This post collects ACC311 (Fundamentals of Auditing) midterm past-paper questions from several solved files in one place. Part 1 has 129 MCQs (duplicates removed); tap Show answer to check yourself. Part 2 has 14 subjective questions with model answers.
Part 1: MCQs
Q1. Which of the following is a primary objective of an operational audit?
- Past protection provided by existing internal control
- The verification that a company's financial report is fairly presented
- The accuracy of the data reflected in management's financial records
- Future improvements to accomplish the goals of management
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Answer: (d) Future improvements to accomplish the goals of management
Q2. Which of the following auditors especially focus upon exceptions, oddities, accounting Irregularities, patterns of conduct, and not on errors or omissions?
- Financial auditors
- Fraud auditors
- External auditors
- Internal auditors
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Answer: (b) Fraud auditors
Q3. Which of the following 'audit process stages' shall generally be conducted at the end in relation to the others?
- Auditing business processes and related accounts
- Preliminary assessment of materiality and audit risk
- Preliminary analytical procedures e.g. ratio analysis
- Consideration of internal control systems
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Answer: (a) Auditing business processes and related accounts
Q4. Which of the following primary assertion is satisfied when an auditor ensures that there is no false transaction recorded and all recorded transactions have actually taken place?
- Occurrence
- Completeness
- Existence
- Rights and obligations
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Answer: (a) Occurrence
Note: Some solved files mark "Completeness"; Occurrence is the assertion that recorded transactions actually took place.
Q5. Which one of the following statements is NOT true about the internal control system of a company?
- Internal control is affected by people working in an organization
- Internal control is a process of bringing accuracy and improvements in the systems
- Internal control system is expected to provide absolute assurance about the performance of a company
- Internal control is geared to achieve objectives of financial reporting, compliance and operations
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Answer: (c) Internal control system is expected to provide absolute assurance about the performance of a company
Q6. Which one of the following meetings is considered as a 'meeting of members'?
- General meeting
- Board meeting
- Management meeting
- Employees meeting
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Answer: (a) General meeting
Note: One solved file marks "Board meeting", which is not a meeting of members.
Q7. The first auditors of a company are required to hold office till which one of the following events? (Companies Ordinance, 1984)
- Board meeting
- Completion of one year
- First annual general meeting
- Extra ordinary general meeting
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Answer: (c) First annual general meeting
Q8. A sports goods manufacturing company has started its operations in year 2003 as a private limited company. After five years of conducting successful business, it has incorporated as a listed company in year 2008. Now, the company is required to hire its first auditors, but neither the directors nor the members could appoint the auditors within four months since the incorporation of the company. Select among the following authorities who can appoint the auditors in this situation? (Companies Ordinance, 1984)
- Company secretary
- Company registrar
- Securities and Exchange Commission
- Institute of Chartered Accountants of Pakistan
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Answer: (c) Securities and Exchange Commission
Q9. Which one of the following actions shall give rise to tort, while performing audit of a company?
- Negligence
- Negligent misconduct
- Assault
- All of the given options
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Answer: (a) Negligence
Q10. Suppose that a private limited company has just been incorporated as public limited company. After how much time the company is required to present its first annual accounts before the Annual General Meeting (AGM)? (Companies Ordinance, 1984)
- Within 12 months
- Within 13 months
- Within 16 months
- Within 18 months
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Answer: (c) Within 16 months
Q11. A listed company has just hired the auditors who have been involved in using ratio analysis, trend analysis, and common size analysis of financial as well as non financial information pertaining to the entity for about a month. In your opinion, auditors should be considered at which one of the following stages of risk assessment?
- Inspection of the entity and others within the entity
- Inquiries of management and others within the entity
- Observation of the entity's procedures and all within the entity
- Using analytical tools of risk assessment
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Answer: (d) Using analytical tools of risk assessment
Q12. Suppose an auditor makes the assessment that there is a low level of control risk and inherent risk for a client, what would you expect the auditor to do in this situation?
- Perform no substantive procedures
- Perform no control tests because of the low level of control risk
- Perform a relatively small number of substantive procedures
- Re-evaluate his or her acceptable level of audit risk
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Answer: (c) Perform a relatively small number of substantive procedures
Q13. During the audit, an independent auditor identifies the existence of a reportable condition in the client's system of internal controls and orally communicates this finding to the client's senior management and audit committee. In your opinion, the auditor should perform which one of the following actions instead of reporting to management in this way?
- Consider the reportable condition a scope limitation and therefore disclaim an opinion
- Document the matter in the working papers and consider the effects of the condition on the audit
- Suspend all audit activities pending directions from the client's audit committee
- Withdraw from the engagement
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Answer: (b) Document the matter in the working papers and consider the effects of the condition on the audit
Q14. Which one of the following statement best describes the inherent risk in auditing?
- Auditors fail to discover a material misstatement in the course of their audit and do not modify their audit opinion
- A company's internal control fails to identify a material misstatement in a timely fashion
- Auditing procedures fail to find a material misstatement
- The possibility that an account or class of transactions contains material misstatements irrespective of the effects of the internal controls
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Answer: (d) The possibility that an account or class of transactions contains material misstatements irrespective of the effects of the internal controls
Q15. While considerating the internal control system, the auditor is basically concerned that the system provides reasonable assurance about which one of the following?
- That the management can not override the system
- Operational efficiency has been achieved according to management plans
- Errors have been prevented or detected
- Controls have not been circumvented by collusion
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Answer: (c) Errors have been prevented or detected
Q16. Which of the following is one of the most fundamental and effective internal controls?
- Increased use of computers for recording accounting transactions
- Increased reliance on internal auditors to monitor accounting systems
- Segregation of incompatible duties across several people
- Having internal auditors report only to the Board of Directors
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Answer: (c) Segregation of incompatible duties across several people
Note: One solved file marks "internal auditors"; segregation of duties is the fundamental control.
