of duties

a. Quality control activities

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AUDITING THEORY MCQ BY SALOSAGCOL

a. Authorization, execution, and payment