REVIEWER2_ Introduction to Audit of Historical Financial Information
LECTURE NOTES
Definition of Auditing
An audit is a systematic process of objectively obtaining
and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of
correspondence between these assertions and established
criteria, and communicating the results to interested users.
Distinction between Auditing and Accounting
Many financial statement users and the public confuse
auditing with accounting. The confusion results
because most auditing is usually concerned with
accounting information, and many auditors have
considerable expertise in accounting matters.
Accounting is the recording, classifying, and summarizing
of economic events in a logical manner for the purpose of
providing financial information for decision-making while
auditing pertains to gathering and evaluation of evidence
regarding the fair presentation of financial statements.
In addition to understanding and knowledge in accounting,
the auditor must possess expertise in the accumulation
and interpretation of audit evidence. It is this expertise
that distinguishes auditors from accountants. Remember,
auditing begins where accounting ends.
Theoretical Framework of Auditing
•
Data to be audited can be verified
•
Independence
•
No long-term conflict between the auditor and
the management
•
Effective internal control system reduces risk of
material misstatement of the FSs
•
Consistent application of GAAP results to
fair presentation
•
What was held true in the past will continue to hold
true in the future in the absence of known conditions
to the contrary
•
An audit benefits the public
Types of Audits
1. As to objective and criteria
a. Financial statement (FS) audits – A financial
statement audit is conducted to determine whether
the financial statements (the information being
verified) are stated in accordance with specified
criteria.
b. Operational (Performance or Management) audits An operational audit evaluates the efficiency and
effectiveness of any part of an organization’s
operating procedures and methods. At the
completion of an operational audit, management
normally expects recommendations for improving
operations.
i.
Economy and efficiency (Management) audit –
The appraisal of management performance
from the most efficient point of view, i.e.,
cost-benefit analysis.
ii. Effectiveness (Program results) audit – The
evaluation of programs, projects and activities
to determine the extent of achievement of
previously set goals and objectives.
c. Compliance audits – A compliance audit is
conducted to determine whether the auditee is
following specific procedures, rules, or regulations
set by some higher authority. Following are
examples of compliance audits for a private
business.
Page 1 of 8
i.
Determine whether accounting personnel are
following the procedures prescribed by the
company controller.
ii.
Review wage rates for compliance with
minimum wage laws.
iii.
Examine contractual agreements with bankers
and other lenders to be sure the company is
complying with legal requirements.
2. As to auditor
a. External (Independent) audits – These are audits
performed by CPAs (independent or external
auditor) who are independent of the organizations
whose assertions are the subject matter of the
audit. Note that independent or external auditors
may also perform operational and compliance
audits.
b. Internal audits – An internal audit is an
independent appraisal function established within
an organization to examine and evaluate its
activities as a service to the organization. Internal
auditors normally report the results of their
examination to those charged with governance
(audit committee or board of directors). Internal
audits mainly comprise operational and
compliance audits. Although internal audit is an
“independent appraisal function”, internal
auditors, being employees of the auditeeorganization, cannot be as independent as
external auditors (or totally independent) as long
as an employer-employee relationship exists.
c. Governmental (State) audits – Government
auditing involves the determination of whether
government funds are being handled properly and
in compliance with the applicable laws and
regulations, and whether the government
programs of a particular agency are conducted
effectively and efficiently. Governmental auditors
can perform financial statements audit, operational
audit and compliance audit.
The following table summarizes the types of audits as to
objective and criteria:
Types
Operationa
l Performance
Audit
Objective
Evaluates the
efficiency and
effectiveness
of any part of
an organization’s
operating
procedures
and methods.
Compliance
Audit
Conducted
to determine
whether the
auditee is
following
specific
procedures,
rules, or
regulations
set by some
higher
authority.
Financial
Statements
Audit
Conducted to
determine
whether the
Example
Evaluate
whether
the
computerized payroll
system is
operating
effectively
and
efficiently
Determine
whether
bank
requirements for
loan
continuatio
n have
been met
Criteria
Company
standards for
efficiency
and
effectiveness
.
Annual
audit of
PLDT
GAAP
(Applicable
financial
Loan
agreement
provisions
REVIEWER2_ Introduction to Audit of Historical Financial Information
financial
statements
(the
information
being
verified) are
stated in
accordance
with specified
criteria.
financial
statements
reporting
framework)
Need for Independent Financial Statements Audit
The need for independent auditing of FSs arises from the
importance of reducing information risk.
