About Auditing

Financial statement audits, or an objective study and assessment of a company's financial statements – usually undertaken by an external third party – are the most common kind of auditing. Internal audits and government audits, such as those conducted by the Internal Revenue Service (IRS), are also possible options.

Importance of Auditing : 

The term audit in accounting refers to the examination and verification of a company's financial records. Its goal is to ensure that financial data is presented in an honest and objective way at all times. Financial statements are also audited to ensure that they are prepared in accordance with accounting rules.

Types of Audits : 

Audits may be divided into three categories:

  1. A company or organization's workers conduct internal audits, as defined by the term. These audits aren't shared with anybody outside of the firm. They are instead ready for management and other internal stakeholders to use.
  2. External audits: External audits, which are conducted by external organizations and other parties, provide an unbiased perspective that internal auditors may not be able to deliver. External financial audits are used to assess whether a company's financial statements include any major misstatements or inaccuracies.
  3. Government audits: Government audits are conducted to check that financial statements have been made correctly and that a company's taxable revenue has not been misrepresented. Conclusion Auditing is necessary to guarantee that organizations correctly and fairly portray their financial status in compliance with accounting standards.

Following are some of the multiple choice questions on the Auditing with answers that will help the students in developing their knowledge.

Auditing MCQ

1. Auditing is compulsory for

  • Small scale business
  • Partnership firms
  • Joint stock Companies
  • Proprietary Concerns

2. Errors of Omission are

  • Technical errors
  • Errors of principle
  • Compensating errors
  • None of the above

3. Civil liability of an auditor implies liability for

  • misappropriation of cash
  • misappropriation of goods
  • fraud
  • misfeasance

4. Audit of banks is an example of –

  • Statutory audit
  • Balance sheet audit
  • Concurrent audit
  • All of the above

5. The first auditor of a company will hold office

  • For a period of one year
  • Till holding of statutory meeting
  • Till the conclusion of first annual general meeting
  • Till a new auditor is appointed

6. An auditor is like a

  • Blood haunt
  • Watch dog
  • May both according to situation
  • None of these

7. Audit in depth is synonymous for

  • Complete audit
  • Completed audit
  • Final audit
  • Detailed audit

8. Purchase returns should be vouched with the help of

  • Bought notes
  • Credit notes
  • Goods inward book
  • Cash book

9. The auditor should state the reasons for his reservations in audit report andshould try to quantify the effect on them. This should be done in case he has expressed _ i) A qualified opinion ii) an unqualified opinion with emphasis of matter paragraph iii) An adverse opinion IV) a disclaimer of opinion

  • i) only
  • i) and (iv) only
  • i), iii) and (iv) only
  • All of the above

10. Vouching of the balances of all incomes and expenses account is known as vouching of _____

  • Personal ledger
  • Impersonal ledger
  • Cash
  • none of the above

11. Internal audit is undertaken

  • By independent auditor
  • Statutorily appointed auditor
  • By a person appointed by the management
  • By a government auditor

12. The term ‘Audit’ is derived from a Latin word “audire” which means;

  • To inspect
  • To examine
  • To hear
  • To investigate

13. Which of the following affects audit effectiveness?

  • Risk of over reliance
  • Risk of incorrect rejection
  • Risk of incorrect acceptance
  • Both (a) and (c)

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

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

15. An auditor assesses control risk because it

  • Affects the audit risk
  • Affects the level of detection risk that auditor may accept
  • Helps him to fix materiality level for each financial assertion
  • Is directly related to inherent risk

16. Errors and frauds already committed can be discovered under the system of ________.

  • internal audit, internal check, internal control
  • external check
  • statutory audit
  • interim audit

17. Which of the following describe the true relationship between auditor, client and external users?

  • Management provides capital to external users and auditor is hired to provide report relied upon by users for assurance.
  • External users rely on auditor’s report assurance to reduce information risk provided by management
  • Auditor ensure report are based on management decision on the economic event to be presented to external users
  • Management and auditor provide financial statement to external users

18. An auditor should study and evaluate internal controls to

  • Determine whether assets are safeguarded
  • Suggest improvements in internal control
  • Plan audit procedures
  • Express and opinion

19. The title of AAS2 issued by Council of ICAI is ___

  • Objective and Scope of the Financial Statements
  • Objective and Scope of the Audit of Financial Statements
  • Objective and Scope of Business of an Entity
  • Objective and Scope of Financial Statements Audit

20. The performance of tests of control is documented in

  • Audit programme
  • Flow charts
  • Working papers
  • Any of the above

21. Control risk is assessed at

  • Overall financial statements level
  • Fraud risk factor level
  • Financial statement assertion level
  • Control environment level

22. While observing a client’s annual physical inventory, an auditor conducted testcounts for certain test counts were higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the client’s failure to record –

  • Purchase returns
  • Sales returns
  • Goods with consignor
  • Purchase discounts

23. The current file of the auditor’s working papers, generally, should include

  • A flowchart of the internal controls
  • Organisation charts
  • A copy of financial statements
  • Copies of bond and debentures

24. Which of the following is not an inherent limitation of internal control system?

  • Management override
  • Collusion among employees
  • Inefficiency of internal auditor
  • Abuse of authority

25. The independence of an internal auditor will most likely be assured if he reportsto the

  • President Finance
  • President System
  • Managing Director
  • CEO

26. Which of the following are included in test of control?

  • Reperformance and observation
  • Inquiry and analytical procedures
  • Comparison and conformation
  • Inspection and verification