Q17. An audit firm audited a Leather Manufacturing company and presented its report addressed to the management. They found significant material misstatements in the company's internal controls system. They strongly recommended that there should be sufficient controls in existence to ensure management can effectively control the business operations. In your opinion, auditors are emphasizing on which one of the following categories of SOAP MAPS?
- Authorization
- Management and Monitoring
- Arithmetic and Accounting
- Segregation of duties
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Answer: (b) Management and Monitoring
Q18. Which one of the following statements best describes the term 'Observation' that is performed during the audit testing stage?
- Reviewing or examining records, documents or tangible assets
- Looking at an operation or procedure being performed by others with a view to determine the manner of its performance
- Examining that an operating system and/or applications are configured appropriately to the companies needs and lockdown requirements
- Seeking relevant information from knowledgeable persons inside or outside the enterprise, whether formally or informally
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Answer: (b) Looking at an operation or procedure being performed by others with a view to determine the manner of its performance
Q19. In which one of the following situations auditors are required to perform tests of controls?
- When the internal controls are operating inefficiently
- When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level
- When substantive procedures alone provide sufficient appropriate audit evidence at the assertion level
- When analytical procedures alone do not provide sufficient appropriate audit evidence at the assertion level
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Answer: (b) When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level
Q20. Which one of the following elements is NOT related to audit quality?
- Due diligence
- Independence
- Audit fees
- Audit competence
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Answer: (c) Audit fees
Q21. One of the main objectives of performing analytical review procedures is to obtain evidence in the planning phase of the audit that helps to identify which one of the followings?
- Transactions that have not been properly authorized
- Illegal acts undetected as a result of poor internal controls
- Inefficient operational activities
- Unusual changes that may signal possible account misstatements
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Answer: (d) Unusual changes that may signal possible account misstatements
Q22. An audit firm audited a company and presented its report addressed to the management. They found discrepancies in the Financial System of the company and strongly recommended the company to incorporate adequate controls to ensure the completeness and accuracy of its financial records. In your opinion, auditors are emphasizing on which one of the following categories of SOAP MAPS?
- Authorization
- Management and Monitoring
- Arithmetic and Accounting
- Segregation of duties
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Answer: (c) Arithmetic and Accounting
Q23. Which one of the following descriptions bestdefine the term 'Flowchart' used in evaluating internal control system of the entities?
- Entity relationship diagram of an accounting system
- Diagrammatical representation of an accounting system
- Show how data move between different entities Narrative
- description of the audit files
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Answer: (b) Diagrammatical representation of an accounting system
Q24. Which one of the following is the possible application of Arithmetic and Accounting category of internal control?
- A supervisor or manager reviews and checks the work of a subordinate in order to check the work quality
- Using of standard accounting procedures e.g. control accounts, reconciliation procedures, arithmetic checks on accounting records
- Authorization of purchases, cash and bank payments, sale of non-current assets, sales to customers on credit, bad debt write offs
- Lines of authority within an organization make it clear which individuals are responsible for decisions and transactions
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Answer: (b) Using of standard accounting procedures e.g. control accounts, reconciliation procedures, arithmetic checks on accounting records
Q25. In auditing, Flowcharts have the following disadvantages EXCEPT:
- When the program logic is very complex the flow chart may become difficult to comprehend.
- Any modifications in the process may require the creation of a new flow chart.
- Generating a flowchart is a tedious procedure, as flowchart symbols cannot be typed.
- Force the auditors to understand how the company controls operations
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Answer: (d) Force the auditors to understand how the company controls operations
Q26. A public limited company hires First statutory auditors who take extensive information about business operations for understanding the entity's environment. For this, they asked for company's records and internal control manuals. They also visited the plant and documented the information about its activities. In your opinion, auditors should be considered at which one of the following stages of risk assessment in this case?
- Inspection of the entity and others within the entity
- Inquiries of management and others within the entity
- Observation of the entity's procedures and all within the entity
- Using analytical tools of risk assessment
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Answer: (a) Inspection of the entity and others within the entity
Q27. When the Cashier of a bank is also appointed to maintain the books of accounts then which one of the following internal control principles is violated?
- Rotating employee duties
- Establishment of responsibility
- Documentation procedures
- Segregation of duties
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Answer: (d) Segregation of duties
Q28. Which of the following may NOT be considered as the essential feature of Auditing?
- Auditing is the examination of financial statements of a firm
- Auditing includes preparation of financial statements of a firm
- The end result of an audit is an opinion to assist the users of the financial statements
- An audit should be independent
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Answer: (b) Auditing includes preparation of financial statements of a firm
Q29. What is the primary difference between an operational audit and a compliance audit?
- Operational audit focuses on business efficiencies and effectiveness, while compliance audit focuses on whether laws and other requirements are being followed
- Operational audit focuses on reliability of the financial statements, while compliance audit focuses on whether laws and other requirements are being followed
- Operational audit focuses on business growth prospects, while a compliance audit focuses on reliability of the financial statements
- Operational audit focuses on business size and potential to grow, while compliance audit focuses on reliability of accounting records
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Answer: (a) Operational audit focuses on business efficiencies and effectiveness, while compliance audit focuses on whether laws and other requirements are being followed
Note: One solved file marks (b), which swaps the two definitions.
Q30. Which one of the following is an objective of the internal audit?
- To report on financial statements
- To check accounting system and internal control are operating efficiently
- To determine the accuracy of financial statement values and disclosures
- To establish a control system in the company
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Answer: (b) To check accounting system and internal control are operating efficiently
Q31. Which one of the following statements is NOT correct in respect of the internal auditor?
- The scope of audit performed by internal auditors is primarily in respect of financial report audits
- An internal auditor does not require a license to practice
- Internal auditors are usually employed by companies and government units
- Primary responsibility of the internal auditor is to the board of directors
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Answer: (a) The scope of audit performed by internal auditors is primarily in respect of financial report audits
Note: One solved file marks (c); internal auditors are normally employed by the company, so that statement is correct.