Users depend on reliable information in making important
decisions. Decisions made based on unreliable information
could have adverse financial consequences. Users,
therefore, turn to expertise of the auditor who provides an
unbiased opinion on the fair presentation of financial
statements through the auditor’s report.
Causes of information risk are the following:
• Conflict of interest between management and users of
financial statements (potential bias)
• Remoteness between a user and the organization
• Voluminous data
• Complexity of the transactions, information, or
processing systems
However, the auditor’s opinion therefore does not assure,
for example, the future viability of the entity nor the
efficiency or effectiveness with which management has
conducted the affairs of the entity.
Nature and Objective of External (Independent)
Financial Statements Audit
FSs audit is an assurance engagement (the broadest in
scope), i. e., there is enhancement of the degree of
confidence of intended users in the FSs. Audit of historical
financial statements is an example of assertion-based
engagement.
The performance of FSs audit by an independent auditor
does not relieve management’s responsibilities to prepare
and present the FSs with oversight from those charged
with governance (TCWG).
In conducting an audit of FSs, the overall objectives of the
auditor are:
•
•
To obtain reasonable assurance whether the FSs are
free from material misstatement, whether due to
fraud or error, to enable the auditor to express an
opinion on whether the FSs are prepared, in all
material respects, in accordance with an applicable
financial reporting framework (FRF); and
To report on the FSs, and communicate as required by
the Philippine Standards on Auditing (PSAs), in
accordance with the auditor’s findings.
In all cases when reasonable assurance cannot be
obtained:
•
•
The auditor shall provide a qualified audit opinion in
the auditor’s report,
If still insufficient for intended users of the financial
statements, the auditor shall:
o disclaim an opinion; or
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o
withdraw from the engagement, is
legally permissible.
Auditor’s Responsibilities
The auditor shall obtain reasonable assurance about
whether the FSs as a whole are free from material
misstatement, whether due to fraud or error.
Reasonable assurance is obtained when the auditor has
sufficient appropriate audit evidence (SAAE) to reduce
audit risk to an acceptably low level. Audit evidence is
primarily obtained through the performance of audit
procedures.
Management’s Responsibilities
An audit is conducted on the premise that management
and, where appropriate, TCWG have responsibility:
•
For the preparation and presentation of the FSs in
accordance with the applicable FRF;
•
The design, implementation and maintenance of
internal control (IC); and
•
To provide the auditor with:
a. All information, such as records and
documentation, and other matters that are
relevant to the preparation and presentation of the
financial statements;
b. Any additional information that the auditor may
request from management and, where appropriate,
those charged with governance; and
c. Unrestricted access to those within the entity from
whom the auditor determines it necessary to
obtain audit evidence.
Scope and Conduct of an Audit of Financial
Statements
The auditor normally exercises professional judgment in
determining the scope of the audit and considers the
requirements of the relevant legislations, regulations and
professional standards.
The auditor shall conduct the audit with the exercise
professional judgment and maintain professional
skepticism throughout the planning and performance of
the audit in:
•
•
•
Identifying and assessing risks of material
misstatement (ROMMs) – ROMMs refer to the risk
that the FSs are materially misstated prior to audit.
Obtaining sufficient appropriate audit evidence (SAAE)
through designing and implementing appropriate
responses to the assessed risks.
Forming an opinion on the FSs.
Throughout the performance of the audit, the auditor shall
comply with the relevant ethical requirements including
those pertaining to independence, relating to FSs audit
engagements.
Ethical Requirements
Relevant ethical requirements ordinarily comprise Parts A
and B of the Code of Professional Ethics and national
requirements that are more restrictive.
Part A of the Code of Ethics establishes the fundamental
principles of professional ethics relevant to the auditor
when conducting an audit of financial statements and
provides a conceptual framework for applying those
principles. The fundamental principles with which the
auditor is required to comply by the Code of Ethics are:
a. Integrity;
b. Objectivity;
REVIEWER2_ Introduction to Audit of Historical Financial Information
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior.
Part B of the Code of Ethics illustrates how the conceptual
framework is to be applied in specific situations.
Professional Skepticism
An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due
to error or fraud, and a critical assessment of audit
evidence. The auditor shall plan and perform an audit with
professional skepticism recognizing that circumstances
may exist that cause the financial statements to be
materially misstated.
