Since 1977

AUDITING THEORY R. C. GLORIA

AT.1804- Introduction to Audit of
Historical Financial Information MAY 2015

LECTURE NOTES
Definition of Auditing to determine the extent of achievement of
previously set goals and objectives.
An audit is a systematic process of objectively obtaining
c. Compliance audits – A compliance audit is
and evaluating evidence regarding assertions about
conducted to determine whether the auditee is
economic actions and events to ascertain the degree of
following specific procedures, rules, or regulations
correspondence between these assertions and established
set by some higher authority. Following are
criteria, and communicating the results to interested users.
examples of compliance audits for a private
business.
Distinction between Auditing and Accounting
i. Determine whether accounting personnel are
Many financial statement users and the public confuse following the procedures prescribed by the
auditing with accounting. The confusion results because company controller.
most auditing is usually concerned with accounting ii. Review wage rates for compliance with
information, and many auditors have considerable minimum wage laws.
expertise in accounting matters. iii. Examine contractual agreements with bankers
and other lenders to be sure the company is
Accounting is the recording, classifying, and summarizing complying with legal requirements.
of economic events in a logical manner for the purpose of 2. As to auditor
providing financial information for decision-making while a. External (Independent) audits – These are audits
auditing pertains to gathering and evaluation of evidence performed by CPAs (independent or external
regarding the fair presentation of financial statements. auditor) who are independent of the organizations
whose assertions are the subject matter of the
In addition to understanding and knowledge in accounting, audit. Note that independent or external auditors
the auditor must possess expertise in the accumulation may also perform operational and compliance
and interpretation of audit evidence. It is this expertise audits.
that distinguishes auditors from accountants. Remember, b. Internal audits – An internal audit is an
auditing begins where accounting ends. independent appraisal function established within
an organization to examine and evaluate its
Theoretical Framework of Auditing activities as a service to the organization. Internal
 Data to be audited can be verified auditors normally report the results of their
 Independence examination to those charged with governance
 No long-term conflict between the auditor and the (audit committee or board of directors). Internal
management audits mainly comprise operational and compliance
 Effective internal control system reduces risk of audits. Although internal audit is an “independent
material misstatement of the FSs appraisal function”, internal auditors, being
 Consistent application of GAAP results to fair employees of the auditee-organization, cannot be
presentation as independent as external auditors (or totally
 What was held true in the past will continue to hold independent) as long as an employer-employee
true in the future in the absence of known conditions relationship exists.
to the contrary c. Governmental (State) audits – Government
 An audit benefits the public auditing involves the determination of whether
government funds are being handled properly and
Types of Audits in compliance with the applicable laws and
regulations, and whether the government
1. As to objective and criteria programs of a particular agency are conducted
a. Financial statement (FS) audits – A financial effectively and efficiently. Governmental auditors
statement audit is conducted to determine whether can perform financial statements audit, operational
the financial statements (the information being audit and compliance audit.
verified) are stated in accordance with specified
criteria. The following table summarizes the types of audits as to
b. Operational (Performance or Management) audits - objective and criteria:
An operational audit evaluates the efficiency and
effectiveness of any part of an organization’s Types Objective Example Criteria
operating procedures and methods. At the Operational Evaluates the Evaluate Company
completion of an operational audit, management Perfor- efficiency and whether the standards for
normally expects recommendations for improving mance effectiveness computeri- efficiency
operations. Audit of any part of zed payroll and
i. Economy and efficiency (Management) audit – an organiza- system is effectiveness.
The appraisal of management performance tion’s operating
from the most efficient point of view, i.e., cost- operating effectively
benefit analysis. procedures and
ii. Effectiveness (Program results) audit – The and methods. efficiently
evaluation of programs, projects and activities
Compliance Conducted to Determine Loan