Q32. After how many days the Securities and Exchange Commission may appoint the auditors, if the Directors of a company could not appoint the auditors to fill casual vacancy? (Companies Ordinance, 1984)
- 30 days
- 60 days
- 80 days
- 120 days
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Answer: (a) 30 days
Q33. Suppose that during audit of a company, an auditor accepted the schedule of bad debts furnished by the client, though it was apparent that debts were not recoverable. The auditor shall be held liable for which one of the following liabilities?
- Liability for negligence
- Liability for misfeasance
- Criminal liability
- Personal liability
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Answer: (a) Liability for negligence
Q34. The books of accounts of a company should be kept at which one of the following offices?(Companies Ordinance, 1984)
- Registered office of the company
- Accounts office of the company
- Record office of the company
- Registrar office
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Answer: (a) Registered office of the company
Q35. Which of the following is NOT a major component of an internal control system?
- Risk assessment
- Staffing
- Control procedures/activities
- Information and communication system
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Answer: (b) Staffing
Q36. Which of the following statements best describes the purpose of an internal control questionnaire (ICQ)?
- An internal control questionnaire is a series of questions regarding accounting and control policies and procedures that the auditor considers necessary to prevent all misstatements in the financial report.
- An internal control questionnaire is a series of questions regarding accounting and control policies and procedures that the auditor considers necessary to prevent material misstatements in the financial report.
- An internal control questionnaire is a series of questions regarding accounting and control policies and procedures that the auditor considers necessary to detect material misstatements in the financial report.
- An internal control questionnaire is a series of questions prepared by the entity about the entity's accounting and control policies and procedures for which the entity seeks guidance on from the auditor in order to detect material misstatements in the financial report.
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Answer: (b) An internal control questionnaire is a series of questions regarding accounting and control policies and procedures that the auditor considers necessary to prevent material misstatements in the financial report.
Q37. A Beverages company is being audited by an audit firm. Audit procedures are being undertaken in all of its departments. During this, the audit team has to spend more time on physical examination of the company assets to get reliable audit evidence. In your opinion, auditors are considering which type of audit inquiry in this case?
- Recalculations
- Inspection of tangible assets
- Analytical procedures
- Confirmations
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Answer: (b) Inspection of tangible assets
Q38. Which one of the following matters should be included in the letter of representation?
- Existence of any immaterial mistake in the statements
- Existence of any fraud or error in the statements
- Company s growth trend in the future in figures
- Market value of the company s stock
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Answer: (b) Existence of any fraud or error in the statements
Q39. Which one of the following may NOT be a type of control of the purchase cycle of an entity?
- Receipt of goods
- Invoicing and returns
- Invoicing and credit notes
- Purchase ledger and suppliers
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Answer: (b) Invoicing and returns
Q40. While testing the purchase system of an entity, which one of the following control tests may be applied to the Credit Notes by the auditors?
- Evidence of matching credit notes to goods returned notes
- Evidence of approval of credit notes
- Evidence of a sequence check
- Proof of issuance date
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Answer: (a) Evidence of matching credit notes to goods returned notes
Q41. During the audit work of testing the purchase system of an entity, which one of the following control tests may be applied to the Payables Ledger by the auditors?
- Evidence of authorization of adjustments to payables ledger
- Evidence of review of reconciliation of purchase ledger listing
- Evidence of authorization of adjustments to payable ledger control account
- Evidence of authorization of adjustments to purchase ledger
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Answer: (b) Evidence of review of reconciliation of purchase ledger listing
Q42. Which one of the following possible misstatements related to payroll does not involve the audit objective of Validity?
- Payments to fictitious employees
- Payments to terminated employees
- Payments to valid employees who have not worked
- Payments to valid employees at a rate in excess of the authorized amount
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Answer: (d) Payments to valid employees at a rate in excess of the authorized amount
Q43. In order to ensure effective control, how often a full inventory count should be held when perpetual inventory records are not kept adequately?
- On a daily basis
- At least once a year
- At least monthly
- At least weekly
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Answer: (b) At least once a year
Q44. An oil exploring company employs 1500 personal in its international market. All of its personnel are paid on monthly basis. The company should compensate them in which form of payment?
- Salary
- Cheque
- Wages
- None of the given option
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Answer: (a) Salary
Q45. For the purpose of keeping effective control in the cash system, who should have no access to the cash or the preparation of the paying-in slip?
- Sales ledger personnel
- Teller/cashier
- Cash officers
- Operations manager
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Answer: (a) Sales ledger personnel
Q46. When should the petty cash book entries be made?
- At the day end
- Next day
- Promptly
- Monthly
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Answer: (c) Promptly
Q47. How often the physical inspection of non current assets should be carried out?
- Rarely
- Periodically
- Never
- Daily
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Answer: (b) Periodically
Q48. In which one of the following ways auditors can choice the verification techniques in a given set of circumstances?
- It depends upon the available audit evidence to the auditor
- It depends upon the nature of business operations of the entity
- It depends upon the audit procedures planned by the auditor
- It depends upon the judgmental skills of the auditor
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Answer: (c) It depends upon the audit procedures planned by the auditor
Q49. Which one of the following may NOT ensure that the movement in share capital of a company is properly authorized and correctly shown and described in accordance with the Companies Ordinance, 1984?
- Check that directors were authorized to allot shares
- Agree authorized capital with memorandum of association
- Consider special rules for allotments of public company shares
- Test payments with supporting evidence and trace entries in register
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Answer: (b) Agree authorized capital with memorandum of association
Q50. Which one of the following testing objectives refers to the management assertion Occurrence in obtaining audit evidence?
