AUDITING THEORY

INTRODUCTION TO AUDITING

1. An independent audit is important to readers of financial statements because it

a. Provides a measure of management's stewardship function
b. Measures and communicates the financial data included in financial statements
c. Objectively examines and reports on management's financial statements
d. Reports on the accuracy of information in the financial statements

2. An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy of management's financial representation.
b. Guarantees that financial data are fairly presented.
c. Assures the readers of financial statements that any fraudulent activity has been corrected.
d. Lends credibility to the financial statements.

3. The purpose of an audit of financial statements is to

a. Obtain an absolute level of assurance that the financial statements as a whole are free
from material misstatement.
b. Relieve management or those charged with governance of the responsibility for the preparation
and presentation of the financial statements in accordance with the applicable financial
reporting framework.
c. Enhance the degree of confidence of intended users in the financial statements.
d. Assure the future viability of the entity by expressing an opinion on the entity's financial statements.

4. Independent auditing can best be described as

a. A branch of accounting.
b. A professional activity that measures and communicates financial and business data.
c. A regulatory function that prevents the issuance of improper financial information.
d. A discipline which attests to the results of accounting and other functional
operations and data.

5. 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

6. The audit process is

a. A special application of the scientific method of inquiry.
b. Regulated by the PICPA.
c. The only service a CPA is allowed to perform by law.
d. Performed only by CPAs.

7. The overall objectives of the auditor in conducting an audit of financial statements are:
I. To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence
IV. To detect all misstatements, whether due to fraud or error
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, III and IV

8. Which of the following is not among the factors that result to limitations of audit?
a. Use of testing
b. Going concern problem of the assurance client
c. Human error
d. Evidence is basically persuasive rather than conclusive

9. The market for auditing services is driven by

a. The regulatory authority of the Securities and Exchange Commission.
b. A demand by external users of financial statements.
c. Pronouncements issued by the Auditing and Assurance Standards Council.
 d. Congress.

10. The independent auditor of the past differs from the auditor of today in that the past auditor
was more concerned with the
a. Validity of the income statement.
b. Determination of fair presentation of financial statements.
c. Improvement of accounting system.
d. Detection of fraud or irregularities.

11. 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. Securities and Exchange Commission Regulations

12. An audit in accordance with PSAs is performed on the premise that management and, where
appropriate, those charged with governance have responsibilities that are fundamental to the
conduct of the audit. Which of the following is not one of those responsibilities?
a. To provide the auditor with all information, such as records and documentation, and
other matters that are relevant to the preparation and presentation of the financial
statements.

b. To provide unrestricted access to those within the entity from whom the auditor
determines it necessary to obtain audit evidence.
c. To comply with all relevant PSAs in the preparation and presentation of
the entity's financial statements.
d. To design, implement, and maintain internal control relevant to the preparation and
presentation of financial statements that are free from material misstate ment,
whether caused by fraud or error.

13. The auditor is required to maintain professional skepticism throughout the audit. Which of the
following statements concerning professional skepticism is false?
a. A belief that management and those charged with governance are honest
and have integrity relieves the auditor of the need to maintain
professional skepticism.
b. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
c. Professional skepticism is necessary to the critical assessment of audit evidence.
d. Professional skepticism is an attitude that includes questioning contradictory audit evidence
obtained.

14. Professional judgment:

a. Is necessary in the evaluation of management's judgments in applying
the entity's applicable financial reporting framework.
b. Should be exercised in planning and performing an audit of financial statements but
need not be documented.
c. Can be used as the justification for the decisions made by the auditor that are not
supported by the facts and circumstances of the engagement.
d. Is not used in making decisions about materiality and audit risk.

15. The primary responsibility for the adequacy of disclosure in the financial statements rests with the:
a. Partner assigned to the audit engagement.
b. Management of the company.
c. Securities and Exchange Commission.
d. Auditor in charge of the field work.

16. Which of the following statements is correct concerning an auditor's responsibilities regarding
financial statements?
a. Making suggestions that are adopted about the form and content of an entity's financial
statements impairs an auditor's independence.
b. An auditor's responsibilities for audited financial statements are confined to
the expression of the auditor's opinion.
c. The fair presentation of audited financial statements in accordance with an
applicable financial reporting framework is an implicit part of the auditor's
responsibilities.
d. The auditor's report should provide an assurance as to the future viability of the entity.