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Audit determine whether agreement in accordance with an applicable financial reporting

whether the bank provisions framework (FRF); and
auditee is require-  To report on the FSs, and communicate as required by
following ments for the Philippine Standards on Auditing (PSAs), in
specific loan accordance with the auditor’s findings.
procedures, continuation
rules, or have been In all cases when reasonable assurance cannot be
regulations met obtained:
set by some
higher  The auditor shall provide a qualified audit opinion in
authority. the auditor’s report,
 If still insufficient for intended users of the financial
Financial Conducted to Annual GAAP statements, the auditor shall:
Statements determine audit of (Applicable o disclaim an opinion; or
Audit whether the PLDT financial o withdraw from the engagement, is legally
financial financial reporting permissible.
statements statements framework)
(the Auditor’s Responsibilities
information
The auditor shall obtain reasonable assurance about
being
whether the FSs as a whole are free from material
verified) are
misstatement, whether due to fraud or error.
stated in
accordance
Reasonable assurance is obtained when the auditor has
with specified
sufficient appropriate audit evidence (SAAE) to reduce
criteria.
audit risk to an acceptably low level. Audit evidence is
primarily obtained through the performance of audit
procedures.
Need for Independent Financial Statements Audit
Management’s Responsibilities
The need for independent auditing of FSs arises from the
An audit is conducted on the premise that management
importance of reducing information risk.
and, where appropriate, TCWG have responsibility:
 For the preparation and presentation of the FSs in
Users depend on reliable information in making important
accordance with the applicable FRF;
decisions. Decisions made based on unreliable information
 The design, implementation and maintenance of
could have adverse financial consequences. Users,
internal control (IC); and
therefore, turn to expertise of the auditor who provides an
 To provide the auditor with:
unbiased opinion on the fair presentation of financial
a. All information, such as records and
statements through the auditor’s report.
documentation, and other matters that are
relevant to the preparation and presentation of the
Causes of information risk are the following:
financial statements;
 Conflict of interest between management and users of
b. Any additional information that the auditor may
financial statements (potential bias)
request from management and, where appropriate,
 Remoteness between a user and the organization
those charged with governance; and
 Voluminous data
c. Unrestricted access to those within the entity from
 Complexity of the transactions, information, or
whom the auditor determines it necessary to
processing systems
obtain audit evidence.
However, the auditor’s opinion therefore does not assure,
Scope and Conduct of an Audit of Financial
for example, the future viability of the entity nor the
Statements
efficiency or effectiveness with which management has
conducted the affairs of the entity. The auditor normally exercises professional judgment in
determining the scope of the audit and considers the
Nature and Objective of External (Independent) requirements of the relevant legislations, regulations and
Financial Statements Audit professional standards.
FSs audit is an assurance engagement (the broadest in
The auditor shall conduct the audit with the exercise
scope), i. e., there is enhancement of the degree of
professional judgment and maintain professional
confidence of intended users in the FSs. Audit of historical
skepticism throughout the planning and performance of
financial statements is an example of assertion-based
the audit in:
engagement.
 Identifying and assessing risks of material
The performance of FSs audit by an independent auditor
misstatement (ROMMs) – ROMMs refer to the risk that
does not relieve management’s responsibilities to prepare
the FSs are materially misstated prior to audit.
and present the FSs with oversight from those charged
 Obtaining sufficient appropriate audit evidence (SAAE)
with governance (TCWG).
through designing and implementing appropriate
responses to the assessed risks.
In conducting an audit of FSs, the overall objectives of the
 Forming an opinion on the FSs.
auditor are:
Throughout the performance of the audit, the auditor shall
 To obtain reasonable assurance whether the FSs are
comply with the relevant ethical requirements including
free from material misstatement, whether due to fraud
those pertaining to independence, relating to FSs audit
or error, to enable the auditor to express an opinion on
engagements.
whether the FSs are prepared, in all material respects,

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 Drawing of conclusions, for example, assessing the

