Auditing MCQs

Auditing

Multiple Choice Questions

1.  The fundamental objective of the audit of a company is to:
(a). Protect the interests of the minority shareholders
(b). Detect and prevent errors and fraud
(c). Assess the effectiveness of the company’s performance
(d). Attest to the credibility of the company’s accounts

Ans: (d) Attest to the credibility of the company’s accounts

2. The concept of stewardship means that a company’s directors
(a). Are responsible for ensuring that the company complies with the law
(b). Are responsible for ensuring that the company pays its tax by the due date
(c). Safeguard the company’s assets and manage them on behalf of shareholders
(d). Report suspected fraud and money laundering to the authorities

Ans: (c) Safeguard the company’s assets and manage them on behalf of shareholders

3. Why do auditors concentrate their efforts on material items in accounts?
(a). Because they are easier to audit
(b). Because it reduces the audit time
(c). Because the risk to the accounts of their being incorrectly stated is greater
(d). Because the directors have asked for it

Ans: (c) Because the risk to the accounts of their being incorrectly stated is greater

4. Which of the following is NOT the responsibility of a company’s directors?
(a). Reporting to the shareholders on the accuracy of the accounts
(b). Establishment of internal controls
(c). Keeping proper accounting records
(d). Supplying information and explanations to the auditor

Ans: (a) Reporting to the shareholders on the accuracy of the accounts

5. International auditing standards are issued by the:
(a). International Accounting Standards Board
(b). Financial Accounting Standards Board
(c). International Audit and Assurance Standards Board
(d). Auditing Practices Board

Ans: (c) International Audit and Assurance Standards Board

6. When an auditor is proposed for removal from office, which one of the following is he NOT permitted to do?
(a). Circulate representations to members
(b). Apply to the court to have the proposal removed
(c). Speak at the AGM/EGM where the removal is proposed
(d). Receive notification of the AGM/EGM where the removal is proposed

Ans: (b) Apply to the court to have the proposal removed

7. Which one of the following is NOT a duty of the auditor?
(a). Duty to report to the company’s bankers
(b). Duty to report to the members
(c). Duty to sign the audit report
(d). Duty to report on any violation of law

Ans: (a) Duty to report to the company’s bankers

 8. Assuming that it is not the first appointment of the auditor, who is responsible for the appointment of the auditor?
(a). The shareholders in a general meeting
(b). The managing director
(c). The board of directors in a board meeting
(d). The audit committee

Ans: (a) The shareholders in a general meeting

9. The independent auditor’s primary responsibility is to:
(a). the directors
(b). the company’s creditors (payables)
(c). the company’s bank
(d). the shareholders

Ans: (d) the shareholders

10. How long is the auditor’s term of office?
(a). Until the audit is complete
(b). Until the financial statements are complete
(c). Until the next AGM
(d). Until the directors remove them

Ans: (c) Until the next AGM

11. Which one of the following is NOT considered to be part of planning?
(a). Background i.e. industry
(b). Previous year’s audit i.e. any qualifications in the report
(c). Considering the work to be done by the client staff e.g. internal audit
(d). Considering whether the financial statements show a true and fair view

Ans: (d) Considering whether the financial statements show a true and fair view

12. Audit risk is composed of 3 factors. Which of the following is NOT one of those factors?
(a). Compliance risk
(b). Detection risk
(c). Control risk
(d). Inherent risk

Ans: (a) Compliance risk

13. Which of the following is NOT a main element of a sales system?
(a). Receiving orders from customers
(b).  Marketing
(c).  Despatching the goods and invoicing customers
(d).  Recording sales and debtors in the accounts

Ans: (b) Marketing

14. Which should NOT be considered at the planning stage?
(a). The timing of the audit
(b). Analytical review
(c). Last year’s written representation letter
(d). Obtaining written representations

Ans: (b) Analytical review

15. At the planning stage you would NOT consider:
(a). the timing of the audit
(b). whether corrections from the inventory count have been implemented
(c). last year’s audit
(d). the potential use of internal audit

Ans: (b) whether corrections from the inventory count have been implemented

16. Which of the following is NOT an accepted method of selection in sampling?
(a). Systematic selection
(b). Pervasive selection
(c). Random selection
(d). Haphazard selection

Ans: (b) Pervasive selection

17. Which of the following are you unlikely to see in the current file of auditors’ working papers?
(a). Memorandum & articles of association
(b). Audit planning memorandum
(c). Summary of unadjusted errors
(d). Details of the work done on the inventory count

Ans: (a) Memorandum & articles of association

18.  According to ISA 500, the strength of audit evidence is determined by which two qualities?
(a). Appropriateness & competence
(b). Sufficiency & appropriateness
(c). Reliability & extensiveness
(d). Objectivity & independence

Ans: (b) Sufficiency & appropriateness

19. Which of the following is NOT a main element of a purchases system?
(a).  Placing orders
(b).  Receiving purchase invoices
(c).  Goods received
(d).  Decisions at board level on whether to incur capital expenditure

Ans: (d) Decisions at board level on whether to incur capital expenditure

20 Which of the following is normally the most reliable source of audit evidence?
(a). Internal audit
(b). Suppliers’ statements
(c). Board minutes
(d). Analytical review

Ans: (b) Suppliers’ statements

21. 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

Ans. d) Depends on the type of audit.

