AUDITING THEORY MCQs

1. The Accountancy Law provided that a CPA certificate c. Employment of the CPA’s spouse as a client’ s
may be suspended or revoked on grounds except director of internal audit.
a. Immoral or dishonorable conduct. d. Acting as an honorary trustee for a not-for-profit
b. Gross negligence or incompetence in the practice organization client.
of profession.
c. Refusal to accept an audit engagement with a 7. Assurance services may improve all of the following
government corporation. except:
d. Conduct discreditable to the accounting a. Relevance. c. Periodicity.
profession b. Timeliness. d. Reliability.

2. Statement 1: Independence standards are required
for audits of public companies, but not for audits of
private companies.
Statement 2: Due care requires a critical review of
the work done and the judgment exercised by those
assisting in an audit at every level of supervision.
a. True, true c. False, true,
b. True, false d. False, false
3. The auditor must be independent of the audit client
unless:
a. The lack of independence does not influence his
or her professional judgment.
b. Both parties agree that the independence issue is
not a problem.
c. The lack of independence is insignificant.
d. None of the above.
4. Statement 1: The Code of Professional Ethics does
not allow an auditor to disclose confidential client
information without the client's consent.
Statement 2: If an auditor is not independent of the
client, it is unlikely that a user of financial
statements will place much reliance on the CPA's
work.
a. True, true c. False, true,
b. True, false d. False, false
5. Which of the following is a “self review” threat to
engagement team member’s compliance with
fundamental principles?
a. An engagement team member has a spouse that
serves as CFO of the attest client.
b. A second partner review is required on all attest
engagements.
c. An engagement team member prepares invoices
for the attest client.
d. An engagement team member has a direct
financial interest in the attest client.
8. Which of the following would best be described as an
assurance service?
a. Preparing a report representing a client's position
during a BIR audit.
b. Working with a client to develop a more efficient
method of processing financial transactions.
c. Offering an opinion concerning the accuracy of
statements made on a client's web site relating
to the client's online privacy policies.
d. Assisting a client in identifying potential sources
of capital for potential acquisitions.
9. Which of the following statements is not true with
respect to assurance, attest (assertion-based
assurance engagement as opposed to direct
reporting assurance engagement), and audit
services?
a. These services are applied only to financial
statements and financial statement accounts.
b. These services all involve obtaining and
evaluating evidence.
c. These services all involve determining the
correspondence of some information to a set of
criteria.
d. These services all involve issuing a report.
10. Statement 1: Assurance services are independent
professional services that improve the quality of
information specifically for internal decision makers.
Statement 2: Management and the external auditor
are responsible for the effectiveness of the entity's
internal control.
a. True, true c. False, true,
b. True, false d. False, false
11. In performing an attestation engagement, a CPA
typically
a. Supplies litigation support services
b. Assesses control risk at a low level
c. Expresses a conclusion about an assertion
d. Provides management consulting advice

12. Which of the following procedures ordinarily

6. According to the standards of the profession, which performed during an audit are also performed in
of the following circumstances will prevent a CPA review?
performing audit engagements from being a. Assessment of accounting and internal control
independent? systems
a. Obtaining a collateralized automobile loan from a b. Test of controls
financial institution client. c. Tests of records and of responses to inquiries
b. Litigation with a client relating to billing for d. Inquiry and analytical procedures
consulting services for which the amount is
immaterial.
13. According to Philippine Standard on Auditing, the
procedures employed in doing compilation are:
a. Designed to enable the accountant to express a
limited assurance.
b. Designed to enable the accountant to express a
negative assurance.
c. Not designed to enable the accountant to
express any form of assurance.
d. Less extensive than review procedures but more
extensive than agreed-upon procedures.
14. One of a certified audit firm’s basic objectives is to
provide professional services that conform to
professional standards. Reasonable assurance of
achieving this basic objective is provided through:
a. A system of quality control.
b. A system of peer review.
c. Continuing professional education.
d. Compliance with International Financial Reporting
Standards.