Ethical Requirements reasonableness of the management’s estimates
Relevant ethical requirements ordinarily comprise Parts A
The distinguishing feature of the professional judgment
and B of the Code of Professional Ethics and national
expected of an auditor is that it is exercised by an auditor
requirements that are more restrictive.
whose training, knowledge and experience have assisted in
developing the necessary competencies to achieve
Part A of the Code of Ethics establishes the fundamental
reasonable judgments.
principles of professional ethics relevant to the auditor
when conducting an audit of financial statements and
Sufficient Appropriate Audit Evidence
provides a conceptual framework for applying those
principles. The fundamental principles with which the Audit evidence is the information obtained by the auditor
auditor is required to comply by the Code of Ethics are: in arriving at the conclusions on which the audit opinion is
a. Integrity; based. Audit evidence is necessary to support the auditor’s
b. Objectivity; opinion and report.
c. Professional competence and due care;
d. Confidentiality; and The sufficiency and appropriateness of audit evidence are
e. Professional behavior. interrelated. Sufficiency is the measure of the quantity of
Part B of the Code of Ethics illustrates how the conceptual audit evidence. The quantity of audit evidence needed is
framework is to be applied in specific situations. affected by the auditor’s assessment of the risks of
misstatement (the higher the assessed risks, the more
Professional Skepticism audit evidence is likely to be required) and also by the
quality of such audit evidence (the higher the quality, the
An attitude that includes a questioning mind, being alert to
less may be required). Obtaining more audit evidence,
conditions which may indicate possible misstatement due
however, may not compensate for its poor quality.
to error or fraud, and a critical assessment of audit
evidence. The auditor shall plan and perform an audit with
Appropriateness is the measure of the quality of audit
professional skepticism recognizing that circumstances
evidence; that is, its relevance and its reliability in
may exist that cause the financial statements to be
providing support for the conclusions on which the
materially misstated.
auditor’s opinion is based. The reliability of evidence is
influenced by its source and by its nature, and is
Professional skepticism includes being alert to, for
dependent on the individual circumstances under which it
example:
is obtained.
 Audit evidence that contradicts other audit evidence
obtained
Whether sufficient appropriate audit evidence has been
 Information that brings into question the reliability of
obtained to reduce audit risk to an acceptably low level,
documents and responses to inquiries to be used as
and thereby enable the auditor to draw reasonable
audit evidence
conclusions on which to base the auditor’s opinion, is a
 Conditions that may indicate possible fraud
matter of professional judgment.
 Circumstances that suggest the need for audit
procedures in addition to requirements of PSAs
Audit Risk
Maintaining professional skepticism throughout the audit is Audit risk is the risk that the auditor gives an inappropriate
necessary if the auditor is, for example, to reduce the risks audit opinion when the financial statements are materially
of: misstated. Audit risk does not include the risk that the
 Overlooking unusual circumstances. auditor might express an opinion that the financial
 Over generalizing when drawing conclusions from audit statements are materially misstated when they are not.
observations. This risk is ordinarily insignificant.
 Using inappropriate assumptions in determining the
nature, timing, and extent of the audit procedures and Audit risk is a function of the risks of material
evaluating the results thereof. misstatement and detection risk. Further, audit risk is a
technical term related to the process of auditing; it does
Professional Judgment not refer to the auditor’s business risks such as loss from
litigation, adverse publicity, or other events arising in
The application of relevant training, knowledge and
connection with the audit of financial statements.
experience, within the context provided by auditing,
accounting and ethical standards, in making informed
Risks of Material Misstatement
decisions about the courses of action that are appropriate
in the circumstances of the audit engagement. The risk that the financial statements are materially
misstated prior to audit.
Professional judgment is essential to the proper conduct of
an audit because it enables the proper interpretation of: The risks of material misstatement may exist at two levels:
 Relevant ethical requirements  The overall financial statement level; and
 PSAs  The assertion level for classes of transactions, account
 Informed decisions balances, and disclosures.