Professional skepticism includes being alert to, for
example:
•
Audit evidence that contradicts other audit evidence
obtained
•
Information that brings into question the reliability of
documents and responses to inquiries to be used as
audit evidence
•
Conditions that may indicate possible fraud
•
Circumstances that suggest the need for audit
procedures in addition to requirements of PSAs
Maintaining professional skepticism throughout the audit is
necessary if the auditor is, for example, to reduce the risks
of:
•
Overlooking unusual circumstances.
•
Over generalizing when drawing conclusions from audit
observations.
•
Using inappropriate assumptions in determining the
nature, timing, and extent of the audit procedures and
evaluating the results thereof.
Professional Judgment
The application of relevant training, knowledge and
experience, within the context provided by auditing,
accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate
in the circumstances of the audit engagement.
Professional judgment is essential to the proper conduct of
an audit because it enables the proper interpretation of:
•
Relevant ethical requirements
•
PSAs
•
Informed decisions
Professional judgment is necessary in particular regarding
decisions about:
•
Materiality and audit risk
•
Nature, timing, and extent of audit procedures
•
Evaluating whether SAAE has been obtained
•
Evaluating management’s judgments in applying the
applicable FRF
•
Drawing of conclusions, for example, assessing the
reasonableness of the management’s estimates
The distinguishing feature of the professional judgment
expected of an auditor is that it is exercised by an auditor
whose training, knowledge and experience have assisted in
developing the necessary competencies to achieve
reasonable judgments.
Sufficient Appropriate Audit Evidence
Audit evidence is the information obtained by the auditor in
arriving at the conclusions on which the audit opinion is
based. Audit evidence is necessary to support the auditor’s
opinion and report.
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The sufficiency and appropriateness of audit evidence are
interrelated. Sufficiency is the measure of the quantity of
audit evidence. The quantity of audit evidence needed is
affected by the auditor’s assessment of the risks of
misstatement (the higher the assessed risks, the more
audit evidence is likely to be required) and also by the
quality of such audit evidence (the higher the quality, the
less may be required). Obtaining more audit evidence,
however, may not compensate for its poor quality.
Appropriateness is the measure of the quality of audit
evidence; that is, its relevance and its reliability in
providing support for the conclusions on which the
auditor’s opinion is based. The reliability of evidence is
influenced by its source and by its nature, and is
dependent on the individual circumstances under which it
is obtained.
Whether sufficient appropriate audit evidence has been
obtained to reduce audit risk to an acceptably low level,
and thereby enable the auditor to draw reasonable
conclusions on which to base the auditor’s opinion, is a
matter of professional judgment.
Audit Risk
Audit risk is the risk that the auditor gives an inappropriate
audit opinion when the financial statements are materially
misstated. Audit risk does not include the risk that the
auditor might express an opinion that the financial
statements are materially misstated when they are not.
This risk is ordinarily insignificant.
Audit risk is a function of the risks of material
misstatement and detection risk. Further, audit risk is a
technical term related to the process of auditing; it does
not refer to the auditor’s business risks such as loss
from litigation, adverse publicity, or other events arising
in connection with the audit of financial statements.
Risks of Material Misstatement
The risk that the financial statements are materially
misstated prior to audit.
The risks of material misstatement may exist at two levels:
•
The overall financial statement level; and
•
The assertion level for classes of transactions, account
balances, and disclosures.
Risks of material misstatement at the overall financial
statement level refer to risks of material misstatement that
relate pervasively to the financial statements as a whole
and potentially affect many assertions.
Risks of material misstatement at the assertion level
are assessed in order to determine the nature, timing,
and extent of further audit procedures necessary to
obtain sufficient appropriate audit evidence.
The risks of material misstatement at the assertion level
consist of two components: inherent risk and control
risk. Inherent risk and control risk are the entity’s risks;
they exist independently of the audit of the financial
statements.
Control risk—Control risk is the risk that a misstatement
that could occur in an account balance or class of
transactions and that could be material, individually or
when aggregated with misstatements in other balances or
classes, will not be prevented or detected and corrected on
a timely basis by the accounting and internal control
systems. Control risk is a function of the effectiveness of
the design, implementation and maintenance of internal
REVIEWER2_ Introduction to Audit of Historical Financial Information
control by management to address identified risks that
threaten the achievement of the entity’s objectives
relevant to preparation of the entity’s financial statements.