- Assets shown include all rights under the control of the enterprise
- Transactions and events that have been recorded have occurred and pertain to the entity
- The amounts at which assets and liabilities are stated is correct
- Assets and liabilities included on the balance sheet actually exist
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Answer: (b) Transactions and events that have been recorded have occurred and pertain to the entity
Q51. Which one of the following certain expense items may be verified in order to keep control of stock-in-trade and stores & spares?
- Interest on short term loan
- Accumulated depreciation on assets
- Director's fees
- Wages and salaries
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Answer: (d) Wages and salaries
Q52. Which one of the following is NOT an advantage of using statistical sampling?
- It aids in the design of an efficient sample
- It allows the auditor to measure the sufficiency of the evidential matter obtained
- It allows the auditor to greatly reduce substantive testing
- It provides means for mathematically measuring the degree of sampling risk
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Answer: (c) It allows the auditor to greatly reduce substantive testing
Note: One solved file marks (d), but measuring sampling risk is an advantage of statistical sampling.
Q53. Which one of the following is an underlying feature of random-based selection of items?
- Each stratum of the accounting population be given equal representation in the sample
- All items in the accounting population be randomly ordered.
- Every item in the population should have an opportunity to be selected
- Every item must be systematically selected using replacement
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Answer: (c) Every item in the population should have an opportunity to be selected
Q54. Which one of the following matters is generally included in an auditor's engagement letter?
- Management's responsibility for the entity's compliance with laws and regulations
- The factors to be considered in setting preliminary judgments about materiality
- Management's vicarious liability for illegal acts committed by its employees
- The auditor's responsibility to search for significant internal control deficiencies
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Answer: (a) Management's responsibility for the entity's compliance with laws and regulations
Q55. What should be the next step of an auditor after establishing the overall audit strategy of an entity?
- To develop an audit plan
- To define the scope of audit
- To determine the focus of engagement team efforts
- To determine the objectives of audit
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Answer: (a) To develop an audit plan
Q56. The establishment of the overall audit strategy involves the following EXCEPT:
- To determine the characteristics of the engagement
- To ascertain the reporting objectives of the engagement
- To consider the important factors i.e. materiality levels, higher risks of material misstatement etc.
- To guide the development of detailed business activities to occur in future
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Answer: (d) To guide the development of detailed business activities to occur in future
Q57. Which one of the following mainly affects the auditors opinion?
- Agreement on accounting policies
- Limitation on the scope of the auditors work
- Dispute among the members of the company
- Future prospects of the company s growth
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Answer: (b) Limitation on the scope of the auditors work
Q58. Which one of the following matters does NOT affect Auditor s Opinion?
- When there is a limitation on the scope of the auditor s work
- When there is a disagreement with management regarding the accounting policies selected
- When there is a disagreement with management regarding the method of applying accounting policies
- When an auditor modify the auditor s report by adding a paragraph to highlight a material matter
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Answer: (d) When an auditor modify the auditor s report by adding a paragraph to highlight a material matter
Note: Adding an emphasis-of-matter paragraph does not change the opinion itself.
Q59. Tracing selected shipments to the sales journal to be sure that each one is included is a test of which of the following?
- Accuracy
- Classification
- Completeness
- Existence
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Answer: (c) Completeness
Note: Tracing from shipping documents to the sales journal tests completeness.
Q60. Which one of the following best describes the term Input VAT?
- Input VAT is charged on a firm when it makes its purchases
- Input VAT is charged on a firm when it makes its investments
- Input VAT is charged on a firm when it produces highly quality products
- Input VAT is charged on a firm when it exports the products
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Answer: (a) Input VAT is charged on a firm when it makes its purchases
Q61. The duties of the wages staff should preferably be rotated during the year when the salary payment is made by which of the following systems?
- By cheque
- In cash
- By demand draft
- Direct transfer to employees bank account
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Answer: (b) In cash
Q62. Which of the following are the three audit objectives that are most important for cash, and that receive the greatest attention during the audit?
- Existence, accuracy, and completeness
- Existence, cutoff, and presentation
- Accuracy, cutoff, and presentation & disclosure
- Completeness, realizable value, and cutoff
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Answer: (a) Existence, accuracy, and completeness
Q63. Which one of the following is most likely to indicate fraud?
- Several overpayments are made for goods received from a supplier
- The year end cash balance does not include cash in transit to the company at year-end
- A check received after year end was inadvertently recorded as if received before year-end
- A documented loan is sanctioned to an officer of the company
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Answer: (a) Several overpayments are made for goods received from a supplier
Q64. When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, which of the following would most likely be increased by the auditor?
- Extent of tests of controls
- Level of detection risk
- Extent of tests of details
- Level of inherent risk
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Answer: (c) Extent of tests of details
Note: Higher control risk means lower acceptable detection risk, so more substantive tests of details.
Q65. Which one of the following statements is TRUE regarding control procedures?
- They are not required if the control environment is strong
- They should generally be all manual
- They should generally be all automated
- They can be either manual or automated
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Answer: (d) They can be either manual or automated
Q66. Which one of the following statements does not apply to the Institute of Chartered Accountants of Pakistan (ICAP) in Pakistan?
- An autonomous body incorporated under the Chartered Accountants Ordinance 1961
- Regulatory body that formulates auditing standards in Pakistan
- Its affairs are run by a council which is elected by its member (Chartered Accountants).
- ICAP is a member of the International Federation of Accountants (IFAC)
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Answer: (b) Regulatory body that formulates auditing standards in Pakistan
Q67. Which one of the following statements indicates a primary difference between an operational audit and a compliance audit?
- Operational audit focuses on business efficiencies and effectiveness, while compliance audit focuses on whether laws and other requirements are being followed
- Operational audit focuses on reliability of the financial statements, while compliance audit focuses on whether laws and other requirements are being followed
- Operational audit focuses on business growth prospects, while a compliance audit focuses on reliability of the financial statements
- Operational audit focuses on business size and potential to grow, while compliance audit focuses on reliability of accounting records
Show answer
Answer: (a) Operational audit focuses on business efficiencies and effectiveness, while compliance audit focuses on whether laws and other requirements are being followed
Q68. Which one of the following primary assertions is satisfied when an auditor ensures that there is no false transaction recorded and all recorded transactions have actually taken place?