22. 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

Ans. b) Objective and Scope of the Audit of Financial Statements.

23. 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

Ans. c) He is responsible for detection and prevention of frauds and errors in financial statements.

24. 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

Ans. b) Error of commission.

25.  ‘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

Ans. a) Error of principle.

26. 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.

Ans. b) Internal control system reduces the possibility of occurrence of employee fraud and management fraud.

27. 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

Ans. a) Objectivity of auditor’s judgment.

28. How many principles are listed in AAS1 which govern auditor’s professional obligation?

a) Nine
b) Fourteen
c) Seven
d) Eight

Ans. a) Nine.

29. 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.

Ans. b) Auditing lends credibility dimension and quality dimension to the financial statements prepared by the accountant.

30. 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

Ans. b) acts to be performed.

31. 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 deposits in transit.
c) Plant and machinery is sold at a loss.
d) The company has made political contributions.

Ans. a) The company is planning a initial public offer of quality shares to raise additional capital for expansion.

32. 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.

Ans. d) Omission of a sales transaction from being recorded.

33. The least important element in the evaluation of an audit firm’s system of quality control would relate to

a)assignment of audit assistants
b) system of determining audit fees
c) consultation with experts
d) confidentiality of client’s information

Ans. b) system of determining audit fees.

34. An auditor obtains knowledge about a new client’s business and its industry to

a) 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

Ans. c) Under stand the events and transactions that may have an effect on client’s financial statements.

37. Audit of banks is an example of –

a) Statutory audit
b) Balance sheet audit
c) Concurrent audit
d) Both (a) and (b)
e) All of the above

Ans. e) All of the above.

38. Concurrent audit is a part of

a) Internal check system
b) Continuous audit
c) Internal audit system
d) None

Ans. c) Internal audit system.

39.  In India, balance sheet audit is synonymous to

a) Annual audit
b) Continuous audit
c) Detailed audit
d) Statutory audit

Ans. a) Annual audit.

40. Balance sheet audit includes verification of_

a) Assets
b) Liabilities
c) Income and expense accounts where appropriate
d) All of the above

Ans. d) All of the above.

41. Which of the following statements is not true about continuous audit?

a) It is conducted at regular interval
b) It may be carried out on daily basis
c) It is needed when the organization has a good internal control system
d) It is expensive

Ans. c) It is needed when the organization has a good internal control system.

42. Balance sheet does not include

a) Verification of assets and liabilities
b) Vouching of income and expense accounts related to assets and liabilities
c) Examination of adjusting and closing entries
d) Routine checks

Ans. d) Routine checks.

43..…..the audit risk,….. the materiality and ……the audit effort

a) Lower, Higher, Lower
b) Lower, Lower, Higher
c) Higher, Lower, Lower
d) Lower, Higher, Higher

Ans. a) Lower, Higher, Lower.

44. Analytical procedures issued in the planning stage of an audit, generally

a) helps to determine the nature, timing and extent of other audit procedures
b) directs attention to potential risk areas
c) indicates important aspects of business
d) All of the above

Ans. d) All of the above.

45. Knowledge of the entity’s business does not help the auditor to

a) reduce inherent risk
b) identify problem areas
c) evaluate reasonableness of estimates
d) evaluate appropriates of GAAP.

Ans. a) reduce inherent risk.

46. The authority to remove the first auditor before the expiry of term is with_

a) the shareholders in a general meeting
b) the shareholders in the first annual General meeting
c) the board of directors
d) the Central Government

Ans. a) the shareholders in a general meeting.

47. The retiring auditor does not have a right to___

a) make written representations
b) get his representations circulated.
c) be heard at the meeting
d) speak as a member of the company

Ans. d) speak as a member of the company.

48. Who out of the following cannot be appointed as a statutory auditor of the company?

a) Erstwhile director
b) Internal auditor
c) Relative of a director
d) Only (b) and (c)

Ans. b) Internal auditor.

49. A statutory auditor has a right of access at all times to

a) Books and accounts of a company
b) Books, accounts and documents of the company
c) Books, accounts and vouchers of the company
d) Notices and documents of the company

Ans. c) Books, accounts and vouchers of the company.

50. Who among the following can be appointed as special auditor by the Central Government?

a) The statutory auditor
b) chartered accountant in practice
c) Any chartered accounted who is not in practice
d) Both (a) and (b)

Ans. b) chartered accountant in practice.