15. Which of the following is not true about International
and Philippine Auditing Standards?
a. International and Philippine Auditing Standards
do not require an audit of internal control.
b. International and Philippine Auditing Standards
do not allow reference to division of
responsibilities in the audit report.
c. International and Philippine Auditing Standards
require obtaining an attorney's letter.
d. International and Philippine Auditing Standards
are based on a risk assessment approach.
16. A CPA is most likely to refer to its quality control
policies and procedures in determining
a. The nature of the CPA's report qualification
b. The scope of the CPA's auditing procedures
c. Requirements for the review of the entity and its
environment
d. Whether the CPA should undertake an audit
engagement
17. Which of the following is not an element of quality
control as defined by Philippine Standards on Quality
Control 1?
a. Monitoring
b. Independence
c. Human resources
d. Relevant ethical requirements
18. The quality control standards are concerned primarily
with
a. Actions of individual auditors
b. A firm's monitoring of its practice
c. Disciplinary actions against individual auditors
d. Preventing legal action
19. An auditor who accepts an audit engagement and
does not possess expertise with respect to the
business entity's industry, should
a. Engage financial experts familiar with the nature
of the business entity.
b. Obtain a knowledge of matters that relate to the
nature of the entity's business.
c. Refer a substantial portion of the audit to
another CPA, who will act as the principal
auditor.
d. First inform management that an unqualified
opinion can not be issued.
20. Before accepting an engagement to audit a new
client, an auditor is required to
a. Make inquiries of the predecessor auditor.
b. Tell the client whether or not the auditor is
willing to issue a "clean" opinion.
c. Prepare a memorandum setting forth the staffing
requirements and documenting the preliminary
audit plan.
d. Become a member of the client's board of
directors.
21. A CPA firm's personnel partner periodically studies
the CPA firm's personnel advancement experience to
ascertain whether the individuals who were assigned
increased degrees of responsibility met a pre-
determined criteria. This is evidence of the CPA
firm's adherence to prescribed standards of
a. Quality control
b. Due professional care
c. Supervision and review
d. Fieldwork
22. Which of the following is an element of a CPA firm's
quality control system that should be considered in
establishing its quality control policies and
procedures?
a. Using the audit risk model
b. Using statistical sampling techniques
c. Assigning personnel to engagements
d. Considering audit risk and materiality
23. In order to achieve effective quality control, a firm of
independent auditors should establish policies and
procedures for
a. Determining the minimum procedures necessary
for unaudited financial statements
b. Setting the scope of audit work
c. Deciding whether to accept or continue a client
d. Setting the scope of internal control study and
evaluation
24. Within the context of quality control, the primary
purpose of continuing professional education and
training activities is to enable a CPA firm to provide
personnel within the firm with
a. Technical training that ensures proficiency as an
auditor
b. Opportunities for career advancement outside
the accounting firm
c. Knowledge required to fulfill assigned
responsibilities
d. Knowledge required to perform a peer review
25. Which of the following actions should a CPA firm take
to comply with the Philippine Standards on Quality
Control?
a. Establish procedures that comply with the
standards of the RA 9298.
 b. Use attributes sampling techniques in testing
internal controls.
c. Consider inherent risk and control risk before
determining detection risk.
d. Establish policies to ensure that the audit work
meets applicable professional standards.
26. Among the possible reasons why an auditor will
discontinue servicing an audit client is
a. Too many errors have to be adjusted to make
the financial statements conform with PFRSs
b. The auditor has to use a specialist in verifying
inventory valuation
c. The auditor is also rendering at the same time, a
management advisory engagement for the same
client
d. A change in the client management and the
auditor is worried about the reputation of the
new management
27. Which of the following best describes the concept of
audit risk?
a. The risk of the auditor being sued because of
association with an audit client.
b. The risk that the auditor will provide an
unqualified opinion on financial statements that
are, in fact, materially misstated.
c. The overall risk that a material misstatement
exists in the financial statements.
d. The risk that auditors use audit procedures that
are inappropriate.
