Chapter 2 - Auditing: An Overview

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1. True Auditing is the process of attesting to assertions about

economic actions and events

2. True The internal auditor is a primary provider of operational

audits

3. True The objectives of internal auditors are considerably broad-

er than the objectives of external auditors

4. False Program audits are primarily focused on inefficient uses of

government funds in sponsored programs.

5. False To help them remain independent of the operations they

audit, internal auditors should report directly to the con-
troller.

6. False Independent financial statements audit is an example of

reasonable level but direct reporting assurance engaga-
ment.

7. False The auditor would ordinarily expect to find evidence to

support management representations and assume they
are necessarily correct.

8. True The CPA Firm is engaged and paid by the client, but the
primary beneficiaries of the audit are those who rely on
the FS.

9. True The auditor has no responsibility to plan and perform the

audit to obtain reasonable assurance that misstatements,
whether caused by errors or fraud, that are not material to
the FS are detected.

10. True Assertions are relevant to the audit process because they
are the representations of management embodied in the
FS.

11. C Auditing is a systematic process that includes all of the

following except:

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A. Communicating results to users
B. Procuring and evaluating evidence
C. Providing important managerial decisions for a client
D. Comparing evidence regarding assertions to certain
established criteria

12. B Broadly defined, the subject matter of any audit consists

of:

A. FS
B. Assertions
C. Economic Data
D. Operating Data

13. A Operational auditing is primarily oriented towards

A. Future improvements to accomplish the goals of man-

agement
B. The accuracy of data reflected in management's finan-
cial records
C. The verification that a company's FS are fairly present-
ed
D. Past protection provided by existing internal control

14. B An audit designed to determine the extent to which the

desired results of an activity established by the legislative
or other authorizing body are being achieved

A. Financial related audit

B. Program results audit
C. Efficiency Audit
D. Economy Audit

15. C Which one of the following is more difficult to evaluate

objectively?

A.Presentation of FS in accordance with GAAP

B. Compliance with government regulations
C. Efficiency and effectiveness of operations
D. All three of the above are equally difficult
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16. D Government auditing often extends beyond expressing an

opinion on the fairness of the financial presentation and
includes audits of efficiency, effectiveness and

A. Internal control
B. Efficiency
C. Accuracy
D. Compliance

17. C Which of the following types of audits are most similar?

A. Operational audits and compliance audits

B. Independent FS audits and operational audits
C. Compliance audits and independent FS audits
D. Internal audits and independent FS audits

18. A Results of compliance audits are typically reported to

someone within the organizational unit being audited
rather than to a broad spectrum of outside users. Which
of the following audits can be regarded as generally being
a compliance audit?

A. BIR agents' examinations of taxpayer returns

B. COA Auditor's evaluation of the computer operations of
governmental audits
C. An internal auditor's review of a company's payroll
authorization procedures
D. A CPA firm's audit of the local school district

19. C Which of the following types of auditing is performed most

commonly by CPAs for more than one client and on a
contractual basis?

A. Internal auditing
B. Income tax auditing
C. External Auditing
D. Government Auditing

20. D
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Internal Auditing relates to an

A. Audit which is performed by professional practitioner as

an independent contractor
B. Audit which is incidentally concerned with the detection
and prevention of fraud
C. Audit wherein the auditor should be independent of
management both in fact and mental attitude
D. Audit which serves the needs of management for them
to effectively discharge their responsibilities

21. D Internal auditing often extends beyond examinations lead-

ing to the expression of an opinion on the fairness of
financial presentation and includes audits of efficiency,
effectiveness and

A. Internal control
B. Evaluation
C. Accuracy
D. Compliance

22. A To maximize independence, the director of internal audit-

ing should report to the

A. Audit Committee
B. Controller
C. Chief Financial Officer
D. Director of information systems

23. B For an internal auditor to render impartial and unbiased

judgments, he or she must be independent of the entity's

A. Stockholders
B. The line function of the organization
C. Independent auditors
D. Board of directors

24. D Which of the following statements relating to internal and

external audits is false?

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A. The execution of solutions to issues brought to light by
internal auditors are the responsibility of management of
the organization
B. The objectives of internal auditors are considerably
broader than the objectives of external auditors
C. For financial auditing, the audit report typically goes to
many users of FS, whereas operational audit reports are
intended primarily for management
D. Independence is a fundamental ethical principle for
internal auditors

25. D Which of the following statements comparing external au-

diting to internal auditing is true?

A. Both produce reports addressed to the company's man-

agement and board of directors
B. They have the same concern with the company's
day-to-day operations
C. They are paid in the same way
D. They have different scopes of work

26. B Which of the following best describes the fundamental,

underlying reason for why there is demand for an inde-
pendent auditor to report on financial statements?

A. A management fraud may exist and it is more likely to

be detected by auditors if they are independent
B. Different interests may exist between the company
preparing the statements and the parties using the state-
ments
C.A misstatement of account balances may exist and it is
the independent auditor's responsibility to ensure that FS
are not misstated
D. A poorly designed internal control system may be in
place

27. A PRTC Corporation's stock is listed on a national stock

exchange and registered with the SEC. PRTC's manage-
ment hires a CPA to perform an independent audit of

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PRTC's FS. The primary objective of the audit is to provide
assurance to the:

A. investors in PRTC Corporation's stock

B. stock exchange
C. SEC
D. management of PRTC Corporation

28. D Which of the following are sources of procedures to be

considered by the auditor to conduct an audit in accor-
dance with PSAs?

PSA Legislation Terms of Eng Type of Opinion

A YES NO NO NO
B NO NO YES YES
C NO YES YES NO
D. YES YES YES NO

29. D Assertions are:

A. Audited by the auditors

B. declarations made by management
C. declarations made by the auditor
D. Both a and b

30. A Which of the following are assertions about classes of

transactions and events in the FS?

