AUDITING Theory [Chapter 4] - Questions With
Comprehensive Solutions
1. Set the following phases in proper order: i
Pre-Engagement
Internal Controls
Evidence-Gathering
Planning
Post-Audit Responsibilities
Reporting
a. I, II, III, IV, V, VI
b.I, IV, II, III,VI, V
c.I, IV, III, II, V, VI
d.I, IV, II, III, V, VI Correct Answer - b.I, IV, II, III,VI, V
2. The four major steps in conducting an audit are
i.Testing internal controls
ii.Audit report
iii.Planning
iv.Testing transactions and balances
The proper sequence in applying the above steps is
A I, IV, III, II
B. II, III, IV, I
C. III, I, IV, II
D. III, IV, I II Correct Answer - C. III, I, IV, II
3. The definition of auditing contained within A Statement of Basic Auditing
Concepts recognizes that 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. Correct Answer - C.
Investigative process and a reporting process.
4 The audit process is
A. A special application of the scientific method of inquiry.
B.Regulated by the AICPA.
C. The only service a CPA is allowed to perform by law.
D. Performed only by CPAs.. Correct Answer - A. A special application of
the scientific method of inquiry.
5. Assertions about account balances at the period-end include completeness,
which means that
A. Assets, liabilities and equity interest exist.
B. All assets, liabilities and equity interests that should have been recorded
have been recorded.
C. Assets, liabilities and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
D. The entity holds or controls the rights to assets, and liabilities are the
obligations of the entity. Correct Answer - B. All assets, liabilities and
equity interests that should have been recorded have been recorded.
6. Preliminary engagement activities include:
A. Setting materiality.
B. Evaluating internal controls.
C. Determining engagement team requirements.
D. Assessing audit risk at the account balance level. Correct Answer - C.
Determining engagement team requirements.
7. Ultimately, the decision about whether or not an auditor is independent
must be made by
A Auditor
B. Public
C. Client's management
, D. Audit committee Correct Answer - a. Auditor
8.In deciding whether to accept or reject an engagement, the auditor's firm
should consider the following.
I. Its competence and independence
II. Its ability to serve the client properly
III. The integrity of the prospective client's management
A I and II
B. II and III
C. I and III
D. I, II and III Correct Answer - D. I, II and III
9. On an audit engagement performed by a CPA firm with one office, at the
minimum, knowledge of the relevant professional accounting and auditing
standards should be held by:
A.The auditor with final responsibility for the audit.
B.All professionals working upon the audit.
C. All professionals working upon the audit and the partner in charge of the
CPA firm.
D. All professionals working in the office. Correct Answer - A.The
auditor with final responsibility for the audit.
10. Which is not considered in deciding whether to accept an engagement?
A. Competence of the audit team
B. Ethical considerations
C. Potential client's reputation
D.Type of opinion to be issued Correct Answer - D.Type of opinion to be
issued
11. An auditor who accepts an audit engagement and does not possess the
industry expertise of the business entity, should
A. Engage financial experts familiar with the nature of the business entity.
Comprehensive Solutions
1. Set the following phases in proper order: i
Pre-Engagement
Internal Controls
Evidence-Gathering
Planning
Post-Audit Responsibilities
Reporting
a. I, II, III, IV, V, VI
b.I, IV, II, III,VI, V
c.I, IV, III, II, V, VI
d.I, IV, II, III, V, VI Correct Answer - b.I, IV, II, III,VI, V
2. The four major steps in conducting an audit are
i.Testing internal controls
ii.Audit report
iii.Planning
iv.Testing transactions and balances
The proper sequence in applying the above steps is
A I, IV, III, II
B. II, III, IV, I
C. III, I, IV, II
D. III, IV, I II Correct Answer - C. III, I, IV, II
3. The definition of auditing contained within A Statement of Basic Auditing
Concepts recognizes that 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. Correct Answer - C.
Investigative process and a reporting process.
4 The audit process is
A. A special application of the scientific method of inquiry.
B.Regulated by the AICPA.
C. The only service a CPA is allowed to perform by law.
D. Performed only by CPAs.. Correct Answer - A. A special application of
the scientific method of inquiry.
5. Assertions about account balances at the period-end include completeness,
which means that
A. Assets, liabilities and equity interest exist.
B. All assets, liabilities and equity interests that should have been recorded
have been recorded.
C. Assets, liabilities and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
D. The entity holds or controls the rights to assets, and liabilities are the
obligations of the entity. Correct Answer - B. All assets, liabilities and
equity interests that should have been recorded have been recorded.
6. Preliminary engagement activities include:
A. Setting materiality.
B. Evaluating internal controls.
C. Determining engagement team requirements.
D. Assessing audit risk at the account balance level. Correct Answer - C.
Determining engagement team requirements.
7. Ultimately, the decision about whether or not an auditor is independent
must be made by
A Auditor
B. Public
C. Client's management
, D. Audit committee Correct Answer - a. Auditor
8.In deciding whether to accept or reject an engagement, the auditor's firm
should consider the following.
I. Its competence and independence
II. Its ability to serve the client properly
III. The integrity of the prospective client's management
A I and II
B. II and III
C. I and III
D. I, II and III Correct Answer - D. I, II and III
9. On an audit engagement performed by a CPA firm with one office, at the
minimum, knowledge of the relevant professional accounting and auditing
standards should be held by:
A.The auditor with final responsibility for the audit.
B.All professionals working upon the audit.
C. All professionals working upon the audit and the partner in charge of the
CPA firm.
D. All professionals working in the office. Correct Answer - A.The
auditor with final responsibility for the audit.
10. Which is not considered in deciding whether to accept an engagement?
A. Competence of the audit team
B. Ethical considerations
C. Potential client's reputation
D.Type of opinion to be issued Correct Answer - D.Type of opinion to be
issued
11. An auditor who accepts an audit engagement and does not possess the
industry expertise of the business entity, should
A. Engage financial experts familiar with the nature of the business entity.
