Q.1 What is the primary objective of an external audit?
To detect fraud in all cases
To provide assurance that financial statements are free from material misstatement
To manage the company's internal controls
To prepare financial statements
Explanation - The main purpose of an external audit is to give reasonable assurance to stakeholders that the financial statements reflect a true and fair view, not to manage accounts or guarantee detection of all fraud.
Correct answer is: To provide assurance that financial statements are free from material misstatement
Q.2 Which of the following is considered an auditor's working paper?
Company's profit and loss account
Notes prepared by the auditor to document audit evidence
Bank statements sent to the company
Board meeting minutes
Explanation - Working papers are documents prepared by auditors to record evidence, procedures, and conclusions, supporting the audit opinion.
Correct answer is: Notes prepared by the auditor to document audit evidence
Q.3 Which auditing principle emphasizes independence of the auditor?
Materiality
Objectivity
Due Care
Professional Skepticism
Explanation - Objectivity requires auditors to remain impartial and free from bias while performing their duties, ensuring independence.
Correct answer is: Objectivity
Q.4 What is meant by 'audit risk'?
Risk of bankruptcy of the client
Risk that auditors give an inappropriate opinion on financial statements
Risk of company being fined
Risk of financial statements being accurate
Explanation - Audit risk is the possibility that the auditor may express an incorrect opinion when financial statements are materially misstated.
Correct answer is: Risk that auditors give an inappropriate opinion on financial statements
Q.5 Which of the following is NOT a type of audit evidence?
Physical examination
Observation
Internal control evaluation
Employee satisfaction surveys
Explanation - Audit evidence refers to information used by auditors to form conclusions; employee satisfaction surveys are not typically used in financial statement audits.
Correct answer is: Employee satisfaction surveys
Q.6 Which type of audit opinion is issued when financial statements present a true and fair view?
Adverse opinion
Disclaimer of opinion
Qualified opinion
Unqualified opinion
Explanation - An unqualified opinion indicates that the auditor believes the financial statements are free from material misstatement and present a true and fair view.
Correct answer is: Unqualified opinion
Q.7 Which of the following is a responsibility of an external auditor?
Preparing financial statements
Reporting to shareholders
Managing company operations
Approving company budgets
Explanation - External auditors report their audit findings to stakeholders, primarily shareholders, while remaining independent from management.
Correct answer is: Reporting to shareholders
Q.8 Which statement about internal control is correct?
External auditors design internal controls for the company
External auditors evaluate the effectiveness of internal controls
Internal controls guarantee financial accuracy
Internal controls are optional in audits
Explanation - Auditors assess internal controls to plan the audit and determine the level of reliance they can place on them, but they do not design them.
Correct answer is: External auditors evaluate the effectiveness of internal controls
Q.9 What is the primary purpose of vouching in auditing?
To check the mathematical accuracy of accounts
To verify transactions with supporting evidence
To prepare management reports
To assess company strategy
Explanation - Vouching involves checking recorded transactions against original documents to confirm authenticity.
Correct answer is: To verify transactions with supporting evidence
Q.10 Which of the following best defines professional skepticism?
Blindly trusting management
Doubting all financial statements
Maintaining a questioning mind and critically assessing audit evidence
Delegating audit decisions
Explanation - Professional skepticism requires auditors to critically evaluate evidence without assuming everything is correct.
Correct answer is: Maintaining a questioning mind and critically assessing audit evidence
Q.11 Which document is usually issued at the end of an external audit?
Board resolution
Audit report
Internal control report
Trial balance
Explanation - The audit report communicates the auditor's opinion on the financial statements and is the final product of an external audit.
Correct answer is: Audit report
Q.12 Which type of audit involves examining financial statements to ensure compliance with laws and regulations?
Operational audit
Compliance audit
Forensic audit
Internal audit
Explanation - Compliance audits check whether an organization is following applicable laws, rules, and regulations.
Correct answer is: Compliance audit
Q.13 Which of the following is NOT a limitation of external audit?
