AUDITING THEORY
AT.0104- Introduction to Audit of Financial Statements
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.
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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.
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 auditee-organization, 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 Objective Example Criteria
Operational Evaluates the Evaluate Company
Perfor- efficiency and whether the standards for
mance effectiveness computeri- efficiency
Audit of any part of zed payroll and
an organiza- system is effectiveness.
tion’s operating
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operating effectively
procedures and  To obtain reasonable assurance whether the FSs are
and methods. efficiently free from material misstatement, whether due to fraud
or error, to enable the auditor to express an opinion on
Compliance Conducted to Determine Loan whether the FSs are prepared, in all material respects,
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:

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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;
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
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 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.
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.
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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
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.
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 definition of auditing includes both a(an)
a. Documentation process and an evaluation process.
b. Evaluation process and a reporting process.
c. Investigative process and a reporting process.
d. 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
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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).
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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.
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
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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.
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.
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
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.
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
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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.
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 “integrated audit” includes an audit of
a. The company’s internal controls
b. The company’s financial statements
c. The company’s compliance with its rules and
policies
d. Both A and B
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
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.
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.
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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.
a. True, True c. False, True
b. False, False 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
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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.
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
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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 - now do the DIY drill -
result of such factors as:
a. b. c. d.

DO-IT-YOURSELF (DIY) DRILL

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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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.0104 - 

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