MULTIPLE CHOICE

1.)​ Which of the following best describes the primary objective of a financial statement
audit?​
a) To detect fraud​
b) To guarantee the accuracy of financial statements​
c) To provide an opinion on the fairness of financial statements​
d) To improve internal controls

2.)​ Audits performed to evaluate compliance with laws and regulations are called:​
a) Financial audits​
b) Compliance audits​
c) Operational audits​
d) Integrated audits

3.)​ Which of the following provides the basis for determining audit procedures?​
a) Internal audit findings​
b) Auditor’s opinion​
c) Risk assessment​
d) Financial statement balances

4.)​ Auditors must provide what level of assurance regarding material misstatements?​
a) Absolute assurance​
b) Reasonable assurance​
c) No assurance​
d) Conditional assurance

5.)​ Which of the following establishes auditing standards for audits of public companies in
the U.S.?​
a) Public Company Accounting Oversight Board (PCAOB)​
b) Financial Accounting Standards Board (FASB)​
c) International Accounting Standards Board (IASB)​
d) Government Accountability Office (GAO)

6.)​ Auditing standards require auditors to have:​

a) Professional skepticism​
b) A complete understanding of every client transaction​
c) Knowledge of tax regulations​
d) Authority over financial reporting decisions
7.)​ Independence for auditors means they must:​
a) Not hold any shares in the client’s company​
b) Disclose all financial relationships with the client​
c) Be free from conflicts of interest​
d) All of the above

8.)​ The primary responsibility for preparing financial statements lies with:​
a) The auditor​
b) The audit committee​
c) Management​
d) The shareholders

9.)​ Auditors are responsible for detecting:​

a) All errors and fraud​
b) Material misstatements caused by fraud or error​
c) Minor misstatements​
d) Operational inefficiencies

10.)​ Which of the following increases the auditor’s risk of not detecting material
misstatements?​
a) Effective internal controls​
b) Collusion among employees​
c) Timely financial reporting​
d) Frequent communication with management

11.)​ Before accepting an engagement, auditors should:​

a) Communicate with the predecessor auditor​
b) Assess the competence of the audit team​
c) Evaluate the client’s integrity​
d) All of the above

12.)​ The engagement letter outlines:​

a) Audit procedures​
b) Auditor and client responsibilities​
c) Internal control deficiencies​
d) Fraud detection plans

13.)​ Why is assessing client management integrity important before accepting an

engagement?​
a) It determines the scope of the audit​
b) It affects the audit fee​
c) It helps evaluate audit risk​
d) It influences the client’s financial statements
14.)​ Audit planning helps auditors to:​
a) Eliminate material misstatements​
b) Establish an overall audit strategy​
c) Detect all fraud​
d) Ensure profitability for the client

15.)​ Materiality is determined during the planning stage to:​

a) Assess which accounts should be audited​
b) Determine the audit fee​
c) Establish acceptable levels of audit risk​
d) Identify fraud risk factors

16.)​ Which of the following is a common audit planning procedure?​

a) Inventory observation​
b) Development of an audit program​
c) Financial statement approval​
d) Engagement letter issuance

17.)​ Internal control systems are primarily designed to provide:​

a) Absolute assurance of no fraud​
b) Assurance of operational efficiency​
c) Reasonable assurance of reliable financial reporting​
d) Legal compliance

18.)​ Which of the following is a component of internal control?​

a) Control environment​
b) Substantive testing​
c) Engagement letter​
d) Independent audit opinion

19.)​ The auditor’s understanding of internal control helps to:​

a) Eliminate audit risk​
b) Determine the nature, timing, and extent of audit procedures​
c) Prepare financial statements​
d) Communicate management’s responsibilities

20.)​ Which of the following types of audits focuses on the accuracy of financial
statements?​
a) Operational audit​
b) Financial audit​
c) Forensic audit​
d) Compliance audit
21.)​ Which of the following is NOT a type of audit opinion?​
a) Qualified opinion​
b) Disclaimer of opinion​
c) Material opinion​
d) Adverse opinion

22.)​ The term "audit risk" refers to:​

a) The risk of not detecting fraud​
b) The risk of issuing an incorrect audit opinion​
c) The risk of conducting an inefficient audit​
d) The risk of financial loss to the auditor

23.)​ The International Auditing and Assurance Standards Board (IAASB) is responsible
for:​
a) Developing audit standards used in the United States​
b) Establishing international auditing standards​
c) Preparing financial statements​
d) Enforcing ethical guidelines for all auditors