- Occurrence
- Completeness
- Existence
- Rights and obligations
Show answer
Answer: (a) Occurrence
Note: Some solved files mark "Completeness" for this question.
Q69. Following are the points considered during the verification of bank balances EXCEPT:
- Obtain direct bank confirmation
- Investigate about outstanding stale cheques
- Investigate any significant reconciling items of an unusual nature
- Ensure that the creditors have been paid for their loan amount
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Answer: (d) Ensure that the creditors have been paid for their loan amount
Q70. Which one of the following persons are responsible for the preparation of Audit engagement later?
- Auditor
- Client
- Company registrar
- Company secretary
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Answer: (a) Auditor
Q71. Who is responsible for designing and preparing the financial statements?
- Auditor
- Management
- Accountant
- Company secretary
Show answer
Answer: (b) Management
Q72. Which one of the following is the method of assessing the internal control system of an entity?
- Audit procedures
- Audit evidence
- Compliance audit
- Technical analysis
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Answer: (a) Audit procedures
Q73. The purpose of engagement letter includes the following EXCEPT:
- To defines the auditor's responsibilities clearly
- To minimize misunderstandings between the client and auditors
- To educate the cliet
- To help the auditor in preparing audit report
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Answer: (d) To help the auditor in preparing audit report
Q74. A manufacturing company wants to hire external auditors who examine the activities operations procedures and processes of each department of the company. The company follows the local and international laws rules ad regulations and also has set standards for the efficiency and effectiveness. The company shall have to provide the access of all kind of operational information that will be required to the auditors as audit evidences. Considering the above situation select the most suitable type of audit which the company should opt?
- Compliance audit
- Operational audit
- Technology audit
- Financial audit
Show answer
Answer: (b) Operational audit
Q75. Which one of the following is considered as the formal opinion or disclaimer thereof issued by an independent auditor as a result of audit or evaluation performed on a legal entity?
- Financial report
- Financial statement
- Director's report
- Auditor's report
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Answer: (d) Auditor's report
Q76. Which of the following statements is true?
- The auditing profession is unregulated
- The auditing profession is regulated only by its own professional body
- Outside bodies sometimes become involved in the regulation of the audit profession
- The auditing profession is regulated only by the government
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Answer: (c) Outside bodies sometimes become involved in the regulation of the audit profession
Q77. Internal control is primarily established within a company to do which of the following?
- To prevent fraud in the company affairs
- To provide reasonable assurance that the company's objectives will be achieved
- To catch all errors that may occur in the company
- To aid in the effective auditing of the company
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Answer: (b) To provide reasonable assurance that the company's objectives will be achieved
Q78. A leather goods manufacturing company has started its operations in year 2001. After five years of conducting successful business it has become a listed company recently. Now the company is required to hire its first auditors but neither the directors nor the members could appoint the auditors during the past 4 months since the incorporation of the company. Select among the following authorities who can appoint the auditors in this situation? (Companies Ordinance 1984)
- Company secretary
- Company registrar
- Commission
- Institute of Chartered Accountants of Pakistan (ICAP)
Show answer
Answer: (c) Commission
Q79. A company has hired auditors who have performed the audit process in accordance with the auditing standards but they fail to present its report. According to the Company law 1984 the auditors shall be liable for which one of the following liabilities?
- Criminal liability
- Liability for misfeasance
- Liability for negligence
- Accounting liability
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Answer: (a) Criminal liability
Q80. DBMSes & Databases are same things.
- false
- true
Show answer
Answer: (a) false
Q81. Audit sampling conducted
- On selected number of items
- On Whole population
- On specific no of items
- All of the given options
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Answer: (a) On selected number of items
Q82. Advantages of Audit Sampling
- Economical
- Time Saving
- More Practical
- All of the given options
Show answer
Answer: (d) All of the given options
Q83. Which of the following is the component of audit risk?
- Inherent risk
- Control risk
- Detection risk
- All of the given options
Show answer
Answer: (d) All of the given options
Q84. Which of the following is not needed to be verified at the time of verification of Equity?
- Share capital classification
- Movement in share capital
- Preliminary expenses are properly write off
- Movements in reserves
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Answer: (c) Preliminary expenses are properly write off
Q85. Which of the following is needed to be verified at the time of verification of Account Balances?
- Look over any significant reconciling items of an unusual nature
- Inspect about outstanding stale cheques
- Acquire direct bank confirmation
- All of the given options
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Answer: (d) All of the given options
Q86. Tolerable error and sample size have
- A direct relationship
- An inverse relationship
- No relation
- None of the given options
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Answer: (b) An inverse relationship
Q87. Sample risk and sample size have
- A direct relationship
- An inverse relationship
- No relation
- None of the given options
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Answer: (b) An inverse relationship
Q88. Where the auditor relies more on the system of internal control the circumstance warrant:
- He spends more time on audit
- Effectiveness of the audit is affected
- Efficiency of the audit is affected
- Reliability of the results of the tests is affected
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Answer: (b) Effectiveness of the audit is affected
Q89. The auditor should select sample in such a way that:
- All important items should be selected
- All items containing misstatement should be selected
- All items in the population are selected
- All items in population have an opportunity of being selected
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Answer: (d) All items in population have an opportunity of being selected
Q90. Stratification is a process of dividing a population into sub- populations which have
- Heterogeneous characteristics
- Nothing in common
- Lot of sampling units
- Homogeneous characteristics
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Answer: (d) Homogeneous characteristics
Q91. Test of controls comprise of testing of all EXCEPT
- Design
- Implementation
- Operating efficiency
- Operating effectiveness
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Answer: (c) Operating efficiency
Q92. Analytical procedures are carried out for which one of the following purposes?