Professional judgment is necessary in particular regarding Risks of material misstatement at the overall financial
decisions about: statement level refer to risks of material misstatement that
 Materiality and audit risk relate pervasively to the financial statements as a whole
 Nature, timing, and extent of audit procedures and potentially affect many assertions.
 Evaluating whether SAAE has been obtained
 Evaluating management’s judgments in applying the Risks of material misstatement at the assertion level are
applicable FRF assessed in order to determine the nature, timing, and

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extent of further audit procedures necessary to obtain For a given level of audit risk, the acceptable level of
sufficient appropriate audit evidence. detection risk bears an inverse relationship to the assessed
risks of material misstatement at the assertion level.
The risks of material misstatement at the assertion level
consist of two components: inherent risk and control risk. Detection risk relates to the nature, timing, and extent of
Inherent risk and control risk are the entity’s risks; they the auditor’s procedures that are determined by the
exist independently of the audit of the financial auditor to reduce audit risk to an acceptably low level. It is
statements. therefore a function of the effectiveness of an audit
procedure and of its application by the auditor.
Control risk—Control risk is the risk that a misstatement
that could occur in an account balance or class of Conduct of an Audit in Accordance with PSAs
transactions and that could be material, individually or
The auditor shall comply with all PSAs relevant to the
when aggregated with misstatements in other balances or
audit. APSA is relevant to the audit when the PSA is in
classes, will not be prevented or detected and corrected on
effect and the circumstances addressed by the PSA exist.
a timely basis by the accounting and internal control
systems. Control risk is a function of the effectiveness of
The auditor shall not represent compliance with PSAs in
the design, implementation and maintenance of internal
the auditor’s report unless the auditor has complied with
control by management to address identified risks that
the requirements of this PSA and all other PSAs relevant to
threaten the achievement of the entity’s objectives
the audit.
relevant to preparation of the entity’s financial statements.
If an objective in a relevant PSA cannot be achieved, the
Inherent risk—Inherent risk is the susceptibility of an
auditor shall evaluate whether this prevents the auditor
account balance or class of transactions to misstatement
from achieving the overall objectives of the auditor and
that could be material, individually or when aggregated
thereby requires the auditor, in accordance with the PSAs,
with misstatements in other balances of classes, assuming
to modify the auditor’s opinion or withdraw from the
that there were no related internal controls. Inherent risk
engagement. Failure to achieve an objective represents a
is higher for some assertions and related classes of
significant matter requiring documentation
transactions, account balances, and disclosures than for
others. For example, it may be higher for complex
Inherent Limitations of Audit
calculations or for accounts consisting of amounts derived
from accounting estimates that are subject to significant An audit is not a guarantee of the correctness of the
estimation uncertainty. financial statements due to the following inherent
limitations of audit:
Detection Risk a. Use of selective testing/sampling risk;
b. Use of judgment/non-sampling risk/human error;
Detection risk is the risk that an auditor’s substantive
c. Inherent limitations of internal control;
procedures will not detect a misstatement that exists in an
d. Persuasive evidence rather than conclusive;
account balance or class of transactions that could be
e. Management representations; and
material, individually or when aggregated with
f. Characteristics of the subject matter/accounts (e.g.,
misstatements in other balances or classes.
accounts arising from accounting estimates).

