Far Eastern University

ACCOUNTING 1.1

CPA REVIEW SCHOOL OF THE PHILIPPINES

AUDITING THEORY

Chapter 1: AUDITING: INTEGRAL TO THE ECONOMY

1)The auditor’s opinion

1. 1. Enhances the credibility of the financial statements.
   2. Is an assurance as to the future viability of the entity.
   3. Is an assurance as to the efficiency with which management has conducted the affairs of the entity, but not effectiveness.
   4. Certifies the correctness of the financial statements.

2. In “auditing” accounting data, the concern is with
   1. Determining whether recorded information properly reflects the economic events that occurred during the accounting period.
   2. Determining if fraud has occurred.
   3. Determining if taxable income has been calculated correctly.
   4. Analyzing the financial information to be sure that it complies with government requirements.

3. A financial statement audit:
   1. Confirms that financial statement assertion are accurate.
   2. Lends credibility to the financial statements.
   3. Guarantees that financial statements are presented fairly.
   4. Assures that fraud had been detected.
4. Which of the following best describes the objective of an audit of financial statements?
   1. To express an opinion whether the financial statements are prepared in accordance with prescribed criteria.
   2. To express an assurance as to the future viability of the entity whose financial statements are being audited.
   3. To express an assurance about the management’s efficiency or effectiveness in conducting the operations of entity.
   4. To express an opinion whether the financial statements are prepared, in all material respect, in accordance with an identified financial reporting framework.

5. The best statement of the responsibility of the auditor with respect to audited financial statement is:
   1. The audit of the financial statements relieves management of its responsibilities
   2. The auditor’s responsibility is confined to his expression of opinion about the audited financial statements.
   3. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements.

1. 4. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.

6. Which of the following is responsible for an entity’s financial statements?
   1. The entity’s management
   2. The entity’s internal auditors
   3. The entity’s audit committee
   4. The entity’s board of directors

7. Which of the following is responsible for the fairness of representations made in financial statements?
   1. The independent auditor.
   2. The internal auditor.
   3. The client's management.
   4. The audit committee.

8. To make the internal audit department independent, he should report directly to the
   1. Board of Directors.
   2. Audit committee.
   3. Stockholders.
   4. Controller.

9. Which of the following best describes why an independent auditor reports on financial statements?
   1. Independent auditors are likely to detect fraud
   2. Competing interests may exist between management and the users of the statements
   3. Misstated account balances are generally corrected by an independent audit.
   4. Ineffective internal controls may exist.

10. Which of the following is an appraisal activity established within an entity as a service to the entity?

1. External auditing
2. Internal auditing
3. Financial auditing
4. Compliance auditing

11. Because an external auditor is paid a fee by a client company, he or she

1. Is absolutely independent and may conduct an audit
2. May be sufficiently independent to conduct an audit
3. Is never considered to be independent
4. Must receive approval of the Securities and Exchange Commission before conducting an audit

12. Which statement is incorrect regarding the external auditor’s consideration of the work of internal auditing?

1. The external auditor should consider the activities of internal auditing and their effect, if any, on external audit procedures.

2. The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach.
3. During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas.
4. When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.

13. Which of the following is an incorrect phrase?

1. Auditing is a systematic process.
2. Auditing subjectively obtains and evaluates evidence.
3. Auditing evaluates evidence regarding assertions.
4. Auditing communicates results to interested users.

14. A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of financial statements through a review of the quality control measures instituted by an Individual CPA, Firm or Partnership of CPAs engaged in the practice of public accountancy.

1. Peer review
2. Quality review
3. Analytical review
4. Administrative review

15. There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance. This statement relates to

1. Credibility
2. Professionalism
3. Quality of Services
4. Confidence

16. A partner or employee of the firm serving as an officer or as a director on the board of an assurance client will most likely create

1. Intimidation threat
2. Self-review threat
3. Advocacy threat
4. Familiarity threat

17. Which of the following least likely create a self-review threat?

1. A former officer, director or employee of the assurance client serve as a member of the assurance team.
2. A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.
3. Assisting an audit client in matters such as preparing accounting records or financial statements.
4. A firm, or network firm, provides internal audit services to an audit client.

18. Indicate the normal pattern of development for a professional accountant.

1. A period of work experience.
2. High standard of general education.
3. Specific education, training and examination in professionally relevant subjects

a. I, II, III               b. II, III, I              c. III, II, I               d. II, I, III

19. Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.

1. Scope of an audit
2. Scope of a review
3. Audit program
4. Scope limitation

20. An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to

1. Express an opinion as to the fairness of Camden's financial statements.
2. Express an opinion as to the attractiveness of Camden for investment purposes.
3. Certify to the correctness of Camden's financial statements.
4. Critique the wisdom and legality of Camden's business decisions.