17. The auditor's judgment concerning the overall fairness of presentation of financial position, results of
 operation, and changes in cash flow is applied within the framework of
a. Generally accepted auditing standards which include the concept of materiality
b. Generally accepted accounting principles.
c. Philippine Financial Reporting Standards
d. Quality control

18. An independent audit is important to readers of financial statements because of the following except:
a. Lends credibility to the financial statements.
b. Objectively examines and reports on management's financial statements
c. Measures and communicates the financial data included in financial statements
d. Provide users with an unbiased opinion about the fairness of information reported in the
financial statements

19. The auditor's judgment concerning the overall fairness of presentation of financial
position, results of operation, and changes in cash flow is applied within the framework of
a. Generally accepted auditing standards which include the concept of materiality
b. Generally accepted accounting principles.
c. Philippine Financial Reporting Standards
d. Quality control

20. In financial statement audits, the audit should be conducted in accordance with
a. Philippine Accounting Standards / Philippine Financial Reporting Standards
b. Generally accepted auditing standards
c. Code of Ethics for CPAs in the Philippines
d. Philippine Standards on Auditing

21. Which of the following statements does not properly describe an element of the theoretical
framework of auditing?
a. An audit benefits the public.
b. The data to be audited are verifiable.
c. Auditor should maintain independence with respect to the audit client.
d. Remoteness of users.

22. The auditor is required to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to fraud or error. In all cases when
reasonable assurance cannot be obtained, the auditor's report should contain a/an:
a. Unmodified opinion
b. Qualified or disclaimer of opinion
c. Qualified or adverse opinion
d. Disclaimer of opinion

23. The benefits of an operational audit generally include all of the following except:
a. Decreased costs.
b. Increased revenue
c. Increased reliability of the financial statements.
d. Increased productivity.

24. The auditor is required to comply with all PSAs relevant to the audit of an entity's financial
statements. A PSA is relevant to the audit when:
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
a. I only
b. II only
c. Either I or II
d. Both I and II

25. 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. Users usually lack the necessary expertise to verify the reliability of the
financial information.
c. As experts, auditors are expected to detect all material misstatements in the financial statements.
d. The readers of the financial statements must possess the necessary expertise to
be able to understand the financial statements.
26. 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. Fatigue and human weaknesses can cause auditors to overlook pertinent evidence.
c. Many financial statement assertions cannot be audited.
d. The work, under taken by the auditor is permeated by judgment.

27. An audit designed to evaluate the efficiency and effectiveness of an organization or some
or part thereof would not come under the title of
a. Performance audit.
b. Compliance audit.
c. Management audit.
d. Operational audit.

28. Inherent limitations in an audit stem from the following factors except
a. Incompetence of the auditor.
b. Most audit evidence is persuasive rather than conclusive.
c. Internal control limitation.
d. Use of testing.

29. Auditing services may include which of the following?

a. Attesting to financial statements
b. Evaluation of a division’s performance for management
c. Examination of the economy and efficiency of governmental operations
d. All of the above

30. Which of the following represents the highest to lowest level of assurance provided by
auditors in the performance of the engagement?
a. An audit; a compilation; a review.
b. An audit; a review; a compilation.
c. A review; an audit; a compilation.
d. A compilation; a review; an audit.

31. The statement that the reviewer "is not aware of any material modification that should be
made to the financial statements in order for them to be in conformity with GAAP" is
known as:
a. Reasonable assurance.
b. Positive assurance.
c. Negative assurance.
d. Negligent performance.

32. Which of the following is a major difference between a review and an audit of the financial statements?
a. The level of knowledge of professional standards needed to perform the procedures.
b. The type of accounting used -reviews are typically on
non-GAAP accounting, while audits are based upon
GAAP accounting.
c. The scope of the procedures performed and the assurance provided.
d. The type of company involved in reviews may only be publicly-held.

33. The review of unaudited financial statements consists of:

a. Inquiry of management and documentation of internal controls.
b. Inquiry of management and analytical procedures.
c. Analytical procedures and compliance with laws and regulations.
d. Internal control evaluation and management representation.