28. Which of the following best describes why an
independent auditor is asked to express an opinion
on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that
fairly present a company's financial position and
changes in cash flows without the expertise of an
independent auditor.
b. It is management's responsibility to seek
available independent aid in the appraisal of the
financial information shown in its financial
statements.
c. The opinion of an independent party is needed
because a company is not likely to be considered
objective with respect to its own financial
statements.
d. It is a customary courtesy that all stockholders
of a company receive an independent report on
management's stewardship in managing the
affairs of the business.
29. Which of the following best describes the
fundamental, underlying reason for why there is
demand for an independent 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 statements.
c. A misstatement of account balances may exist
and it is the independent auditor's responsibility
to ensure that financial statements are not
misstated.
d. A poorly designed internal control system may
be in place.
30. The primary responsibility for the adequacy of
disclosures in the financial statements of a publicly
held company rests with the
a. Partner assigned to the audit engagement
b. Management of the company
c. Auditor in charge of the fieldwork
d. Securities and Exchange Commission
31. Which is not an attribute of an external auditor?
a. Independence
b. Client advocacy
c. Objectivity
d. Concern for the public interest
32. Which of the following is true concerning internal and
external auditors?
a. Internal and external auditors require the same
professional designation.
b. Internal and external auditors must be
independent, but they define independence
differently.
c. Internal and external auditors both report to the
shareholders of the company.
d. Internal and external auditors both increase the
internal control of a company.
33. An attitude of “professional skepticism” is necessary
if a CPA is to perform an audit engagement with due
care. Which of the following best describes how a
CPA may display an attitude of “professional
skepticism” when performing an audit engagement?
a. By insisting that all management assertions are
documented in writing
b. By obtaining appropriate evidence in support of
all material management assertions
c. By assessing inherent risk as high for all material
financial statement assertions
d. By requiring both the client’s CEO and CFO to
sign the letter of representation to the auditor
34. Which of the following activities is typically
associated with operational auditing?
a. Determining whether the financial statements
are an accurate representation of the entity's
operations.
b. Evaluating the feasibility of attaining the entity's
operational objectives.
c. Making recommendations for improving
performance.
d. Reporting on the entity's relative success in
meeting profitability goals.
35. The single feature that most clearly distinguishes
auditing, attestation, and assurance is
a. Type of service.
b. Training required to perform the service
c. Scope of services.
d. CPA’s approach to the service.
36. 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 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.
37. Statement 1: Testing all transactions that occurred
during the period is cost prohibitive.
Statement 2: Audit procedures are designed to test
management assertions.
c. True, true c. False, true,
d. True, false d. False, false
38. Evidence is reliable if it
a. Signals the true state of a management
assertion.
b. Applies to the period being audited.
c. Relates to the audit assertion being tested.
d. Is consistent with management's assertions.
39. Statement 1: Audit evidence includes only written
information used by the auditor in arriving at an
opinion about the fairness of financial statements.
Statement 2: The classification assertion refers to
transactions and events being recorded in the correct
accounting period.
Statement 3: The relevance of audit evidence or
specific audit procedures depends on the assertion
being tested.
a. True, true, true c. False, true, true
b. True, false, true d. False, false, true
40. A confirmation is used to:
a. Verify the inventory count is correct.
b. Verify that a control is being observed.
c. Verify a representation from a third party.
d. Verify that a specific trend is correct.
