INTRODUCTION TO AUDITING
1. The main object of an audit is ___
a) Expression of opinion b) Detection and Prevention of fraud and error
c) Both (a) and (b) d) Depends on the type of audit.
2. The title of AAS2 issued by Council of ICAI is ___
a) Objective and Scope of the Financial Statements
b) Objective and Scope of the Audit of Financial Statements
c) Objective and Scope of Business of an Entity
d) Objective and Scope of Financial Statements Audit
3. Which of the following is not true about opinion on financial statements?
a) The auditor should express an opinion on financial statements.
b) His opinion is no guarantee to future viability of business
c) He is responsible for detection and prevention of frauds and errors in financial statements
d) He should examine whether recognised accounting principle have been consistently
4. A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _
a) Error of omission b) Error of commission c) Compensating error d) Error of principle
5. ‘Goods sent on approval basis’ have been recorded as ‘Credit sales’. This is an example of _
a) Error of principle b) Error of commission c) Error of omission d) Error of duplication
6. Which of the following statements is not true?
a) Management fraud is more difficult to detect than employee fraud
b) Internal control system reduces the possibility of occurrence of employee fraud and
management fraud
c) The auditor’s responsibility for detection and prevention of errors and frauds is similar.
d) All statements are correct.
7. As per AAS4 if auditor detects an error then –
a) He should inform the management.
b) He should communicate it to the management if it is material
c) The auditor should ensure financial statements are adjusted for detected errors.
d) Both (b) and (c)
8. Which of the following is not a limitation of audit as per AAS4?
a) Objectivity of auditor’s judgment b) Selective testing
c) Persuasiveness of evidence d) Limitations of internal control system.
9. How many principles are listed in AAS1
which govern auditor’s professional obligation?
a) Nine b) Fourteen c) Seven d) Eight
10. Both auditing and accounting are concerned with financial statements. Which of the
following
a) Auditing uses the theory of evidence to verify the financial information made available by
Accountancy
b) Auditing lends credibility dimension and quality dimension to the financial statements
prepared by the accountant.
c) Auditor should have through knowledge of accounting concepts and convention to enable
him to express an opinion on financial statements
d) All of the above.
11.The risk of management fraud increases in the presence of :
a) Frequent changes in supplies b) Improved internal control system
c) Substantial increases in sales
d) Management incentive system based on sales done in a quarter12.Auditing standards differ from audit procedures in that procedures relate to
a) Audit assumptions b) acts to be performed c) quality criterion d) methods of work
13. Which of the following factors likely to be identified as a fraud factor by the auditor?
a) The company is planning a initial public offer of quality shares to raise additional capital
for expansion.
b) Bank reconciliation statement includes depositsintransit.
c) Plant and machinery is sold at a loss.
d) The company has made political contributions.
14.The most difficult type of misstatement to detect fraud is based on:
a) Related party purchases b) Related party sales
c) The restatement of sales d) Omission of a sales transaction from being recorded.
15.Which of the following statements is correct concerning the required documentation in
working papers of fraud risk assessment undertaken by the auditor?
a) All risk factors as mentioned in AAS4,
should be considered and documented along with
response to them.
b) Document the identification of fraud risk factors along with response to them.
c) Document material fraud, risk factors and response to them.
d) No documentation in required.
16.Which of the following is the most appropriate potential reaction of the auditor to his
assessment that the risk of material misstatement due to fraud is high in relation to
existence of inventory?
a) Visit location on surprise basis to observe test counts
b) Request inventory count at a date close to yearend
c) Vouch goods sent on approval very carefully
d) Perform analytical procedures.
17.Which of the following is not likely to be a fraud risk factor relating to management’s
characteristics
a) Tax evasion b) Failure to correct known weakness in internal control system
c) Adoption of conservative accounting principles
d) High management turnover
18.Professional skepticism requires that the auditor assume that management is
a) reasonably honest b) Neither honest nor dishonest
c) Not necessarily honest d) Dishonest unless proved otherwise
19.Which of the following information should a successor auditor obtain during the inquiry of
the predecessor auditor before accepting engagement?
i) Information about integrity of management
ii) Disagreement with management concerning auditing procedures
iii) Review of internal control system.
iv) Organisation structure
a) (i) and (ii) b) (ii) and (iii) c) (i) , (ii) and (iii) d) i) and (iii)
20.The audit engagement letter, generally, should include a reference to each of the following
except
a) limitations of auditing b) responsibilities of management with respect to audit work
c) expectation of receiving a written management representation letter.
d) a description of the auditor’s method of sample selection.