- done -

MULTIPLE CHOICE
Definition of Auditing 4. An independent audit is important to readers of
1. Auditing is a systematic process that includes all of the financial statements because it
following except: a. Provides a measure of management's stewardship
a. Systematic process function.
b. Assertions about economic actions and events b. Measures and communicates the financial data
c. Objectively obtaining and evaluating assurance included in financial statements.
d. Degree of correspondence between assertions and c. Objectively examines and reports on
GAAP management's financial statements.
d. Reports on the accuracy of information in the
2. The definition of auditing includes both a(an) financial statements.
a. Documentation process and an evaluation process.
b. Evaluation process and a reporting process. 5. Which one of the following is a potential problem with
c. Investigative process and a reporting process. management's communication of financial information
d. Documentation process and a reporting process. that causes third parties to desire the independent
auditor's assessment of the financial statement
Demand for Auditing presentation?
3. Auditing is important in a free market society because a. Complexity of transactions affecting the financial
a. The public requires CPAs functioning as divisions of statements
regulatory bodies b. Lack of criteria on which to base information
b. Auditors detect all errors and fraud made by c. Remoteness of the user from the organization
company employees d. A and C
c. It provides reliable information based upon which
to judge economic performance Types of Audit
d. The auditor is an amiable insurance policy for 6. The objective of an operational audit is to
investors a. Evaluate whether laws have been broken by
management

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b. Evaluate fairness of presentation of financial a. Audit which is performed by professional

statements practitioner as an independent contractor
c. Evaluate compliances with company rules and b. Audit which is incidentally concerned with the
regulations detection and prevention of fraud
d. Evaluate the effectiveness and efficiency with c. Audit wherein the auditor should be independent of
which resources are employed management both in fact and in mental attitude
d. Audit which serves the needs of management
7. What is the criteria used in an operational audit?
a. GAAP 16. To provide for the greatest degree of independence in
b. Effectiveness and efficiency performing internal auditing functions, an internal
c. Rules and regulations auditor most likely should report to the
d. Company policies a. Financial vice-president.
b. Corporate controller.
8. Before an operational audit for effectiveness can be c. Those charged with governance.
performed, there must be: d. Corporate stockholders.
a. a financial audit by an independent auditor.
b. a financial audit by an internal auditor. 17. For an internal auditor to render impartial and
c. a review performed by either an independent or an unbiased judgments, he or she must be independent of
internal auditor. the entity's
d. specific criteria developed to define effectiveness. a. Stockholders.
b. Personnel and operating activities (line functions of
9. A primary purpose of an operational audit is to provide the organization).
a. A means of assurance that internal accounting c. Independent (external) auditors.
controls are functioning as planned. d. Board of directors.
b. The results of internal examination of financial and
accounting matters to a company’s top level 18. Government auditing often extends beyond expressing
management. an opinion on the fairness of the financial presentation
c. A measure of management performance in and includes audits of efficiency, effectiveness and
meeting organizational goals. a. Internal control
d. Aid to the independent auditor, who is conducting b. Efficiency
the examination of the financial statements. c. Accuracy
d. Compliance
10. The main objective of operations auditing is
a. To verify fulfillment of plans and sound business 19. An “integrated audit” includes an audit of
requirements. a. The company’s internal controls
b. To evaluate the integrity of accounting information. b. The company’s financial statements
c. To measure and evaluate the effectiveness of c. The company’s compliance with its rules and
controls. policies
d. To produce results as desired or directed. d. Both A and B

11. Which type of auditor would typically perform an 20. Which type of auditor may perform a financial
operational audit? statement audit?
a. External auditor a. External auditor
b. Internal auditor b. Internal auditor
c. Governmental auditor c. Governmental auditor
d. Both B and C d. Both A and C

12. Usually, an operational audit is performed 21. Which of the following is true?
a. By independent external auditors. a. External auditors may perform operational audits
b. By a team consisting of an equal number of and internal auditors may perform financial audits.
external and internal auditors. b. The criteria for any audit (an operational audit or a
c. Only when an operating division is experiencing financial audit) are GAAP.
declines in productivity or profitability. c. Both external and internal auditors can provide
d. By internal auditors at the request of top management advice to the company.
management or the board of directors. d. A financial audit is designed to determine if the
company is acquiring resources at the lowest cost.
13. This is an independent appraisal activity established
within an entity as a service to the entity: 22. Which of the following statements comparing external
a. Internal audit function auditing to internal auditing is true?
b. Independent auditing a. Both produce reports addressed to the company’s
c. Government auditing management and board of directors.
d. Compliance audit function b. They have the same concern with the company’s
day-to-day operations.
14. Internal auditors may perform all of the following types c. They have different scopes of work.
of audits except d. They are paid in the same way.
a. Operational audits
b. Compliance audits 23. Which of the following types of audits are most similar?
c. Computer system audits a. Operational audits and compliance audits.
d. All of the above may be performed by internal b. Independent financial statement audits and
auditors operational audits.
c. Compliance audits and independent financial
15. Internal auditing relates to an statement audits.