- To reduce detection risk
- To assess inherent risk
- To reduce control risk
- To determine detection risk
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Answer: (a) To reduce detection risk
Q93. Nature of audit procedure refers to which one of the following description?
- It refers to the purpose i.e. (tests of controls or substantive procedures) and their type that is inspections observation inquiry confirmation recalculation re-performances or analytical procedures
- It refers when audit procedures are to be performed or the period or date to which the audit evidence applies
- It refers to sample size or number of observations of a control activity (quantity of audit evidence)
- It refers to the nature of testing and their procedures that is designing structuring and compiling work to be done
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Answer: (a) It refers to the purpose i.e. (tests of controls or substantive procedures) and their type that is inspections observation inquiry confirmation recalculation re-performances or analytical procedures
Q94. The auditors are required to perform tests of controls when
- The internal controls are operating inefficiently
- Substantive procedures alone provide sufficient appropriate audit evidence at the assertion level.
- Substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
- Analytical procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
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Answer: (c) Substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
Q95. Following desc riptions are the examples of substantive testing EXCEPT:
- Test of account balances to verify the correctness of the amounts
- Verification that an operating system and/or applications are configured appropriately to the companies needs
- Review of minutes of directors; meetings and inquiry
- Use of statistical sampling to determine the accuracy of financial statement figures
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Answer: (b) Verification that an operating system and/or applications are configured appropriately to the companies needs
Q96. How often the Bank reconciliations should be prepared?
- Weekly
- Monthly
- Quarterly
- Annually
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Answer: (b) Monthly
Q97. How often Inventory levels should be checked against the inventory records in order to keep its control effectively?
- Rarely
- Periodically
- Never
- Daily
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Answer: (b) Periodically
Q98. What auditors seek in the register of non current assets for each major group of assets?
- Details of each item its cost and residual value
- Details of each item its cost and accumulated depreciation
- Details of each item its cost and depreciation
- Details of each item its cost and capital investment expected returns
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Answer: (c) Details of each item its cost and depreciation
Q99. Which one of the following may NOT consist of any verification methods?
- Closing balance
- Acquisitions
- Disposals
- Reconciliation
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Answer: (a) Closing balance
Q100. Which one of the following may not be any matter relevant to verification of assets?
- Taxation
- Vouching
- Insurance
- The letter of representation
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Answer: (b) Vouching
Q101. Which one of the following aspects of assets must be verified?
- Cost and authorization
- Value and existence
- Beneficial investment
- Presentation in the accounts
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Answer: (b) Value and existence
Q102. An Automobile Company hires auditors at the year end. Auditors are at the stage of verification and vouching of company's financials. Before examining the equity section they develop general aspects concerning the owner's equity. In your opinion which one of the following aspects may NOT be considered by the auditors during this assessment?
- Share capital is properly classified and described in the accounts
- Capital stock is enough to execute the company's financial needs
- Reserves are properly classified and presented
- Movements in reserves are properly authorized
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Answer: (b) Capital stock is enough to execute the company's financial needs
Q103. Non current assets manufactured or constructed by the company itself should reflect which types of costs in the costing records?
- Direct costs plus relevant overhead but not include any profit
- Direct costs plus relevant overhead and any profit earned on it
- Indirect costs plus relevant overhead but not include any profit
- Indirect costs plus relevant overhead and any profit earned on it
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Answer: (a) Direct costs plus relevant overhead but not include any profit
Q104. Who should prepare the annual capital expenditure budgets of the company in order to keep effective?
- Someone directly responsible to the shareholders
- Someone directly responsible for goods delivery to the customers
- Someone directly responsible to the board of directors
- Someone directly responsible to deal with the suppliers
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Answer: (c) Someone directly responsible to the board of directors
Q105. The following authorities can determine fixation of remuneration of auditors EXCEPT: (Companies Ordinance 1984)
- Directors
- Company secretary
- Commission
- Members
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Answer: (b) Company secretary
Q106. Standard format of Auditor's Report as per the Companies Ordinance 1984 is described in which one of the following Legal Forms?
- Form31A
- Form32A
- Form30A
- Form35A
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Answer: (d) Form35A
Q107. IFRS stands for which one of the following?
- International Financial Reporting Standards
- International Financial Recording Systems
- International Financial Recording Statements
- International Financial Reporting Systems
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Answer: (a) International Financial Reporting Standards
Q108. Which of the following is NOT one of the five major components of internal control?
- Risk assessment
- Control activities
- Information and communication system
- Human resource background checks
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Answer: (d) Human resource background checks
Q109. All of the following should be observed and inspected by the auditors during the risk assessment process of an entity EXCEPT:
- Observations of Activities and operations
- Inspection of Documents and records
- Reading Management reports
- Visit to other companies in the industry
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Answer: (d) Visit to other companies in the industry
Q110. Which one of the following audit techniques ordinarily provides an auditor with the least assurance about the operating effectiveness of an internal control activity?
- Inquiry of client personnel
- Inspection of documents and reports
- Observation of client personnel
- Preparation of system flowcharts
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Answer: (a) Inquiry of client personnel
Note: One solved file marks (b); inquiry alone gives the least assurance.
Q111. Which one of the following opinions advocates that the auditor should form an opinion only after obtaining sufficient audit evidence instead of blindly accepting any information given by the management?
- Auditor's liability
- Professional ethics
- Professional Skepticism
- Auditor's opinion
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Answer: (c) Professional Skepticism
Note: One solved file marks "Professional ethics".
Q112. Which one of the following is NOT required as part of the audit process?
- Substantive procedures
- Tests of control
- Assessment of materiality
- Procedures to obtain an understanding of the internal control structure
Show answer
Answer: (b) Tests of control
Note: Tests of control are needed only when the auditor plans to rely on controls; understanding internal control is always required.