21.The use of an audit engagement letter is the best method of assuring the auditor will have
which of the following?
a) Auditor will obtain sufficient appropriate audit evidence.
b) Management representation letter
c) Access to all books, accounts and vouchers required for audit purpose
d) Cooperation from other auditors22.The use of an audit engagement letter is the best method of documenting
i) the required communication of significant deficiencies in internal control
ii) significantly higher control risk than that assessed in prior audit.
iii) Objective and scope of auditor’s work
iv) Notification of any changes in the original arrangements of the audit.
a) (i) and (ii) b) (i) and (iii) c) ii and (iv) d) (iii and (iv)
23.An auditor who accepts an audit but does not possess the industry expertise of the
business entity should
a) engage experts
b) obtain knowledge of matters that relate to the nature of entity’s business
c) inform management about it d) take help of other auditors
24.The least important element in the evaluation of an audit firm’s system of quality control
would relate toa)
assignment of audit assistants b) system of determining audit fees
c) consultation with experts d) confidentiality of client’s information
25.The primary purpose of establishing quality control policies and procedures for deciding on
client evaluation is toa)
ensure adherence to generally accepted auditing standards
b) acceptance or retention of clients whose management does not lack integrity
c) ensure audit fees is charged according to the type of audit work assigned
d) all of the above
26.Which of the following is not a quality control consideration on accepting a new client?
a) Availability of audit assistants with necessary skill and competence.
b) Provision of other services to the client which may impair independence
c) Predecessor auditor’s advice as to whether audit fees were paid promptly
d) Review of audit work done by one partner by the other
27.An auditor obtains knowledge about a new client’s business and its industry toa)
Make constructive suggestions concerning improvements to the client’s internal control
system.
b) Evaluate the appropriateness of audit evidence obtained
c) Under stand the events and transactions that may have an effect on client’s financial
statements.
d) All of the above
Answers
1. d 2. b 3. c 4. b 5. a
6. b 7. d 8. a 9. a 10. b
11. d 12. b 13. a 14. d 15. b
16. a 17. c 18. b 19. a 20. d
21. c 22. d 23. b 24. b 25. b
26. c 27. c
1. The main object of an audit is ___
a) Expression of opinion b) Detection and Prevention of fraud and error
c) Both (a) and (b) d) Depends on the type of audit.
2. The title of AAS2 issued by Council of ICAI is ___
a) Objective and Scope of the Financial Statements
b) Objective and Scope of the Audit of Financial Statements
c) Objective and Scope of Business of an Entity
d) Objective and Scope of Financial Statements Audit
3. Which of the following is not true about opinion on financial statements?
a) The auditor should express an opinion on financial statements.
b) His opinion is no guarantee to future viability of business
c) He is responsible for detection and prevention of frauds and errors in financial statements
d) He should examine whether recognised accounting principle have been consistently
4. A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _
a) Error of omission b) Error of commission c) Compensating error d) Error of principle
5. ‘Goods sent on approval basis’ have been recorded as ‘Credit sales’. This is an example of _
a) Error of principle b) Error of commission c) Error of omission d) Error of duplication
6. Which of the following statements is not true?
a) Management fraud is more difficult to detect than employee fraud
b) Internal control system reduces the possibility of occurrence of employee fraud and
management fraud
c) The auditor’s responsibility for detection and prevention of errors and frauds is similar.
d) All statements are correct.
7. As per AAS4 if auditor detects an error then –
a) He should inform the management.
b) He should communicate it to the management if it is material
c) The auditor should ensure financial statements are adjusted for detected errors.
d) Both (b) and (c)
8. Which of the following is not a limitation of audit as per AAS4?
a) Objectivity of auditor’s judgment b) Selective testing
c) Persuasiveness of evidence d) Limitations of internal control system.
9. How many principles are listed in AAS1
which govern auditor’s professional obligation?
a) Nine b) Fourteen c) Seven d) Eight
10. Both auditing and accounting are concerned with financial statements. Which of the
following
a) Auditing uses the theory of evidence to verify the financial information made available by
Accountancy
b) Auditing lends credibility dimension and quality dimension to the financial statements
prepared by the accountant.
c) Auditor should have through knowledge of accounting concepts and convention to enable
him to express an opinion on financial statements
d) All of the above.