41. Which of the following is an essential factor in
evaluating the sufficiency of evidence? The evidence
must
a. Be well documented and cross-referenced in the
audit documents
b. Be based on sources that are considered reliable
c. Bear a direct relationship to the audit assertion
d. Be persuasive enough to enable the auditor to
form an opinion
42. Tracing is used primarily to test which of the
following assertions about classes of transactions?
a. Occurrence
b. Completeness
c. Cutoff
d. Classification
43. Which of the following presumptions does not relate
to the appropriateness of audit evidence?
a. The more effective the internal control system,
the more assurance it provides about the
accounting data and financial statements
b. An auditor's opinion, to be economically useful, is
formed within a reasonable time and based on
evidence obtained at a reasonable cost
c. Evidence obtained from independent sources
outside the entity is more reliable than evidence
secured solely within the entity
d. The independent auditor's direct personal
knowledge, obtained through observation and
inspection, is more persuasive than information
obtained indirectly
44. Of the following, which is the least persuasive type of
audit evidence?
a. Documents mailed by outsiders to the auditor
b. Correspondence between the auditor and third
party vendors
c. Copies of client sales invoices inspected by the
auditor
d. Computations made by the auditor
45. All of the following are typically in the current file
except
a. Adjusting journal entries
b. Copies of the audit report
c. Chart of accounts
d. Lead schedules
46. You are auditing a store that sells merchandise.
Some of the store merchandise is held on
consignment. Which account balance assertion for
inventory should you be most concerned about
verifying?
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Valuation or allocation
47. Which of the following best describes the primary
purpose of audit procedures?
a. To detect all errors or fraudulent activities
b. To comply with generally accepted accounting
principles
c. To gather corroborative evidence about
management's assertions
d. To verify the accuracy of the balance sheet
account balances
48. Which statement concerning audit evidence is not
valid?
a. The auditor is seldom convinced beyond all doubt
with respect to all aspects of the financial
statements being audited
b. The auditor performs tests to collect convincing
evidence that the financial statements are not
misstated
c. The auditor weighs the cost of obtaining
evidence with its usefulness
d. The auditor considers the amount of risk present
in deciding the nature and extent of evidence to
be collected

49. Each of the following might, by itself, form a valid
basis for an auditor to reduce substantive testing
except for the
a. Difficulty and expense involved in testing a
particular item
b. Assessment of control risk at a low level
c. Low inherent risk involved
d. Relationship between the cost of obtaining
evidence and its usefulness
50. Which of the following presumptions is correct about
the reliability of audit evidence?
a. Information obtained indirectly from outside
sources is the most reliable audit evidence
b. To be reliable, audit evidence should be
convincing rather than persuasive
c. Reliability of audit evidence refers to the amount
of corroborative evidence obtained
d. An effective internal control system provides
more reliable audit evidence
51. Which of the following is the least persuasive
documentation in support of an auditor's opinion?
a. Schedules of details of physical inventory counts
conducted by the client
b. Notation of auditor's inferences drawn from
ratios and trends
c. Notation of appraisers' conclusions documented
in the auditor's working papers
d. Lists of negative confirmation requests for which
no response was received by the auditor
52. Audit documents record the results of the auditor's
evidence-gathering procedures. When preparing
audit documents, the auditor should remember that
a. Audit documents should be kept on the client's
premises so that the client can have access to
them for reference purposes
b. Audit documents should be the primary support
for the financial statements being examined
c. Audit documents should be considered as a
substitute for the client's accounting records
d. Audit documents should be designed to facilitate
the review and supervision of work done by
auditors assigned to the engagement
53. Based on conversations with the owner-manager of
an audit client, the auditor ascertained that the
company's primary motivation is to avoid paying
income taxes. Based on this motivation, which
account balance assertion for ending inventory will
the auditor be most concerned about verifying?
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Observation
54. Your audit client is under intense pressure to meet
an earnings target. Which transaction assertion for
transactions within the purchasing process are you
most concerned with?
