Q.1 What is the primary objective of auditing?
To prepare financial statements
To detect and prevent fraud
To express an opinion on the financial statements
To maintain accounting records
Explanation - The main objective of auditing is to provide an independent opinion on whether the financial statements present a true and fair view of the company’s financial position.
Correct answer is: To express an opinion on the financial statements
Q.2 Which of the following is considered a limitation of auditing?
Auditors can guarantee absolute accuracy of financial statements
Auditing is a systematic process
Auditors express their opinion based on evidence
Auditors may not detect all frauds
Explanation - Auditing provides reasonable assurance, not absolute certainty. Some errors or frauds may remain undetected due to their nature or concealment.
Correct answer is: Auditors may not detect all frauds
Q.3 Which type of audit is conducted by the management itself?
Internal audit
External audit
Statutory audit
Government audit
Explanation - Internal audits are conducted by an organization’s own employees to evaluate internal controls and improve operational efficiency.
Correct answer is: Internal audit
Q.4 Who appoints an external auditor in a public limited company?
Shareholders
Board of Directors
Government
Internal Audit Department
Explanation - External auditors are appointed by the shareholders during the annual general meeting to ensure independent review of financial statements.
Correct answer is: Shareholders
Q.5 Which auditing standard emphasizes independence and objectivity?
SA 200
SA 220
SA 230
SA 240
Explanation - SA 200 (Overall Objectives of the Independent Auditor and the Conduct of an Audit) stresses that auditors must maintain independence and objectivity throughout the audit.
Correct answer is: SA 200
Q.6 What is meant by 'audit evidence'?
Financial statements prepared by management
Records of previous audits
Information used by the auditor to draw conclusions
Government reports
Explanation - Audit evidence includes documents, records, and other information the auditor collects to support their opinion on the financial statements.
Correct answer is: Information used by the auditor to draw conclusions
Q.7 Which of the following is NOT a type of audit opinion?
Unqualified opinion
Qualified opinion
Adverse opinion
Internal opinion
Explanation - Audit opinions include unqualified, qualified, adverse, and disclaimer opinions. 'Internal opinion' is not a recognized type.
Correct answer is: Internal opinion
Q.8 Vouching in auditing refers to:
Examining source documents to verify transactions
Preparing financial statements
Conducting internal control review
Testing inventory physically
Explanation - Vouching is the process of checking the authenticity of recorded transactions by examining supporting documents like invoices, receipts, and bills.
Correct answer is: Examining source documents to verify transactions
Q.9 Which of the following is a responsibility of an auditor?
Managing company finances
Detecting errors and frauds
Making investment decisions
Paying taxes
Explanation - Auditors are responsible for detecting material misstatements, including errors and frauds, while providing a professional opinion on financial statements.
Correct answer is: Detecting errors and frauds
Q.10 Which document authorizes an auditor to conduct an audit?
Engagement letter
Audit report
Board resolution
Financial statements
Explanation - An engagement letter is a formal agreement between the auditor and the client, specifying the scope, responsibilities, and terms of the audit.
Correct answer is: Engagement letter
Q.11 Which type of audit is mandated by law for certain companies?
Statutory audit
Internal audit
Management audit
Performance audit
Explanation - A statutory audit is required by law to ensure compliance with legal requirements and accurate reporting of financial statements.
Correct answer is: Statutory audit
Q.12 The term 'materiality' in auditing refers to:
The size and importance of an item that affects decision making
The weight of physical assets
Auditor’s personal opinion
The number of transactions in the accounting period
Explanation - Materiality helps auditors focus on matters that could influence the economic decisions of users of financial statements.
Correct answer is: The size and importance of an item that affects decision making
Q.13 Who can perform internal audit in an organization?
Management or appointed internal auditors
External auditors only
Shareholders
Government agencies
Explanation - Internal audits are conducted by the organization’s own staff or appointed internal auditors to assess risk and improve processes.
Correct answer is: Management or appointed internal auditors
Q.14 Which of the following is a characteristic of an effective audit?
Independence, competence, and objectivity
Management control
Maximizing profits
Tax compliance
Explanation - An effective audit requires auditors to be independent, competent, and objective in their assessment of financial statements.
Correct answer is: Independence, competence, and objectivity
Q.15 What is meant by 'audit risk'?
The risk of loss in investments
The risk that auditor expresses an inappropriate opinion
The risk of legal action against the company
The risk of theft in the company
Explanation - Audit risk is the possibility that an auditor may give an unqualified opinion on materially misstated financial statements.
Correct answer is: The risk that auditor expresses an inappropriate opinion
Q.16 Which is NOT a type of audit?
Financial audit
Operational audit
Social audit
Tax preparation audit
Explanation - Audits include financial, operational, compliance, and social audits. Tax preparation is not a formal audit type.
Correct answer is: Tax preparation audit
Q.17 Which principle requires auditors to exercise professional skepticism?
SA 200
SA 230
SA 250
SA 315
Explanation - SA 200 requires auditors to apply professional skepticism, being alert to conditions that may indicate misstatement due to error or fraud.
Correct answer is: SA 200
Q.18 Which of the following is a primary document used in vouching?
Invoice
Audit report
Balance sheet
Trial balance
Explanation - Invoices, bills, receipts, and contracts are primary documents used to verify transactions in vouching.
Correct answer is: Invoice
Q.19 What does a disclaimer of opinion indicate?
Financial statements are accurate
Auditor cannot form an opinion
Financial statements have minor errors
Financial statements are fraudulent
Explanation - A disclaimer is issued when auditors are unable to obtain sufficient appropriate evidence to form an opinion.
Correct answer is: Auditor cannot form an opinion
Q.20 Which of the following is a benefit of auditing?
Ensures the company pays more taxes
Enhances credibility of financial statements
Replaces accounting function
Prevents all frauds
Explanation - Auditing provides assurance to stakeholders, increasing the reliability and credibility of the financial information.
Correct answer is: Enhances credibility of financial statements
Q.21 SA 240 relates to which aspect of auditing?
Fraud in financial statements
Audit planning
Audit documentation
Materiality
Explanation - SA 240 deals with the auditor’s responsibility to detect material misstatements due to fraud.
Correct answer is: Fraud in financial statements
Q.22 Which of the following is a qualitative aspect of audit evidence?
Reliability and relevance
Number of documents
Length of audit report
Profit of the company
Explanation - Audit evidence is evaluated based on its reliability and relevance to support audit conclusions.
Correct answer is: Reliability and relevance
Q.23 What is meant by 'substantive procedures' in auditing?
Tests to detect material misstatements
Procedures to maintain company policies
Review of employee performance
Preparation of tax returns
Explanation - Substantive procedures are audit tests performed to detect material misstatements in financial statements.
Correct answer is: Tests to detect material misstatements
Q.24 Which of the following is true about external auditors?
They are independent of the organization
They are part of management
They prepare financial statements
They approve company budgets
Explanation - External auditors are independent professionals who review financial statements without any bias from management.
Correct answer is: They are independent of the organization