34. In an assurance engagement, this refers to the information obtained by the practitioner in
arriving at the conclusions on which the conclusion is based.
a. Generally accepted auditing standards
b. Assertions
c. Evidence
d. Criteria

35. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then the information is
a. Significant.
b. Material.
c. Relevant.
d. Pervasive.
36. In performing a financial statement audit, which of the following would an auditor least likely consider?
a. Compliance with GAAP.
b. Quality of managements' business decisions.
c. Internal control.
d. Fairness of the financial statement amounts.

37. The Philippine Standards on Auditing issued by AASC:

a. Require that in no circumstances would an auditor may judge it necessary to depart from a
PSA, even though such a departure may result to more effective achievement of the
objective of an audit.
b. Apply to independent examination of financial statements of any entity when
such an examination is conducted for the purpose of expressing an opinion.
c. Need to be applied on all audit related.
d. Must not apply to other related activities of auditors.

38. 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. Auditors 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 taken as a whole are fairly presented in conformity
with GAAP.

39. The term that describes the role of persons entrusted with the supervision, control and
direction of an entity is
a. Management.
b. Administration.
c. Governance.
d. Government.

40. 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 not be a valid criterion?

a. International Accounting Standards

b. Philippine Standards on Auditing
c. Philippine Financial Reporting Standards
d. Philippine Accounting Standards

41. Which of the following statements about independent financial statement audit is correct?
a. The audit of financial statements relieves management of its responsibilities for die
financial statements.
b. 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.
c. An audit is designed to provide limited assurance that the financial statements taken as a
whole are free from material misstatement.
d. The procedures required to conduct an audit in accordance with PSAs should be
determined by the client who engaged the services of the auditor.

42. The reason an independent auditor gathers evidence is to

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

43. 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. Audited financial statements.

44. The auditor's judgment concerning the overall fairness of presentation of financial position,
results of operation, and changes in cash flow is applied within the framework of
a. Quality control
b. Generally accepted auditing standards which include the concept of materiality
c. The auditor's evaluation of the audited company's internal control.
 d. Generally accepted accounting principles.

45. The expertise that distinguishes auditors from accountants is in the

a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the bachelor's degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret PAS/PFRS.

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

47. The underlying conditions that create demand by users for reliable information include the
following except:
a. Transactions that are numerous and complex.
b. Users separated from accounting records by distance and time.
c. Financial decisions that are important to investors and users.
d. Decisions are not time-sensitive.

48. Why does a company choose to have an independent auditor report on its financial statements?
a. Independent auditors will always detect management fraud.
b. The company preparing the statements may have a vested interest in reporting
certain results.
c. Independent auditors guarantee the accuracy of the financial statements.
d. An independent audit is designed to search for deficiencies in the company's internal controls.

49. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Information can have substantial economic consequences for a decision maker.
b. Expertise is often required for information preparation and verification.
c. Users can directly assess the quality of information.
d. Conflict between an information preparer and a user can result in biased information.

50. Information risk refers to the risk that

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

51. Which of the following is a cause of information risk?

a. Voluminous data.
b. Biases and motives of the provider of information.
c. Remoteness of the information.
d. Each of the above is a cause of information risk.

52. In financial statement audits, the audit process should be conducted in accordance with
a. Philippine Accounting Standards
b. The audit program
c. Philippine Standards on Auditing
d. Philippine Financial Reporting Standards

53. Which of the following is not one of the general principles governing the audit of financial statements?
a. The auditor should obtain sufficient appropriate evidence primarily through
inquiry and analytical procedures to be able to draw reasonable conclusions.
b. The auditor should plan and perform the audit with an attitude of professional skepticism.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.

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

55. Which of the following criteria is unique to the independent auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. Independence.

56. 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, can prove, beyond reasonable doubt, the truthfulness of the data.
c. Working independently, each reach essentially similar conclusions.
d. Working together, can agree upon the accuracy of the data.

57. The level of assurance provided by a professional accountant on an audit report is:
a. Low
b. Reasonable
c. Moderate
d. None

58. Reasonable assurance means:

a. Gathering of all available corroborating evidence for the auditor to conclude that there are
no material misstatements in the financial statements, taken as a whole.
b. Gathering of the audit evidence necessary for the auditor to conclude that the financial
statements, taken as a whole, are free from any misstatements.
c. Gathering of the audit evidence necessary for the auditor to conclude that the financial
statements are free of material unintentional misstatements.
d. Gathering of the audit evidence necessary for the auditor to conclude that there
are no material misstatements in the financial statements, taken as a whole.