Inherent risk—Inherent risk is the susceptibility of an
account balance or class of transactions to misstatement
that could be material, individually or when aggregated
with misstatements in other balances of classes, assuming
that there were no related internal controls. Inherent risk
is higher for some assertions and related classes of
transactions, account balances, and disclosures than for
others. For example, it may be higher for complex
calculations or for accounts consisting of amounts derived
from accounting estimates that are subject to significant
estimation uncertainty.
Detection Risk
Detection risk is the risk that an auditor’s substantive
procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be
material, individually or when aggregated with
misstatements in other balances or classes.
For a given level of audit risk, the acceptable level of
detection risk bears an inverse relationship to the assessed
risks of material misstatement at the assertion level.
Detection risk relates to the nature, timing, and extent of
the auditor’s procedures that are determined by the
auditor to reduce audit risk to an acceptably low level. It is
therefore a function of the effectiveness of an audit
procedure and of its application by the auditor.
Conduct of an Audit in Accordance with PSAs
The auditor shall comply with all PSAs relevant to the
audit. APSA is relevant to the audit when the PSA is in
effect and the circumstances addressed by the PSA exist.
The auditor shall not represent compliance with PSAs in
the auditor’s report unless the auditor has complied with
the requirements of this PSA and all other PSAs relevant to
the audit.
If an objective in a relevant PSA cannot be achieved, the
auditor shall evaluate whether this prevents the auditor
from achieving the overall objectives of the auditor and
thereby requires the auditor, in accordance with the PSAs,
to modify the auditor’s opinion or withdraw from the
engagement. Failure to achieve an objective represents a
significant matter requiring documentation
Inherent Limitations of Audit
An audit is not a guarantee of the correctness of the
financial statements due to the following inherent
limitations of audit:
a. Use of selective testing/sampling risk;
b. Use of judgment/non-sampling risk/human error;
c. Inherent limitations of internal control;
d. Persuasive evidence rather than conclusive;
e. Management representations; and
f. Characteristics of the subject matter/accounts (e.g.,
accounts arising from accounting estimates).
- done -
MULTIPLE CHOICE
Definition of Auditing
1. Auditing is a systematic process that includes all of the
following except:
a. Systematic process
b. Assertions about economic actions and events
c. Objectively obtaining and evaluating assurance
d. Degree of correspondence between assertions and
GAAP
2. The
a.
b.
c.
d.
definition of auditing includes both a(an)
Documentation process and an evaluation process.
Evaluation process and a reporting process.
Investigative process and a reporting process.
Documentation process and a reporting process.
Demand for Auditing
3. Auditing is important in a free market society because
a. The public requires CPAs functioning as divisions of
regulatory bodies
b. Auditors detect all errors and fraud made by
company employees
c. It provides reliable information based upon which to
judge economic performance
d. The auditor is an amiable insurance policy for
investors
4. 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.
Page 4 of 8
d.
Reports on the accuracy of information in the
financial statements.
5. Which one of the following is a potential problem with
management's communication of financial information
that causes third parties to desire the independent
auditor's assessment of the financial statement
presentation?
a. Complexity of transactions affecting the financial
statements
b. Lack of criteria on which to base information
c. Remoteness of the user from the organization
d. A and C
Types of Audit
6. The objective of an operational audit is to
a. Evaluate whether laws have been broken by
management
b. Evaluate fairness of presentation of financial
statements
c. Evaluate compliances with company rules and
regulations
d. Evaluate the effectiveness and efficiency with which
resources are employed
7. What is the criteria used in an operational audit?
a. GAAP
b. Effectiveness and efficiency
c. Rules and regulations
d. Company policies
8. Before an operational audit for effectiveness can be
performed, there must be:
a. a financial audit by an independent auditor.
b. a financial audit by an internal auditor.
REVIEWER2_ Introduction to Audit of Historical Financial Information
c. a review performed by either an independent or an
internal auditor.
d. specific criteria developed to define effectiveness.
9. A primary purpose of an operational audit is to provide
a. A means of assurance that internal accounting
controls are functioning as planned.
b. The results of internal examination of financial and
accounting matters to a company’s top level
management.
c. A measure of management performance in meeting
organizational goals.
d. Aid to the independent auditor, who is conducting
the examination of the financial statements.
10. The main objective of operations auditing is
a. To verify fulfillment of plans and sound business
requirements.
b. To evaluate the integrity of accounting information.
c. To measure and evaluate the effectiveness of
controls.
d. To produce results as desired or directed.