11.The risk of management fraud increases in the presence of :
a) Frequent changes in supplies b) Improved internal control system
c) Substantial increases in sales
d) Management incentive system based on sales done in a quarter12.Auditing standards differ from audit procedures in that procedures relate to
a) Audit assumptions b) acts to be performed c) quality criterion d) methods of work
13. Which of the following factors likely to be identified as a fraud factor by the auditor?
a) The company is planning a initial public offer of quality shares to raise additional capital
for expansion.
b) Bank reconciliation statement includes depositsintransit.
c) Plant and machinery is sold at a loss.
d) The company has made political contributions.
14.The most difficult type of misstatement to detect fraud is based on:
a) Related party purchases b) Related party sales
c) The restatement of sales d) Omission of a sales transaction from being recorded.
15.Which of the following statements is correct concerning the required documentation in
working papers of fraud risk assessment undertaken by the auditor?
a) All risk factors as mentioned in AAS4,
should be considered and documented along with
response to them.
b) Document the identification of fraud risk factors along with response to them.
c) Document material fraud, risk factors and response to them.
d) No documentation in required.
16.Which of the following is the most appropriate potential reaction of the auditor to his
assessment that the risk of material misstatement due to fraud is high in relation to
existence of inventory?
a) Visit location on surprise basis to observe test counts
b) Request inventory count at a date close to yearend
c) Vouch goods sent on approval very carefully
d) Perform analytical procedures.
17.Which of the following is not likely to be a fraud risk factor relating to management’s
characteristics
a) Tax evasion b) Failure to correct known weakness in internal control system
c) Adoption of conservative accounting principles
d) High management turnover
18.Professional skepticism requires that the auditor assume that management is
a) reasonably honest b) Neither honest nor dishonest
c) Not necessarily honest d) Dishonest unless proved otherwise
19.Which of the following information should a successor auditor obtain during the inquiry of
the predecessor auditor before accepting engagement?
i) Information about integrity of management
ii) Disagreement with management concerning auditing procedures
iii) Review of internal control system.
iv) Organisation structure
a) (i) and (ii) b) (ii) and (iii) c) (i) , (ii) and (iii) d) i) and (iii)
20.The audit engagement letter, generally, should include a reference to each of the following
except
a) limitations of auditing b) responsibilities of management with respect to audit work
c) expectation of receiving a written management representation letter.
d) a description of the auditor’s method of sample selection.
21.The use of an audit engagement letter is the best method of assuring the auditor will have
which of the following?
a) Auditor will obtain sufficient appropriate audit evidence.
b) Management representation letter
c) Access to all books, accounts and vouchers required for audit purpose
d) Cooperation from other auditors22.The use of an audit engagement letter is the best method of documenting
i) the required communication of significant deficiencies in internal control
ii) significantly higher control risk than that assessed in prior audit.
iii) Objective and scope of auditor’s work
iv) Notification of any changes in the original arrangements of the audit.
a) (i) and (ii) b) (i) and (iii) c) ii and (iv) d) (iii and (iv)
23.An auditor who accepts an audit but does not possess the industry expertise of the
business entity should
a) engage experts
b) obtain knowledge of matters that relate to the nature of entity’s business
c) inform management about it d) take help of other auditors
24.The least important element in the evaluation of an audit firm’s system of quality control
would relate toa)
assignment of audit assistants b) system of determining audit fees
c) consultation with experts d) confidentiality of client’s information
25.The primary purpose of establishing quality control policies and procedures for deciding on
client evaluation is toa)
ensure adherence to generally accepted auditing standards
b) acceptance or retention of clients whose management does not lack integrity
c) ensure audit fees is charged according to the type of audit work assigned
d) all of the above
26.Which of the following is not a quality control consideration on accepting a new client?
a) Availability of audit assistants with necessary skill and competence.
b) Provision of other services to the client which may impair independence
c) Predecessor auditor’s advice as to whether audit fees were paid promptly
d) Review of audit work done by one partner by the other
27.An auditor obtains knowledge about a new client’s business and its industry toa)
Make constructive suggestions concerning improvements to the client’s internal control
system.
b) Evaluate the appropriateness of audit evidence obtained
c) Under stand the events and transactions that may have an effect on client’s financial
statements.
d) All of the above
Answers
1. d 2. b 3. c 4. b 5. a
6. b 7. d 8. a 9. a 10. b
11. d 12. b 13. a 14. d 15. b
16. a 17. c 18. b 19. a 20. d
21. c 22. d 23. b 24. b 25. b
26. c 27. c
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