59. 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

60. 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

61. Which of the following terms does not belong to the group
a. Financial audit
b. Internal audit
c. External audit
d. Independent audit

62. The overall objective of forensic auditing is to

a. Attest to the efficiency with which resources are employed
b. Assist members of the organization in the effective discharge of their responsibilities
c. Unearth the truth and provide evidence in legal and financial disputes
d. Provide assurance that financial data have been accurately recorded

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

64. Which of the following types of audits is performed to determine whether an entity's financial
statements are fairly stated in conformity with generally accepted accounting principles?
a. Operational audit
b. Financial statement audit
c. Compliance audit
 d. Performance audit

65. 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

66. 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 qualified opinion but not for any other type of opinion.

67. Anaudit of financial statements is conducted to determine if the

[Link] is operating efficiently and effectively
[Link] is following specific procedures or rules set down by some higher authority
[Link] financial statements are stated in accordance with an identified financial
reporting framework.
d. Client's internal control is functioning as intended.

68. 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.

69. Most of the independent auditor's work in formulating an opinion on financial statements
consists of

a. Studying and evaluating internal control

b. Obtaining and examining evidential matter
c. Examining cash transactions
d. Comparing recorded accountability with assets

70. Audits of financial statements include an expression of a conclusion about which of the
following financial statement characteristics?
a. Governance.
b. Reliability.
c. Relevance.
d. Timeliness.

71. The essence of the attest function is to

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

72. 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.

73. 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. As experts, auditors are expected to detect all material misstatements in the financial statements.

74. An audit can have a significant effect on

a. Information risk.
b. Business risk.
c. The risk-free interest rate.
d. All of these.

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

76. 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, under taken by the auditor is permeated by judgment.
c. Fatigue and human weaknesses can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.

77. Financial statements audits:

a. Reduce the cost of capital
b. Report on compliance with laws and regulations
c. Assess management's efficiency
d. Overlook information risk

78. In relation to auditing, which of the following is an incorrect phrase?

a. Auditing is a systematic process.
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.

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

a. Economic data
b. Financial statements
c. Assertions about economic actions and events
d. Operating data

80. As used in auditing, which of the following statements best describes "assertions”?
a. Assertions are the auditor's findings to be communicated in his audit report.
b. Assertions are found only in the notes to the financial statements.
c. Assertions are the representations of management as to the reliability of the information system.
d. Assertions are the representations of management as to the fairness of
presentation of the financial statements.

81. Users of financial statements demand independent audit because

a. Users demand assurance that fraud does not exist.
b. Management may not be objective in reporting.
c. Users expect auditors to correct management errors.
d. Management relies on the auditor to improve internal control.

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

a. Is absolutely independent and may conduct an audit.
b. May be sufficiently independent to conduct an audit.
c. Is never considered to be independent.
d. Must receive approval of the Securities and Exchange Commission before conducting an audit.

83. Auditing is based on the assumption that financial data and statements are
a. Verifiable
b. In conformity with the identified applicable financial reporting framework
c. Presented fairly
d. Consistently applied

84. Independent auditors of financial statements perform audits that reduce and control
a. Business risk faced by investors
 b. Information risk faced by investors
c. Complexity of financial statements
d. Timeliness of financial statements

85. Which of the following is an incorrect statement relating to the theoretical framework of auditing?
a. Effective internal control structure reduces the probability of fraud or irregularities in an
organization.
b. Application of generally accepted accounting principles results in a fair
presentation of financial statements.
c. When examining financial data for the purpose of expressing an independent opinion
thereon, the auditor acts exclusively in the capacity of an auditor.
d. In collecting evidence, auditors should maintain an attitude of trust about
their clients' assertions.

86. Which of the following statements is true?

a. The degree or level of assurance that may be provided by the practitioner is inversely
related to the scope of procedures performed and their results.
b. Assurance engagements do not require independence.
c. The term “auditor” is broader in scope compared to the term “practitioner.”
d. Assurance engagements performed by professional accountants are intended
to enhance the credibility of information.