24.)​ Auditors must apply which of the following attitudes when conducting an audit?​
a) Trust but verify​
b) Neutral skepticism​
c) Professional skepticism​
d) Unquestioning acceptance

25.)​ Ethical behavior for auditors requires compliance with:​

a) Auditing procedures​
b) The audit engagement letter​
c) The fundamental principles of integrity, objectivity, and independence​
d) Financial reporting rules

26.)​ Auditors are primarily responsible for providing an opinion on:​

a) The effectiveness of the internal control system​
b) The accuracy of all transactions​
c) Whether the financial statements are fairly presented in accordance with the
applicable framework​
d) The client’s business strategy

27.)​ Auditors are required to report material fraud to:​

a) The audit committee​
b) Shareholders​
c) Law enforcement​
d) The general public
28.)​ The risk of material misstatement increases when:​
a) The client has weak internal controls​
b) The company’s operations are simple​
c) Management has strong oversight over financial reporting​
d) The audit is conducted by experienced auditors

29.)​ When deciding to accept a new audit engagement, auditors should consider:​
a) The integrity of management​
b) The auditor’s own competence and independence​
c) Any potential conflicts of interest​
d) All of the above

30.)​ The purpose of an engagement letter is to:​

a) Outline the auditor’s qualifications​
b) Confirm the terms and scope of the audit engagement​
c) Identify potential risks to the company​
d) Approve the company’s financial statements

31.)​ Which of the following is a valid reason for an auditor to refuse an engagement?​
a) The client is unable to pay high audit fees​
b) The auditor lacks the required technical expertise​
c) Management refuses to sign the engagement letter​
d) Both b and c

32.)​ What is the primary purpose of audit planning?​

a) To prepare detailed financial statements​
b) To set the audit fee​
c) To determine the nature, timing, and extent of audit procedures​
d) To ensure internal controls are designed properly

33.)​ The audit plan is developed based on:​

a) Preliminary risk assessments​
b) Client financial performance​
c) Historical audit opinions​
d) Management’s estimates

34.)​ Which of the following is NOT typically performed during the planning stage?​
a) Conducting inventory counts​
b) Establishing overall materiality​
c) Identifying fraud risks​
d) Reviewing prior-year working papers
 35.)​ Internal control systems are primarily designed to:​
a) Improve the accuracy of financial statements​
b) Ensure compliance with laws and regulations​
c) Safeguard company assets and enhance the reliability of financial reporting​
d) Ensure operational efficiency

36.)​ Which of the following best describes control activities?​

a) Oversight by the board of directors​
b) Policies and procedures to mitigate risks​
c) Evaluation of accounting estimates​
d) Approval of the audit plan

37.)​ Auditors must document their understanding of internal controls to:​

a) Assess control risk​
b) Evaluate management’s integrity​
c) Identify key fraud risks​
d) Issue an audit report

TRUE OR FALSE

1.​ Audits are designed to provide reasonable assurance that financial statements are free
of material misstatements.
2.​ Auditors are responsible for providing guarantees of no errors or fraud
3.​ Professional skepticism is a required attitude for all auditors.
4.​ Auditors can express an unqualified opinion even if they lack independence.
5.​ Auditors must plan their audits to obtain absolute assurance of no material
misstatements.
6.​ Collusion among employees can make fraud more difficult for auditors to detect.
7.​ The engagement letter should be signed by both the auditor and the client.
8.​ Auditors can accept any engagement without regard to client risks.
9.​ Setting materiality levels is part of the audit planning process.
10.​Audit planning is only necessary for new clients.
11.​Auditors are responsible for designing internal controls.
12.​The control environment reflects the overall attitude of management toward internal
controls.
13.​Auditors must assess both inherent and control risks when planning an audit.
14.​The primary responsibility for financial statement preparation rests with the auditor.
15.​Auditors may accept gifts from clients as long as they do not affect their independence.
16.​Professional standards require auditors to continually update their knowledge and skills.
17.​Auditors are responsible for expressing an opinion on the effectiveness of a company’s
internal controls in all audits.
18.​Fraud risk assessment is a critical part of the auditor’s planning process.
19.​Auditors should consider the risks of material misstatement before accepting an
engagement.
20.​The engagement letter should be prepared only for new audit clients.
21.​Audit planning is required to reduce audit risk to an acceptably low level.
22.​The audit plan should remain unchanged regardless of audit findings.
23.​Auditors are required to test the operating effectiveness of internal controls in every
audit.
24.​The control environment sets the tone for an organization’s internal controls.