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d. Internal audits and independent financial c. Based upon audit fees

statement audits. d. Determined based upon the importance to a user
of the financial statements
Independent FSs Audit
24. An audit of financial statements is a non-assurance 30. Which of the following statements is correct concerning
engagement. The auditor is engaged for purposes of an auditor’s responsibilities regarding financial
expressing an opinion designed to enhance the degree statements?
of confidence of intended users in the financial a. An auditor’s responsibilities for audited financial
statements. statements are not confined to the expression of
the auditor’s opinion.
In conducting the audit so as to achieve its objective, b. Making suggestions that are adopted about the
the overall objective of the independent auditor is to form and content of an entity’s financial
obtain reasonable assurance about whether the statements impairs an auditor’s independence.
financial statements as a whole are free from material c. An auditor may draft an entity’s financial
misstatement, whether due to fraud or error, and to statements based information from management’s
report on the financial statements in accordance with accounting system.
the auditor’s findings. d. The fair presentation of audited financial
a. True, True c. False, True statements in conformity with GAAP is an implicit
b. False, False d. True, False part of the auditor’s responsibilities.

25. In order to obtain reasonable assurance, the auditor 31. The auditor’s opinion
shall obtain sufficient appropriate audit evidence to be a. Guarantees the credibility of the financial
able to draw reasonable conclusions on which to base statements.
the audit opinion. Reasonable assurance is obtained b. Is an assurance as to the future viability of the
when the auditor has thereby reduced audit risk to an entity.
acceptably low level. c. Is not an assurance as to the efficiency with which
management has conducted the affairs of the
The objective of an audit cannot be fulfilled unless the entity.
auditor achieves the overall objective of the auditor. In d. Certifies the correctness of the financial
all cases when the overall objective of the auditor statements.
cannot be achieved, the PSAs require that the auditor
modifies the auditor’s opinion accordingly or withdraws 32. The independent auditor lends credibility to client
from the engagement. financial statements by
a. True, False c. False, False a. Stating in the auditor’s management letter that the
b. False, True d. True, True examination was made in accordance with
generally accepted auditing standards
26. The reason an independent auditor gathers evidence is b. Maintaining a clear-cut distinction between
to management’s representation and the auditor’s
a. Form an opinion on the financial statements. representations
b. Detect fraud. c. Attaching an auditor’s opinion to the client’s
c. Evaluate management. financial statements
d. Evaluate internal controls. d. Testifying under oath about client financial
information
27. The auditor shall plan and perform an audit with an
attitude of professional skepticism recognizing that 33. The independent auditor’s responsibility in a regular
circumstances may exist that cause the financial audit is to express an opinion on the financial
statements to be materially misstated. statements. The auditor’s opinion:
a. Helps the company adopt sound accounting
The auditor shall not represent compliance with PSAs policies.
unless the auditor has complied with majority of the b. Assists the company in maintaining an adequate
PSAs relevant to the audit. and effective system of accounts.
a. True, True c. False, True c. Helps establish the credibility of the financial
b. False, False d. True, False statements.
d. Helps management safeguard the company assets.
28. Which of the following is least likely an application of
maintaining an attitude of professional skepticism? 34. Third-party users of the audit report expect the auditor
a. The auditor does not consider representations from to do all of the following except:
management as substitute for obtaining sufficient a. To evaluate measurements and disclosures made
appropriate audit evidence to be able to draw by management
reasonable conclusions on which to base the audit b. To provide a biased evaluation of the financial
opinion. statements
b. In planning and performing an audit, the auditor c. To determine whether financial statements are
assumes that management is dishonest. presented in accordance with GAAP
c. The auditor is alert to audit evidence that d. To gather sufficient evidence to support their
contradicts or brings into question the reliability of opinion
documents or management representations.
d. The auditor makes a critical assessment, with a 35. The following are the general principles governing an
questioning mind, of the validity of audit evidence audit of FS Audit, except
a. Independence c. Confidentiality
29. As it relates to an audit, materiality is b. Professionalism d. Professional behavior
a. Not taken into consideration
b. Related only to the sufficiency of procedures 36. An audit is conducted on the premise that
performed management and, where appropriate, those charged