87. Which of the following statements is true?

a. Professional standards prohibit CPAs from performing non-assurance engagements.
b. Absolute assurance is attainable owing to the fact that much of the evidence available
to the CPA is persuasive rather than conclusive.
c. The CPA’s conclusion provides a level of assurance about the subject matter.
d. The responsible party expresses a conclusion that provides a level of assurance as to
whether the subject matter conforms, in all material respects, with the identified
suitable criteria.

88. Which of the following statements is true?

a. An audit, if properly conducted, ensures that fraud is prevented.
b. An independent auditor must be a CPA.
c. After conducting an audit and release of the auditor’s report, the primary responsibility
on the fairness of the financial statements is shifted to the auditor.
d. Compliance audits are conducted to determine adherence to rules and regulations set by the auditor.

89. Which of the following best describes the primary purpose of audit procedures?
a. To detect errors or fraud
b. To comply with generally accepted auditing standards
c. To gather sufficient, appropriate evidence
d. To verify the accuracy of account balances

90. Which of the following engagements is covered by the Framework for Assurance Engagements?
a. Consulting engagements
b. Preparation of tax returns
c. Agreed-upon procedures
d. Independent financial statements audit

91. Which of the following is least likely an application of maintaining an attitude of professional skepticism?
a. The auditor does not consider representations from management as substitute for
obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions
on which to base the audit opinion.
b. In planning and performing an audit, the auditor assumes that management is dishonest.
c. The auditor is alert to audit evidence that contradicts or brings into question the reliability
of documents or management representations.
d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit
evidence obtained.

92. Which of the following types of audits are most similar?

a. Internal audits and independent financial statement audits.
b. Operational audits and compliance audit.
c. Compliance audits and independent financial statement audits.
d. Independent financial statement audits and operational audits.

93. Which of the following types of audits would be intended to determine whether a
governmental entity is following sound procurement practices?
 a. Program audit
b. Compliance audit
c. Financial statement audit
d. Operational audit

94. In government auditing, the three elements of expanded scope auditing are
a. Pre-audit, post-audit, internal audit.
b. Goal analysis, audits of operations, audit of systems.
c. Financial and compliance, economy and efficiency, program results.
d. National government audit, local government audit, corporation audit.

95. Which of the following best describes the operational audit?

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

96. What is the proper organizational role of internal auditing?

a. To serve as an independent, objective assurance and consulting activity that
adds value to operations.
b. To assist the external auditor in order to reduce external audit fees.
c. To perform studies to assist in the attainment of more efficient operations.
d. To serve as the investigative arm of the audit committee of the board of directors.

97. 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 responsibilities.

98. 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

99. An audit which is undertaken in order to determine whether the auditee is following specific
procedures or rules set down by some higher authority is classified as a(n)
a. Audit of financial statements.
b. Compliance audit.
c. Operational audit.
d. Production audit.

100. What is the overall objective of internal auditing?

a. To attest to the efficiency with which resources are used.
b. Ascertain that the cost of internal control is justified.
c. To ascertain that financial statements present accurately the financial position, operating
results, and changes in cash and stockholders' equity.
d. To help members of the organization to effectively discharge their responsibilities.

101. 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

102. 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
103. A operational audit is primarily oriented toward
a. Future improvements to accomplish management’s goals.
b. Past protection provided by existing internal control.
c. Operational information is in accordance with generally accepted accounting principles.
d. Financial statements are fairly presented.

104. The most important function of operational audit report is to:

a. Direct management to take specified actions.
b. State the auditor’s opinion or conclusion.
c. Report findings and recommendations.
d. Report the objective of the audit.

105. Operational audit differs in many ways from an audit of financial statements. Which of the
following is the best example of one of these differences?
a. The usual audit of the financial statement covers four basic statements, whereas
operational audit is usually limited either the statement of financial position or the
income statement.
b. Operational audit do not necessarily result in the preparation of a report.
c. The operational audit deals with pre-tax income.
d. The boundaries of an operational audit are often drawn from an organization
chart and are not limited to a single accounting period.

106. Which of the following best describes the scope of internal auditing as it has developed to date?
a. Internal auditing has evolved to verifying the existence of assets and reviewing
the means of safeguarding assets.
b. Internal auditing has evolved to more of an operational orientation from
a strictly financial orientation.
c. Internal auditing involves appraising the economy and efficiency with which resources are employed.
d. Internal auditing involves evaluating compliance with policies, plans,
procedures, laws, and regulations.