17. For an internal auditor to render impartial and unbiased
judgments, he or she must be independent of the
entity's
a. Stockholders.
b. Personnel and operating activities (line functions of
the organization).
c. Independent (external) auditors.
d. Board of directors.
18. Government auditing often extends beyond expressing
an opinion on the fairness of the financial presentation
and includes audits of efficiency, effectiveness and
a. Internal control
b. Efficiency
c. Accuracy
d. Compliance
19. An
a.
b.
c.
d.
“integrated audit” includes an audit of
The company’s internal controls
The company’s financial statements
The company’s compliance with its rules and policies
Both A and B
11. Which type of auditor would typically perform an
operational audit?
a. External auditor
b. Internal auditor
c. Governmental auditor
d. Both B and C
20. Which type of auditor may perform a financial statement
audit?
a. External auditor
b. Internal auditor
c. Governmental auditor
d. Both A and C
12. Usually, an operational audit is performed
a. By independent external auditors.
b. By a team consisting of an equal number of
external and internal auditors.
c. Only when an operating division is experiencing
declines in productivity or profitability.
d. By internal auditors at the request of top
management or the board of directors.
21. Which of the following is true?
a. External auditors may perform operational audits
and internal auditors may perform financial audits.
b. The criteria for any audit (an operational audit or a
financial audit) are GAAP.
c. Both external and internal auditors can provide
management advice to the company.
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:
a. Internal audit function
b. Independent auditing
c. Government auditing
d. Compliance audit function
14. Internal auditors may perform all of the following types
of audits except
a. Operational audits
b. Compliance audits
c. Computer system audits
d. All of the above may be performed by internal
auditors
15. Internal auditing relates to an
a. Audit which is performed by professional
practitioner as an independent contractor
b. Audit which is incidentally concerned with the
detection and prevention of fraud
c. Audit wherein the auditor should be independent of
management both in fact and in mental attitude
d. Audit which serves the needs of management
16. To provide for the greatest degree of independence in
performing internal auditing functions, an internal
auditor most likely should report to the
a. Financial vice-president.
b. Corporate controller.
c. Those charged with governance.
d. Corporate stockholders.
Page 5 of 8
22. Which of the following statements comparing external
auditing to internal auditing is true?
a. Both produce reports addressed to the company’s
management and board of directors.
b. They have the same concern with the company’s
day-to-day operations.
c. They have different scopes of work.
d. They are paid in the same way.
23. Which of the following types of audits are most similar?
a. Operational audits and compliance audits.
b. Independent financial statement audits and
operational audits.
c. Compliance audits and independent financial
statement audits.
d. Internal audits and independent financial statement
audits.
Independent FSs Audit
24. An audit of financial statements is a non-assurance
engagement. The auditor is engaged for purposes of
expressing an opinion designed to enhance the degree
of confidence of intended users in the financial
statements.
In conducting the audit so as to achieve its objective,
the overall objective of the independent auditor is to
obtain reasonable assurance about whether the financial
statements as a whole are free from material
misstatement, whether due to fraud or error, and to
report on the financial statements in accordance with
the auditor’s findings.
REVIEWER2_ Introduction to Audit of Historical Financial Information
a.
b.
True, True
False, False
c. False, True
d. True, False
25. In order to obtain reasonable assurance, the auditor
shall obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base
the audit opinion. Reasonable assurance is obtained
when the auditor has thereby reduced audit risk to an
acceptably low level.
The objective of an audit cannot be fulfilled unless the
auditor achieves the overall objective of the auditor. In
all cases when the overall objective of the auditor cannot
be achieved, the PSAs require that the auditor modifies
the auditor’s opinion accordingly or withdraws from the
engagement.
a. True, False
c. False, False
b. False, True
d. True, True
26. The reason an independent auditor gathers evidence is
to
a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal controls.
27. The auditor shall plan and perform an audit with an
attitude of professional skepticism recognizing that
circumstances may exist that cause the financial
statements to be materially misstated.