27. Which of the following assets is least likely to be subjected to lien?

  • Freehold land
  • Plant and machinery
  • Leasehold property
  • Motor vehicles

28. Which of the following is not true with regard to verification of assets?

  • It invoices substantiation of occurrence of transactions
  • Its objective is to establish existence, ownership, possession, valuation and disclosure of assets
  • The auditor has to form an opinion on different aspects
  • All are true

29. Which of the following statements with regard to rules regarding exemptionfrom branch audit is not true?

  • A branch office of a company can be granted exemption on the basis of quantum of activity criterion
  • If a satisfactory arrangement of scrutiny check of the books of account of a branch office of a manufacturing company has been made, it can be exempted from branch audit
  • Cost consideration should be considered as an important factor/ground for exemption from branch audit
  • The auditor should state in his audit report that branch office is exempted by virtue of quantum of activity or any other basis

30. Who among the following can be appointed as special auditor by the CentralGovernment?

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

31. An auditor in a casual vacancy is appointed by the _______

  • Board of Directors
  • Shareholders
  • Central Government
  • Company Law board

32. Internal check is done by the

  • Internal auditor
  • External auditor
  • Employees
  • None of these

33. Which of the following statements is most closely associated with analytical procedureapplied at substantive stage?

  • It helps to study relationship among balance sheet accounts
  • It helps to discover material misstatements in the financial statements
  • It helps to identify possible oversights
  • It helps to accumulate evidence supporting the validity of a specific account balance

34. What would most effectively describe the risk of incorrect acceptance in terms ofsubstantive audit testing?

  • The auditor has ascertained that the balance is materially correct when in actual fact it is not
  • The auditor concludes the balance is materially misstated when in actual fact is not
  • The auditor has rejected an item from sample which was not supported by documentary evidence
  • He applies random sampling on data which is inaccurate and inconsistent

35. What would most appropriately describe the risk of incorrect rejection in terms ofsubstantive testing?

  • The auditor concludes balance is materially correct when in actual fact it is not
  • The auditor concludes that the balance is materially misstated when in actual fact it not
  • The auditor has rejected an item for sample which was material
  • None of the above

36. Which of the following is not true about opinion on financial statements?

  • The auditor should express an opinion on financial statements.
  • His opinion is no guarantee to future viability of business
  • He is responsible for detection and prevention of frauds and errors in financial statements
  • He should examine whether recognised accounting principle have been consistently

37. Internal check is carried on by

  • Staff specially appointed for the purpose
  • Internal auditor
  • Supervisor of the staff
  • Members of the staff

38. Institute of Chartered Accountants of India was established

  • 1956
  • 1949
  • 1956
  • 1948

39. An auditor is held criminally liable for

  • Loss to his client
  • Neglect of his duty
  • Offence against statutory provisions
  • Frauds

40. Which of the following statement is not true regard to auditor’s attendance atstock taking?

  • Auditor should attend physical stock taking only if inventory is material
  • Auditor may not attend physical verification of stock by management, if he does not find it appropriate to rely on it
  • If inventory is material, even when the auditor is not placing reliance on the physical verification by the management, he should attend it
  • The primary objective of an auditor’s observation of an entity’s observation of an entity’s stock take is to obtain direct knowledge that the stock and has been property counted

41. Which of the following financial statements assertions are addressed by testingthe cut off for plant asset addition?

  • Existence and ownership
  • Valuation and disclosure
  • Possession and ownership
  • Completeness and valuation

42. Which of the following report not result in qualification of the auditor’s opinion due to a scope limitation?

  • Restrictions the client imposed
  • Reliance on the report of other auditor
  • Inability to obtain sufficient appropriate evidential matter
  • Inadequacy of accounting records

43. Which of the following is true about explanatory notes?

  • These are given by the directors of the company
  • These are given to adhere to requirements of section 211.
  • These are given by auditors of the company in auditor’s report
  • All of the above

44. The overall attitude and awareness of an entity’s board of directors concerningthe importance of internal control is reflected in

  • Accounting controls
  • Control environment
  • Control procedures
  • Supervision

45. Analytical procedures are least likely to be use in the audit of –

  • Cash balance
  • Investments
  • Bills receivables
  • Debtors

46. Which of the following statements is not true with regard to teeming andlading ?

  • It results in the deliberate misappropriation of cash receipts
  • It is associated with cash receipts
  • If same individual maintains cash receipts and cash payments teeming and lading is likely to exist
  • To conceal the shortage, the defraud, usually, tries to keep bank and book amounts in daily agreement so that a bank reconciliation will not detect the irregularity.

47. The auditor has noticed existence of recurring losses sale of fixed assets thisindicates

  • Depreciation charges are insufficient
  • Policy of sale or disposal of fixed assets needs to be reviewed
  • The sale of assets have not been properly authorized
  • Accounting errors

48. The auditor is most likely to examine related party transactions very carefullywhile vouching

  • Credit sales
  • Sales returns
  • Credit purchases
  • Cash purchases

49. External auditor considered reliance on internal auditor based on the evaluation of effectiveness of audit conduct by internal auditor if

  • Independence of the audit team have been evaluated
  • Competency and skills needed are achieved
  • Recommendation from client point of view accepted
  • Relevant audit tests of the internal controls and financial statement have been performed

50. The internal auditor’s independence is most likely to be compromised when the internal audit department is responsible directly to audit committee of the board of directors.

  • TRUE
  • FALSE

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