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Presentation and disclosure
55. Which of the following is not a typical analytical
procedure?
a. Study of relationships of the financial information
with relevant nonfinancial information
b. Comparison of the financial information with
similar information regarding the industry in
which the entity operates
c. Comparison of recorded amounts of major
disbursements with appropriate invoices
d. Comparison of the financial information with
budgeted amounts
56. A primary objective of analytical procedures used in
the final review stage of an audit is to
a. Identify account balances that represent specific
risks relevant to the audit.
b. Gather evidence from tests of details to
corroborate financial statement assertions.
c. Detect fraud that may cause the financial
statements to be misstated.
d. Assist the auditor in evaluating the overall
financial statement presentation.
57. What is the best method an auditor may use to
detect fraud in the financial statements of clients?
a. Use professional skepticism.
b. Understand and properly apply Generally
Accepted Accounting Standards.
c. Brainstorm with the client to find the types of
fraud occurring.
d. Actively search for all errors in the financial
statements.
58. According to professional audit standards, how might
an understanding of the nature of fraud that may
occur in the client organization best be identified by
the audit firm?
a. Fraud training courses from actual corporate
fraud ex-criminals.
b. Conducting a brainstorming meeting with the
members of the audit team.
c. Circulating a survey to the client company
employees for completion.
d. Discussions with other CPA firms.
59. Misappropriation of assets is normally perpetrated
by:
a. members of the board of directors.
b. employees at lower levels of the organization.
c. management of the company.
d. the internal auditors.
60. If an auditor believes a client may have committed
illegal acts, which of the following actions should the
auditor take?
a. Consult with the client’s counsel and the auditor’s
counsel to determine how the suspected illegal
acts will be communicated to stockholders.
b. Extend auditing procedures to determine
whether the suspected illegal acts have a
material effect on the financial statements.
c. Make inquiries of the client’s management and
obtain an understanding of the circumstances
 underlying the acts and of other evidence to
determine the effects of the acts on the financial
statements.
d. Notify each member of the audit committee of
the board of directors about the nature of the
acts and request that they advise an approach to
be taken by the auditor.
61. Which of the following is least likely to uncover
fraud?
a. External auditors c. Internal controls
b. Internal auditors d. Management
62. Which of the following would most likely be deemed
a direct-effect illegal act?
a. Violation of employment laws.
b. Violation of environmental regulations.
c. Violation of income tax laws.
d. Violation of civil rights laws.
63. If the auditor suspects that members of senior
management, including members of the board of
directors, are involved in noncompliance to laws as
regulations, and he believes his report may not be
acted upon, he would:
a. Do nothing.
b. Issue a disclaimer of opinion.
c. Consider seeking legal advice.
d. Make special investigation in order to fully
determine the extent of client’s noncompliance.
64. An auditor who discovers that a client's employees
paid small bribes to municipal officials most likely
would withdraw from the engagement if
a. The payments violated the client's policies
regarding the prevention of illegal acts
b. The client receives financial assistance from a
federal government agency
c. Documentation that is necessary to prove that
the bribes were paid does not exist
d. Management fails to take the appropriate
remedial action
65. If material fraud perpetrated by management is
discovered by the auditor, the nature of the fraud
should always be reported directly to:
a. the BOA
b. the SEC
c. the NBI
d. the audit committee of the company
66. Management of Premium Discovery Company is
compensated through large salaries, stock options
and bonuses tied to the company's working capital
growth. The CEO is constantly holding meetings to
ensure that management is on target for increased
operating income each month. Based upon the above
information only, what type of probable motivation is
there to commit fraud at the Premium Discovery
Company?
a. Pressure.
b. Opportunity.
c. Rationalization.
d. Expectation.