The auditor shall not represent compliance with PSAs
unless the auditor has complied with majority of the
PSAs relevant to the audit.
a. True, True
c. False, True
b. False, False
d. True, False
28. 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
29. As it relates to an audit, materiality is
a. Not taken into consideration
b. Related only to the sufficiency of procedures
performed
c. Based upon audit fees
d. Determined based upon the importance to a user of
the financial statements
30. Which of the following statements is correct concerning
an
auditor’s
responsibilities
regarding
financial
statements?
a. An auditor’s responsibilities for audited financial
statements are not confined to the expression of the
auditor’s opinion.
b. Making suggestions that are adopted about the
form and content of an entity’s financial statements
impairs an auditor’s independence.
c. An auditor may draft an entity’s financial statements
based information from management’s accounting
system.
Page 6 of 8
d.
The fair presentation of audited financial statements
in conformity with GAAP is an implicit part of the
auditor’s responsibilities.
31. The auditor’s opinion
a. Guarantees the credibility of the financial
statements.
b. Is an assurance as to the future viability of the
entity.
c. Is not an assurance as to the efficiency with which
management has conducted the affairs of the entity.
d. Certifies
the
correctness
of
the
financial
statements.
32. The independent auditor lends credibility to client
financial statements by
a. Stating in the auditor’s management letter that the
examination was made in accordance with generally
accepted auditing standards
b. Maintaining a clear-cut distinction between
management’s representation and the auditor’s
representations
c. Attaching an auditor’s opinion to the client’s
financial statements
d. Testifying under oath about client financial
information
33. The independent auditor’s responsibility in a regular
audit is to express an opinion on the financial
statements. The auditor’s opinion:
a. Helps the company adopt sound accounting
policies.
b. Assists the company in maintaining an adequate and
effective system of accounts.
c. Helps establish the credibility of the financial
statements.
d. Helps management safeguard the company assets.
34. Third-party users of the audit report expect the auditor
to do all of the following except:
a. To evaluate measurements and disclosures made by
management
b. To provide a biased evaluation of the financial
statements
c. To determine whether financial statements are
presented in accordance with GAAP
d. To gather sufficient evidence to support their
opinion
35. The following are the general principles governing an
audit of FS Audit, except
a. Independence
c. Confidentiality
b. Professionalism
d. Professional behavior
36. An audit is conducted on the premise that management
and, where appropriate, those charged with
governance, have acknowledged and understand that
they have responsibilities that are fundamental to the
conduct of an audit in accordance with PSAs. Which of
the following is not one of those responsibilities?
a. To provide the auditor unrestricted access to
persons within the entity from which the auditor
determines it necessary to obtain audit evidence
b. The preparation and presentation of financial
statements
in
accordance
with
the
pronouncements issued by AASC
c. The establishment and maintenance of internal
control relevant to the preparation and presentation
of financial statements that are free from material
misstatement, whether due to fraud or error
REVIEWER2_ Introduction to Audit of Historical Financial Information
39. Users of the audit report can reasonably expect the
audited financial statements to be
a. Include complete information and contain all
financial disclosures
b. Presented fairly according to the substance of GAAP
c. Free from all errors
d. All of the above
d. To provide complete information to the auditor.
37. Management of a company is responsible for
a. Hiring the auditor
b. Preparing the financial statements
c. The audit workpapers
d. Independence and obtaining evidence
38. Absolute assurance is generally not attainable
result of such factors as:
a.
b.
The use of testing
Yes Yes
The inherent limitations of
internal control
Yes Yes
The use of judgment
Yes
No
Most audit evidence are
persuasive rather than
conclusive
No Yes
as a
c.
Yes
Yes
Yes
Yes
40. Results of the financial
statement
communicated to users through a(n)
a.
Financial statement
d.
b.
Written management assertion
No
c.
Audit report
d.
none of the above
Yes
No
- now do the DIY drill -
audit
are
Yes
DO-IT-YOURSELF (DIY) DRILL
1. The auditor’s responsibility in an audit engagement is
limited to:
a. Expression of an opinion on the financial statements
b. Expression of an opinion on the financial statements
and adequacy of the notes to financial statements
c. Opinion issued and fairness of presentation of
financial statements
d. Expression
of
opinion
and
inclusion
of
supplementary information, if necessary
2. Auditing is a systematic process that includes all of the
following except:
a. Communicating results to users
b. Procuring and evaluating evidence
c. Providing important managerial decisions for a client
d. Comparing evidence regarding assertions to certain
established criteria
3. Which of the following statements about theoretical
framework of auditing is(are) incorrect?