Use of sampling techniques
Possibility of human error
Absolute assurance of fraud detection
Dependence on internal controls
Explanation - Audits provide reasonable assurance but cannot guarantee detection of all fraud or errors due to inherent limitations.
Correct answer is: Absolute assurance of fraud detection
Q.14 Which factor affects the auditor's assessment of audit risk?
Nature of the business
Financial ratios of competitors
Number of employees
Brand reputation
Explanation - The inherent risk and complexity of a business affect the auditor's assessment of audit risk.
Correct answer is: Nature of the business
Q.15 Which of the following statements is TRUE regarding audit planning?
It is optional for small audits
It helps in efficient allocation of audit resources
It guarantees fraud detection
It is done after the audit is complete
Explanation - Audit planning ensures that time and resources are used efficiently, focusing on areas of higher risk.
Correct answer is: It helps in efficient allocation of audit resources
Q.16 Which of the following best describes substantive procedures?
Tests of internal control only
Procedures to detect material misstatements in accounts
Reviewing company policies
Preparing management reports
Explanation - Substantive procedures are audit tests designed to verify the correctness of account balances and transactions.
Correct answer is: Procedures to detect material misstatements in accounts
Q.17 What is the significance of materiality in auditing?
It determines which financial statements to prepare
It helps auditors decide the nature, timing, and extent of audit procedures
It ensures no errors exist
It is irrelevant for audits
Explanation - Materiality guides auditors in focusing on significant areas that could influence decisions of users of financial statements.
Correct answer is: It helps auditors decide the nature, timing, and extent of audit procedures
Q.18 Which of the following is considered an independent audit?
Audit conducted by company employees
Audit conducted by a shareholder
Audit conducted by an external qualified auditor
Audit conducted by the CEO
Explanation - External audits are independent because auditors are not part of the company's management, ensuring unbiased opinion.
Correct answer is: Audit conducted by an external qualified auditor
Q.19 Which type of audit evidence is considered the most reliable?
Oral representations by management
External confirmations
Internal memos
Notes by the auditor
Explanation - Evidence obtained from independent external sources is generally more reliable than internally generated information.
Correct answer is: External confirmations
Q.20 Which of the following is a key objective of vouching?
Ensure all cash is spent
Verify recorded transactions with supporting documents
Assess employee performance
Prepare management budgets
Explanation - Vouching is an auditing procedure to ensure authenticity and accuracy of recorded transactions.
Correct answer is: Verify recorded transactions with supporting documents
Q.21 What does a 'qualified opinion' indicate in an audit report?
Financial statements are free from material misstatement
There are material misstatements, except for specific areas
The auditor cannot express an opinion
The company is bankrupt
Explanation - A qualified opinion is issued when financial statements are generally correct but contain material misstatements in specific areas.
Correct answer is: There are material misstatements, except for specific areas
Q.22 Which of the following is NOT a phase of an external audit?
Planning
Fieldwork
Reporting
Budgeting
Explanation - External audits typically involve planning, fieldwork, and reporting; budgeting is part of company management, not the audit process.
Correct answer is: Budgeting
Q.23 Which of the following is the responsibility of an auditor regarding fraud?
Detect all frauds
Assess the risk of material misstatement due to fraud
Prevent fraud in the company
Ignore fraud unless material
Explanation - Auditors are responsible for considering fraud risk in their audit but cannot guarantee all frauds will be detected.
Correct answer is: Assess the risk of material misstatement due to fraud
Q.24 Which of the following is a key characteristic of an external auditor?
Management role
Independence
Decision-making authority
Employee of the company
Explanation - External auditors must remain independent of the organization to provide an unbiased opinion on financial statements.
Correct answer is: Independence
Q.25 Which of the following is considered an inherent limitation of an audit?
Auditor's lack of skill
Use of sampling and human judgment
Company's negligence
Board approval delays
Explanation - Audits cannot examine every transaction and rely on judgment, which are inherent limitations, making absolute assurance impossible.
Correct answer is: Use of sampling and human judgment