67. The fraud triangle consists of three components
(pressure, opportunity, and rationalization). Which of
the three components are present in most every
fraud?
a. All three factors are usually present when fraud
occurs.
b. Pressure and opportunity
c. Opportunity and rationalization
d. Rationalization and pressure
68. Which of the following statements best describes the
auditor's responsibility regarding the detection of
material fraud?
a. Because of the inherent limitations of an audit,
the auditor is not responsible for the failure to
detect material fraud.
b. The auditor is responsible for the failure to detect
material fraud when such failure results from
nonperformance of audit procedures specifically
described in the engagement letter.
c. The auditor should design audit programs that
will provide reasonable assurance that material
errors and fraud will be detected in the ordinary
course of the examination.
d. The auditor is responsible for the failure to detect
material fraud when the auditor's evaluation of
internal control procedures indicates that they
are ineffective.
69. Which of the following issues is normally part of the
“brainstorming” session required by PSAs?
How assets How and where the entity’s
could be financial statements are
misappropriated susceptible to material
misstatements due to fraud
a. Yes Yes
b. No No
c. Yes No
d. No Yes
70. Research has found that the most fraudulent
financial reporting, such as misleading reporting was
perpetrated by which of the following.
a. lower-level employees.
b. external auditors.
c. internal auditors.
d. senior management.
71. Which of the following matters is generally included
in auditor's engagement letter?
a. Management's responsibility for the entity's
compliance with laws and regulations.
b. The factors to be considered in setting
preliminary judgments about materiality.
c. Management's liability for illegal acts committed
by its employees.
d. The auditor's responsibility to search for signifi-
cant internal control deficiencies.
72. For which engagements are engagement letters
required?
a. All engagements
b. Audit engagements only
c. Assurance engagements only
 d. All engagements except the preparation of
income tax returns
73. 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 system.
b. The existence of related party transactions.
c. The adequacy of the accounting records
d. The operating effectiveness of control
procedures.
74. If the auditor believes that an understanding with
the client has not been established, he or she should
ordinarily
a. Perform the audit with increased professional
skepticism
b. Assess the control risk at the maximum level and
perform a primarily substantive audit
c. Decline to accept or perform the audit
d. Modify the scope of the audit to reflect an
increased risk of material misstatement due to
fraud
75. An auditor who accepts an audit engagement and
does not possess expertise with respect to the
business entity's industry, should
a. Engage financial experts familiar with the nature
of the business entity.
b. Obtain a knowledge of matters that relate to the
nature of the entity's business.
c. Refer a substantial portion of the audit to
another CPA, who will act as the principal
auditor.
d. First inform management that an unqualified
opinion can not be issued.
76. Before accepting an engagement to audit a new
client, an auditor is required to
a. Make inquiries of the predecessor auditor.
b. Tell the client whether or not the auditor is
willing to issue a "clean" opinion.
c. Prepare a memorandum setting forth the staffing
requirements and documenting the preliminary
audit plan.
d. Become a member of the client's board of
directors.
77. Hawkins requested permission to communicate with
the predecessor auditor and review certain portions
of the predecessor auditor's working papers. The
prospective client's refusal to permit this will bear
directly on Hawkins' decision concerning the
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of
accounting principles between years
c. Apparent scope limitation
d. Integrity of management
78. Engagement letters include all of the following
except
a. A list of additional services that will be provided
b. A list of adjusting journal entries
c. Information about the audit fee
d. Arrangements involving the use of specialists
79. Which of the following factors most likely would
cause a CPA not to accept a new audit engagement?
a. The prospective client's unwillingness to permit
inquiry of its legal counsel
b. The inability to review the predecessor auditor's
documentation
c. The CPA's lack of understanding of the
prospective client's operations and industry
d. Indications that management has not
investigated employees in key positions before
hiring them
80. An auditor is required to establish an understanding
with a client regarding the responsibilities for each
engagement. This understanding generally includes
a. Management's responsibility to guarantee that
there are no material misstatements due to fraud
b. The auditor's responsibility to plan and perform
the audit to provide reasonable, but not
absolute, assurance of detecting material errors
or fraud
c. Management's responsibility for providing the
auditor with an assessment of the risk of
material misstatement due to fraud
d. The auditor's responsibility for the fairness of the
financial statements
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