Q113. SECP stands for which one of the following?
- Securities and Exchange Collaboration of Pakistan
- Securities and Exchange Consortium of Pakistan
- Securities and Exchange Commission of Pakistan
- Securities and Exchange Constitution of Pakistan
Show answer
Answer: (c) Securities and Exchange Commission of Pakistan
Q114. One type of analytical procedure is the 'Trend Analysis'. Which one of the following is the best example of trend analysis?
- Comparison of company financial ratios to that of its competitors
- Comparison of accounting records to budgeted amounts
- Comparison of inventory levels over the past 3 years
- Comparison of interest expenses to outstanding loan balances
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Answer: (c) Comparison of inventory levels over the past 3 years
Q115. While conducting operational audit, which one of the following auditing procedures does the auditor primarily rely upon?
- Inquiry and observation
- Analytical procedures
- Physical inspection
- Tracing and vouching
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Answer: (a) Inquiry and observation
Q116. Which one of the following helps to achieve reasonable assurance about the fairness of financial statements during an audit process?
- Audit report
- Audit evidence
- Audit engagement
- Audit program
Show answer
Answer: (b) Audit evidence
Note: One solved file marks "Audit report".
Q117. For better assessing the audit risk, the auditor inquires different groups in the organization EXCEPT:
- Board of governance and top level management
- Legal counsel
- Middle level management
- Stakeholders
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Answer: (d) Stakeholders
Q118. Internal sources of audit evidence for an entity include the following EXCEPT:
- Associated companies of the entity
- Accounting systems, records and documents
- Non-financial data and records
- Management representation and discussion
Show answer
Answer: (a) Associated companies of the entity
Note: An associated company is not an internal source.
Q119. Which of the following is the least concern to an auditor regarding the client's internal control system?
- Efficiency and effectiveness of operations
- Controls related to the reliability of financial reporting
- Controls over classes of transactions
- Auditors are equally concerned with each of the given issues
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Answer: (a) Efficiency and effectiveness of operations
Q120. During test of control procedure, its design can easily be tested with the help of:
- ICQs and walk-through tests
- ICQs and judgment sample
- ICQs and random sample
- ICQs and ICEC
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Answer: (a) ICQs and walk-through tests
Note: One solved file marks (d); a walk-through test is the usual way to check design.
Q121. Which of the following is TRUE?
- The audit profession is unregulated
- The audit profession is regulated by its own professional body
- Outside bodies sometimes become involved in the regulation of the audit profession
- The audit profession is regulated only by the government
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Answer: (c) Outside bodies sometimes become involved in the regulation of the audit profession
Note: One solved file marks (b).
Q122. The small audit firms provide the following services EXCEPT:
- Liquidation and receivership work, fraud auditing
- Financial management and system consultancy
- Financial system planning and preparation
- Tax management and statutory form filling
Show answer
Answer: (c) Financial system planning and preparation
Q123. Which of the following is not included in the category of cash?
- Deposit with banks
- Cheques
- Postdated cheques
- Money orders
Show answer
Answer: (c) Postdated cheques
Q124. Which of the following should be included in the letter of representation?
- Existence of immaterial mistake in the statement
- Existence of any fraud or any error in the statement
- Company's growth trend in the future in figures
- Market value of the company's stock
Show answer
Answer: (b) Existence of any fraud or any error in the statement
Note: One solved file marks (a).
Q125. For measuring the quality of audit evidence auditors use the tool of appropriateness; if the auditor wants to measure the quantity of audit evidence, which tool should be adopted?
- Relevance
- Reliability
- Sufficiency
- Effectiveness
Show answer
Answer: (c) Sufficiency
Q126. Which statement cannot be highlighted as a merit of the audit process?
- It settles the dispute between management
- It helps the auditor to give more constructive advice to top management
- It helps to restrict a sole proprietor by changing some fee
- It gives strength to the company for acquiring finance
Show answer
Answer: (c) It helps to restrict a sole proprietor by changing some fee
Q127. When should cash sales be recorded by companies in order to achieve control objectives?
- Record the cash sales when the purchase order is received from the customer
- Record the cash sales at the point they are made
- Record the cash sales after some period
- Record the cash sales weekly
Show answer
Answer: (b) Record the cash sales at the point they are made
Note: One solved file marks (a).
Q128. Auditors conduct auditing in accordance with:
- International Financial Reporting Standards
- Local pronouncements/Legislations
- Financial Accounting Standards Board
- All of the given options
Show answer
Answer: (d) All of the given options
Q129. Which of the following primary assertions is satisfied when an auditor ensures that there are no unrecorded assets, liabilities, transactions or events or undisclosed items in the client's financial records?
- Valuation
- Completeness
- Existence
- Rights and obligations
Show answer
Answer: (b) Completeness
Part 2: Subjective Questions
Q1. Mr. Kamran is a partner of an audit firm. He bought shares of a company for which his firm is also conducting the audit. However, he sold all these shares within thirty days and immediately informed the company secretary about the whole transaction. Is the company secretary required to take any step under the Companies Law, 1984? (5 marks)
An auditor (or a partner of the audit firm) who holds shares in the company being audited lacks independence, and the Companies Ordinance, 1984 disqualifies such a person from acting as auditor. The law, however, allows a short period to put things right: if the shares are disposed of within the permitted period (thirty days) and the company is informed, the disqualification does not continue.
Here Mr. Kamran sold the shares within thirty days and reported the transaction to the company secretary, so he has complied and does not have to vacate the audit. The company secretary, on receiving the information, should record it (in the company's records / register kept for this purpose) and place it before the board of directors; no further action such as removing the auditor is needed, because the disqualification was removed within the allowed time.
Q2. Why are books of accounts required to be kept by companies? Discuss the types of books of accounts with examples. (5 marks)
Why they are required
- Section 230 of the Companies Ordinance, 1984 requires every company to keep proper books of account at its registered office.