107. Which of the following actions would be an appropriate response by companies to

improve the public's perception of their financial reporting?
a. Requiring internal auditors to report all significant findings of fraud and illegal activity to
the company president.
b. Increased adoption of audit committees.
c. Keeping external and internal auditing work separated to maintain independence.
d. None of the above.

108. Which of the following is considered a primary reason for creating an internal audit department?
a. To safeguard resources entrusted to the organization.
b. To evaluate and improve the effectiveness of control processes.
c. To ensure the accuracy, reliability, and timeliness of financial and operating
data used in management's decision making.
d. To relieve management of the responsibility for establishing effective controls.

109. The internal auditing profession has advanced primarily as a result of

a. Increased interest by Bachelor of Science in Accountancy (BSA) graduates and experienced auditors.
b. The limitation of financial statement audit scope.
c. Job qualification specifications that include added emphasis on background knowledge and skills.
d. Increased complexity and sophistication of business operations.

110. The internal auditing department's responsibility for deterring fraud is to

a. Exercise operating authority over fraud prevention activities.
b. Establish an effective internal control system.
c. Maintain internal control.
d. Examine and evaluate the system of internal control.

111. Internal auditors review the adequacy of the company's internal control system primarily to
a. Help determine the nature, timing, and extent of tests necessary to achieve audit objectives.
b. Determine whether the internal control system ensures that financial statements are fairly
presented.
Determine whether the internal control system provides
c. reasonable assurance that the
company's objectives and goals are met efficiently and economically.
d. Ensure that material weaknesses in the system of internal control are corrected.
112. Internal auditors should review the means of physically safeguarding assets from losses arising from
a. Procedures that are not cost justified.
b. Exposure to the elements.
c. Underusage of physical facilities.
d. Misapplication of accounting principles.

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

a. Determine whether the financial statements fairly present the entity's operations.
b. Evaluate the feasibility of attaining the entity's operational objectives.
c. Make recommendation for improving performance.
d. Report on the entity's relative success in maximizing profits.

114. An objective of a performance audit is to determine whether an entity's

a. Operational information is in accordance with government auditing standards.
b. Specific operating units are functioning economically and efficiently.
c. Financial statements present fairly the results of operations.
d. Internal control is adequately operating as designed.

115. 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

116. Operational audits generally have been conducted by internal and COA auditors, but
may be performed by certified public accountants. A primary purpose of an operational
audit is to provide:
a. A measure of management performance in meeting organizational goals.
b. The results of internal examinations of financial and accounting matters to a company's
top-level management.
c. Aid to the independent-auditor, who is conducting the examination of the financial statements.
d. A means of assurance that internal accounting controls are functioning as planned.

117. Governmental auditing often extends beyond examinations leading to the expression of
opinion on the fairness of financial presentation and includes audits of efficiency, economy,
effectiveness, and also:

a. Accuracy
b. Evaluation
c. Compliance
d. Internal control

118. What is the responsibility of an auditor who is engaged to audit the financial
statements of a government entity?
a. Assess control risk with respect to each component of internal control.
b. Assume responsibility for assuring that the entity complies with applicable laws and regulations.
c. Obtain an understanding of the possible financial statement effects of laws
and regulations having direct and material effects on amounts reported.
d. Design the audit to provide reasonable assurance that the statements are free
of material misstatements resulting from illegal acts having direct or indirect
effects.

119. The objective of governmental effectiveness or program auditing is to determine if the

desired results of a program are being achieved. What is the first step in conducting such an
audit?
a. Identify the legislative intent of the program being audited.
b. Collect quantifiable data on the program's success or failure.
c. Determine the time frame to be audited.
d. Evaluate the system used to measure results.

120. Which of the following statements is a standard applicable to financial statement

audits in accordance with Government Auditing Standards?
a. An auditor should briefly describe in the auditor's report the method of statistical
sampling used in per forming tests of controls and substantive tests.
b. An auditor should report on the scope of the auditor's testing of internal control.
c. An auditor should determine the extent to which the entity's programs achieve the
desired level of results.
d. An auditor should assess whether the entity has reportable measures of
economy and efficiency that are valid and