A. Occurrence, cut-off, classification, completeness and

accuracy
B. Existence, rights and obligations, completeness and
valuation and allocation
C. Occurrence and rights and obligations, completeness,
classification and understandability and accuracy and val-
uation
D. All of the above

31. A Which of the following is an assertion?

A. A statement made by management regarding the col-

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lectability of A/R
B. The audit firm's estimation of the client's inventory ob-
solence
C. The statement by management regarding the appoint-
ment of auditors
D. The statement by the management that the firm will
close its branch office because of snow

32. C Assertions are representations of management that are

embodied in FS components. They can be either explicit
or implicit. Which of these assertions is not about valuation
or allocation?

A. Property is recorded at historical cost

B. Trade A./R in the balance sheet are stated at NRV
C. Notes Payable in the balance sheet include all such
obligations of the entity
D. Property cost is systematically allocated to appropriate
accounting period

33. A The auditor has considerable responsibility for notifying

users as to whether or not the statements are properly
stated. This imposes upon the auditor a duty to:

A. provide reasonable assurance that material misstate-

ments will be detected
B. be a guarantor of the fairness in the statements
C. be equally responsible with management for the prepa-
ration of the FS
D. be an insurer of the fairness in the statements

34. D An auditor is unable to obtain absolute assurance that

misstatements due to fraud will be detected for all of the
following except

A. Employee collusion
B. Falsified documentation
C. Need to apply professional judgement in evaluating

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fraud risk factors
D. Professional skepticism

35. A Which of the following least likely limits the auditors ability
to detect material misstatement?

A. Most audit evidence is conclusive rather than being

persuasive
B. The inherent limitations of any accounting and internal
control system
C. Audit is based on testing
D. Audit procedures that are effective in detecting ordinary
misstatements are ineffective in detecting intentional mis-
statements

36. A The existence of audit risk is recognized by the statement

in the auditor's standard report that the auditor

A. Obtains reasonable assurance about whether the FS

are free of material misstatement
B. Assesses the accounting principles used and also eval-
uates the overall FS presentation
C. Realizes some matters, either individually or in the
aggregate, are important while other matters are not im-
portant
D. Is responsible for expressing an opinion on the FS,
which are the responsibility of management

37. C Which of the following equations represents the audit risk

model where AR is audit risk, RMM is the risk of material
misstatement and DR is detection risk

A. AR= RMM+.DR
B. AR= RMM-DR
C. AR= RMMxDR
D. AR= RMM/DR

38. C Which of the following is not a distinguishing feature of

risk-based auditing?

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A. Identifying areas posing the highest risk of FS errors
B. Analysis of internal control
C. Collecting and evaluating evidence
D. Concentrating audit resources in those areas present-
ing the highest risk of FS errors

39. C Results of the FS audit are communicated to users

through a(n)

A. FS
B. Written management assertion
C. Audit report
D. none of the above

40. A A "clean" audit report states that:

A. there are no material misstatements in the FS

B. the internal control environment is operating well
C. the auditors evaluated all evidence
D. All of the above

41. C When an auditor issues a qualified opinion, the implication

is that the auditor

A. Does not know of the FS are presented fairly

B. Does not believe the FS are fairly presented
C. Is satisfied that the FS are presented fairly except for a
specific aspect of them
D. Is satisfied that the FS are presented fairly

42. C The "hallmark" of auditing is

A. Available audit technology

B. GAAP
C. Professional judgement
D. Materiality and audit risk

43. D Professional judgement is essential to the proper conduct

of an audit because it enables the auditor to perform the
following, except?
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A. Interpret relevant ethical requirements

B. Understand relevant, applicable auditing standards to
the engagement
C. Make informed decisions in the circumstances of the
audit
D. Avoid audit risk

44. D In which of the following circumstances the auditor's pro-

fessional judgement is unnecessary?

A. Determining materiality and audit risk level

B. Nature, timing, and extent of audit procedures, and
evaluating whether the sufficiency and appropriateness of
evidence obtained
C. Evaluating management's judgments in applying the
applicable GAAP
D. Making accounting estimates for the FS

45. B According to international auditing standards, professional

skepticism includes being alert to all of the following ex-
cept:

A. Audit evidence that contradicts other audit evidence

obtained
B. Long-standing relationships with management that
should be used as a basis to trust the information they
provide
C. Information that brings into question the reliability of
documents and responses to inquiries to be used as audit
evidence
D. Conditions that may indicate possible fraud

46. D An auditor who is professionally skeptical will do which of

the following?

A. Critically question contradictory audit evidence

B. Carefully evaluate the reliability of audit evidence, espe-
cially in situations in which fraud risk is high

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C. Reasonably question the authenticity of documentation
D. all of the above

47. C Professional skepticism requires that an auditor assume

that management is

A. Honest, in the absence of fraud risk factors

B. Dishonest until completion of audit tests
C. Neither honest nor dishonest
D. Offering reasonable assurance of honesty

48. A Two overriding considerations affect the many ways an

auditor can accumulate evidence:

I. Sufficient appropriate evidence must be accumulated to

meet the auditor's professional responsibility
II. Cost of accumulating evidence should be minimized

in evaluating these considerations:

A. The first is more important than the second

B. The second is more important than the firsy
C. They are equally important
D. It is impossible to prioritize them

49. C Which of the following is most likely to be unique to the

audit work of CPAs as compared to work performed by
practitioners of other professions?

A. Due professional care

B. Competence
C. Independence
D. Complex body of knowledge

50. C Which of the following attributes most clearly differentiates

a CPA who audits management's financial statements as
contrasted to management?

A. Integrity
B. Competence
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C. Independence
D. keeping informed on current professional developments

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