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with governance, have acknowledged and understand The use of testing Yes Yes Yes No
that they have responsibilities that are fundamental to The inherent limitations of
the conduct of an audit in accordance with PSAs. internal control Yes Yes Yes Yes
Which of the following is not one of those The use of judgment Yes No Yes No
responsibilities? Most audit evidence are
a. To provide the auditor unrestricted access to persuasive rather than
persons within the entity from which the auditor conclusive No Yes Yes Yes
determines it necessary to obtain audit evidence
b. The preparation and presentation of financial 39. Users of the audit report can reasonably expect the
statements in accordance with the audited financial statements to be
pronouncements issued by AASC a. Include complete information and contain all
c. The establishment and maintenance of internal financial disclosures
control relevant to the preparation and b. Presented fairly according to the substance of
presentation of financial statements that are free GAAP
from material misstatement, whether due to fraud c. Free from all errors
or error d. All of the above
d. To provide complete information to the auditor.
40. Results of the financial statement audit are
37. Management of a company is responsible for communicated to users through a(n)
a. Hiring the auditor a. Financial statement
b. Preparing the financial statements b. Written management assertion
c. The audit workpapers c. Audit report
d. Independence and obtaining evidence d. none of the above

38. Absolute assurance is generally not attainable as a - Do now your STD-

result of such factors as:
a. b. c. d.

Self-Test Drill (STD)

1. The auditor’s responsibility in an audit engagement is a. The regulatory authority of the Securities and
limited to: Exchange Commission.
a. Expression of an opinion on the financial b. A demand by external users of financial
statements statements.
b. Expression of an opinion on the financial c. Pronouncements issued by the Auditing Standards
statements and adequacy of the notes to financial Board.
statements d. Congress at the federal level and elected legislative
c. Opinion issued and fairness of presentation of bodies at the state level
financial statements
d. Expression of opinion and inclusion of 6. The overall objectives of the auditor in conducting an
supplementary information, if necessary audit of financial statements are
I. To obtain reasonable assurance about whether the
2. Auditing is a systematic process that includes all of the financial statements as a whole are free from
following except: material misstatements, whether caused by fraud
a. Communicating results to users or error
b. Procuring and evaluating evidence II. To report on the financial statements
c. Providing important managerial decisions for a III. To obtain conclusive rather than persuasive
client evidence
d. Comparing evidence regarding assertions to certain IV. To detect all misstatements, whether due to fraud
established criteria or error
a. I and II only c. I, II and III only
3. Which of the following statements about theoretical b. II and IV only d. I, II, III and IV
framework of auditing is(are) incorrect?
I. The data to be audited can be verified 7. Which of the following statements does not describe a
II. Long-term conflicts may exist between managers condition that creates a demand for auditing?
who prepare the data and auditors who examine a. Conflict between an information preparer and a
the data user can result in biased information.
III. Auditors act on behalf of management b. Information can have substantial economic
IV. An audit benefits the public consequences for a decision maker.
a. II and III only c. Expertise is often required for information
b. II, III and IV only preparation and verification.
c. II only d. Users can directly assess the quality of
d. III only information.