I. The data to be audited can be verified
II. Long-term conflicts may exist between managers
who prepare the data and auditors who examine the
data
III. Auditors act on behalf of management
IV. An audit benefits the public
a. II and III only
b. II, III and IV only
c. II only
d. III only
4. What is the criteria used in a compliance audit?
a. Effectiveness and efficiency
b. Rules and regulations
c. Company policies
d. Both B and C
5. 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 Standards
Board.
d. Congress at the federal level and elected legislative
bodies at the state level
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6. 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 misstatements, 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
c. I, II and III only
b. II and IV only
d. I, II, III and IV
7. Which of the following statements does not describe a
condition that creates a demand for auditing?
a. Conflict between an information preparer and a user
can result in biased information.
b. Information can have substantial economic
consequences for a decision maker.
c. Expertise is often required for information
preparation and verification.
d. Users can directly assess the quality of information.
8. An audit of the financial statements of Camden
Corporation is being conducted by an external auditor.
The external auditor is expected to
a. Express an opinion as to the fairness of Camden's
financial statements.
b. Express an opinion as to the attractiveness of
Camden for investment purposes.
c. Certify to the correctness of Camden's financial
statements.
d. Critique the wisdom and legality of Camden's
business decisions.
9. An attitude that includes a questioning mind and a critical
assessment of audit evidence is referred to as
a. Due professional care
b. Professional skepticism
c. Reasonable assurance
d. Supervision
10. The following are the general principles governing an
audit of financial statements:
I. Loyalty
II. Confidentiality
REVIEWER2_ Introduction to Audit of Historical Financial Information
III.
IV.
V.
VI.
a.
b.
c.
d.
Objectivity
Professionalism
Professional Behavior
Independence
I, II, III, IV, V and VI
II, III, IV, V and VI only
II, III and V only
II, III, V and VI only
11. Why does a company choose to have an independent
auditor report on its financial statements?
a. Independent auditor will always detect
management fraud
b. The company’s management preparing the
financial 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 control
d.
16. The primary reason for an audit by an independent,
external audit firm is to
a. Satisfy government regulatory requirements
b. Guarantee that there are no misstatements in the
financial statements and ensure that any fraud will
be discovered
c. Relieve management of responsibility for the
financial statements
d. Provide increased assurance to users as to the
fairness of the financial statements
17. 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.
The essence of the audit function applies only to
financial statements that are substantially accurate.
a. True, True
b. False, False
c. True, False
d. False, True
12. The objective of the ordinary examination of financial
statements is the expression of an opinion on the
accuracy of such financial statements.
The independent auditor’s opinion is an assurance as
to the future viability of the entity.
a. The first statement is false, the second statement
is true
b. The first statement is true, the second statement is
true
c. The first statement is false, the second statement
is false
d. The first statement is true, the second statement is
false
13. According to PSAs, because there are inherent
limitations in an audit that affect the auditor’s ability to
detect material misstatements, the auditor is
a. A guarantor but not an insurer of the FSs
b. An insurer but not a guarantor of the FSs
c. Both a guarantor and an insurer of the FSs
d. Neither a guarantor nor an insurer of the FSs
14. Which one of the following is not a management
expectation for independent auditors?
a. An outside source of expertise on accounting
matters
b. Individuals who perform tests and draw
conclusions on assertions
c. A participant in management decision making
d. A provider of a written communication
15. A financial statement audit is designed to
a. Provide assurance on internal control and to
identify reportable conditions.
b. Detect error or fraud in the financial statements,
regardless of whether or not the error or fraud is
material.
c. Obtain reasonable assurance about whether the
financial statements are free of material
misstatement, whether caused by error or fraud.
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Obtain absolute assurance on the financial
statements and express an opinion on the financial
statements.
18.
Which of the following best describes why an
independent
auditor
reports
on
the
financial
statements?
a. Independent auditors are likely to detect fraud
b. Conflicting
interests
may
exist
between
management and the users of the statements
c. Misstated account balances are generally corrected
by an independent audit
d. Ineffective internal controls may exist
19. The independent auditor’s opinion helps establish the
credibility of the financial statements.
The independent auditor’s opinion is an assurance
as to the efficiency or effectiveness with which
management has conducted the affairs of the entity.
a. The first statement is false, the second statement is
true
b. The first statement is true, the second statement is
true
c. The first statement is false, the second statement is
false
d. The first statement is true, the second statement is
false
20. Which of the following is not normally a
service rendered by public accountants?
a. Management consultation service
b. Attest function
c. Internal auditing
d. Taxation
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