- They show the true and fair financial position and results of the company.
- They give shareholders, creditors, tax authorities and regulators reliable information.
- They are the basis for preparing financial statements and for the audit.
- They help management control assets, detect errors and prevent fraud.
Types of books of account
- Books of original entry (journals): cash book, petty cash book, sales day book, purchases day book, sales returns and purchase returns books, journal proper.
- Ledgers: general ledger, sales (receivables) ledger, purchases (payables) ledger.
- Subsidiary records and registers: bills receivable/payable books, fixed asset register, stock records, payroll records.
- Where required by the law, cost records for specified industries.
Q3. What is the primary difference between an operational audit and a compliance audit? (3 marks)
An operational audit evaluates the efficiency, effectiveness and economy of an organization's activities and suggests improvements to help management achieve its goals. A compliance audit checks whether the organization is following the laws, regulations, policies and procedures that apply to it.
Q4. If you are hired by a government bank as an auditor, what would you do to protect the bank's credibility? (5 marks)
- Accept the engagement only after confirming independence and competence, and issue an engagement letter setting out the scope and responsibilities.
- Follow the auditing standards and the Companies Ordinance and the banking regulations (e.g. State Bank rules).
- Plan the audit: understand the bank, assess risk and set materiality.
- Evaluate and test the internal controls, especially over cash, loans, and approvals.
- Collect sufficient appropriate evidence (confirmations, inspection, analytical review) and apply professional skepticism.
- Report honestly: give an unbiased opinion, report fraud or irregularities to the proper authority, and keep client information confidential.
Q5. What is the audit process and what is its importance? (5 marks)
The audit process is the series of steps an auditor follows to reach an opinion on the financial statements:
- Accepting the engagement and issuing the engagement letter
- Planning: understanding the entity, preliminary analytical procedures, materiality and audit risk
- Assessing risks and understanding internal control
- Tests of controls
- Substantive procedures (tests of details of transactions and balances, analytical procedures)
- Completing the audit: review, letter of representation, subsequent events
- Forming the opinion and issuing the audit report
Importance: it gives a structured, consistent way to collect enough reliable evidence, keeps the audit risk low, makes the work efficient, supports the auditor's opinion and increases users' confidence in the financial statements.
Q6. What is audit risk assessment? (3 marks)
Audit risk assessment is the auditor's process of identifying and evaluating the risk that the financial statements contain a material misstatement and that the auditor fails to detect it. Audit risk = inherent risk x control risk x detection risk. The auditor performs risk assessment procedures (inquiries, analytical procedures, observation and inspection) to understand the entity and its controls, and then designs the nature, timing and extent of further audit procedures accordingly.
Q7. What are the disqualifications of an auditor under the Companies Ordinance, 1984 (Section 253/254)? (5 marks)
A person is not qualified to be an auditor of a company if he is:
- A body corporate (an individual or firm of chartered accountants only can be appointed)
- A director, officer or employee of the company, or a partner or employee of such a person
- A person indebted to the company above the prescribed amount (or who has guaranteed a debt of a third party to the company)
- A holder of shares in the company (or in its holding/subsidiary company), or having a business relationship that affects independence
- A person convicted by a court of an offence involving fraud or moral turpitude
- Not a practising chartered accountant of the prescribed standing, or whose name has been removed by ICAP
If an auditor becomes disqualified after appointment, he must vacate the office.
Q8. List the categories of risk assessment procedures. (3 marks)
- Inquiries of management and others within the entity
- Analytical procedures (ratio, trend and common-size analysis)
- Observation of the entity's activities and operations
- Inspection of documents, records and internal control manuals
Q9. Define internal control and list the audit procedures. (3 marks)
Internal control is the process designed, implemented and maintained by those charged with governance, management and other personnel to give reasonable assurance that the entity's objectives are achieved: reliable financial reporting, effective and efficient operations, and compliance with laws and regulations.
Audit procedures: inspection, observation, inquiry, confirmation, recalculation, re-performance and analytical procedures.
Q10. What is the purpose of substantive procedures? Define timing. (5 marks)
Purpose: substantive procedures are performed to detect material misstatements at the assertion level. They consist of tests of details (of classes of transactions, account balances and disclosures) and substantive analytical procedures. They give direct evidence about the amounts in the financial statements.
Timing refers to when the audit procedures are performed, or the period or date to which the audit evidence applies (for example at interim date or at year-end).
Q11. What is an information system and what is its importance in accounting systems? (5 marks)
An information system is the set of people, procedures, records and technology that captures, processes, stores and reports the entity's transactions and information.
Importance: it produces accurate and timely financial reports, supports management decisions, keeps records complete, enforces controls (authorization, validation), reduces errors and fraud, and gives the auditor a trail to follow when testing transactions.
Q12. Explain the tort of negligence and the auditor's liability for negligence. (5 marks)
A tort is a civil wrong. Negligence in audit means failing to use the skill and care that a reasonably competent auditor would use. An auditor is liable in tort if (1) he owed a duty of care to the person who suffered loss, (2) he breached that duty, and (3) the breach caused the loss.
Example: accepting a schedule of bad debts without checking even though the debts were clearly irrecoverable. Remedies are damages; criminal liability is separate (for example failing to report as required by the Companies Ordinance).
Q13. What are tests of controls and when are they performed? (3 marks)
Tests of controls are audit procedures to evaluate the design, implementation and operating effectiveness of internal controls in preventing or detecting material misstatements. They are required when the auditor plans to rely on the controls, or when substantive procedures alone cannot provide sufficient appropriate audit evidence.
Q14. What is the risk of material misstatement? (3 marks)
It is the risk that the financial statements are materially misstated before the audit. It is the combination of inherent risk (the susceptibility of an assertion to misstatement assuming no controls) and control risk (the risk that internal controls fail to prevent or detect it). It is assessed at the financial-statement level and at the assertion level.