4. What is the criteria used in a compliance audit? 8. An audit of the financial statements of Camden
a. Effectiveness and efficiency Corporation is being conducted by an external auditor.
b. Rules and regulations The external auditor is expected to
c. Company policies a. Express an opinion as to the fairness of Camden's
d. Both B and C financial statements.
b. Express an opinion as to the attractiveness of
5. The market for auditing services is driven by Camden for investment purposes.

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 EXCEL PROFESSIONAL SERVICES, INC.

c. Certify to the correctness of Camden's financial 15. A financial statement audit is designed to
statements. a. Provide assurance on internal control and to
d. Critique the wisdom and legality of Camden's identify reportable conditions.
business decisions. b. Detect error or fraud in the financial statements,
regardless of whether or not the error or fraud is
9. An attitude that includes a questioning mind and a material.
critical assessment of audit evidence is referred to as c. Obtain reasonable assurance about whether the
a. Due professional care financial statements are free of material
b. Professional skepticism misstatement, whether caused by error or fraud.
c. Reasonable assurance d. Obtain absolute assurance on the financial
d. Supervision statements and express an opinion on the financial
statements.
10. The following are the general principles governing an
audit of financial statements: 16. The primary reason for an audit by an independent,
I. Loyalty external audit firm is to
II. Confidentiality a. Satisfy government regulatory requirements
III. Objectivity b. Guarantee that there are no misstatements in the
IV. Professionalism financial statements and ensure that any fraud will
V. Professional Behavior be discovered
VI. Independence c. Relieve management of responsibility for the
a. I, II, III, IV, V and VI financial statements
b. II, III, IV, V and VI only d. Provide increased assurance to users as to the
c. II, III and V only fairness of the financial statements
d. II, III, V and VI only
17. After conducting an audit and release of the auditor’s
11. Why does a company choose to have an independent report, the primary responsibility on the fairness of the
auditor report on its financial statements? financial statements is shifted to the auditor.
a. Independent auditor will always detect
management fraud The essence of the audit function applies only to
b. The company’s management preparing the financial statements that are substantially accurate.
financial statements may have a vested interest in a. True, True
reporting certain results. b. False, False
c. Independent auditors guarantee the accuracy of c. True, False
the financial statements d. False, True
d. An independent audit is designed to search for
deficiencies in the company’s internal control 18. Which of the following best describes why an
independent auditor reports on the financial
12. The objective of the ordinary examination of financial statements?
statements is the expression of an opinion on the a. Independent auditors are likely to detect fraud
accuracy of such financial statements. b. Conflicting interests may exist between
management and the users of the statements
The independent auditor’s opinion is an assurance as c. Misstated account balances are generally corrected
to the future viability of the entity. by an independent audit
a. The first statement is false, the second statement d. Ineffective internal controls may exist
is true
b. The first statement is true, the second statement is 19. The independent auditor’s opinion helps establish the
true credibility of the financial statements.
c. The first statement is false, the second statement
is false The independent auditor’s opinion is an assurance as
d. The first statement is true, the second statement is to the efficiency or effectiveness with which
false management has conducted the affairs of the entity.
a. The first statement is false, the second statement
13. According to PSAs, because there are inherent is true
limitations in an audit that affect the auditor’s ability to b. The first statement is true, the second statement is
detect material misstatements, the auditor is true
a. A guarantor but not an insurer of the FSs c. The first statement is false, the second statement
b. An insurer but not a guarantor of the FSs is false
c. Both a guarantor and an insurer of the FSs d. The first statement is true, the second statement is
d. Neither a guarantor nor an insurer of the FSs false

14. Which one of the following is not a management 20. Which of the following is not normally a service
expectation for independent auditors? rendered by public accountants?
a. An outside source of expertise on accounting a. Management consultation service
matters b. Attest function
b. Individuals who perform tests and draw c. Internal auditing
conclusions on assertions d. Taxation
c. A participant in management decision making
d. A provider of a written communication  - end of AT.1804 - 

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