Auditing MCQ Quiz - Objective Question with Answer for Auditing - Download Free PDF

The correct answer is 2) Auditor's Report.

Key Points
The end product of every Statutory Auditor is the "Auditor's Report."

• The Auditor's Report is a formal document prepared by the Statutory Auditor upon the completion of the audit of a company's financial statements.
• It contains the auditor's independent opinion and assessment of the financial statements' fairness, accuracy, and compliance with applicable accounting standards and laws.

Important Points

• The Auditor's Report is addressed to the shareholders of the company and is included in the company's annual financial statements.
• It typically consists of several sections that cover various aspects of the audit, such as the scope of the audit, the auditor's opinion on the financial statements, any material misstatements or non-compliance detected during the audit, and other relevant disclosures.
• The Auditor's Report is an essential communication from the auditor to the stakeholders of the company, providing assurance on the reliability and credibility of the financial statements.
• The report is based on the auditor's examination and evaluation of the company's financial records, transactions, and internal controls during the audit process.

The correct answer is 1) by employees.

Key Points

• In internal check, the work is performed by the employees of the organization itself.
• It is an ongoing process that involves the checks and balances of transactions and operations by employees at various levels to ensure accuracy and completeness of financial and accounting data.
• The objective of internal check is to reduce the possibility of errors and frauds, and to ensure that the business operations are running smoothly and efficiently.
• Internal check is a part of the internal control system of an organization, and the internal auditor plays an important role in assessing the effectiveness of the internal check system. 

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff.

Key Points Internal audit 

•  Internal audit is carried out by the internal audit staff, who are employees of the organization but are independent of the areas they audit.
• They assess risks, review financial and operational processes, identify weaknesses, and recommend improvements to enhance the efficiency and effectiveness of operations.

Important Points

Internal auditing is a valuable tool for organizations of all sizes. It can help organizations to:

• Identify and mitigate risks.
• Improve the effectiveness of their controls.
• Ensure that they are complying with laws and regulations.
• Improve their performance.

 The incorrect statement is Trade creditors do not rely on financial audit.

Important Points

The opinion of the auditor assures the owners about the reliability of the financial statements.

• This Statement is true. 
• The primary purpose of an external financial audit is to provide assurance to the owners (shareholders) of the company about the reliability and accuracy of the financial statements.
• The auditor's opinion confirms whether the financial statements are prepared in accordance with accounting principles and whether they present a true and fair view of the company's financial position and performance.

Bank will place greater reliance on financial statements if they have been audited.

• This Statement is true.
• Banks and other lenders place significant reliance on audited financial statements when making lending decisions.
• An audited financial statement provides an independent and credible assessment of the company's financial health and performance, reducing the risk for the bank when considering loan applications.

Trade creditors do not rely on financial audit.

• This Statement is false. 
• Trade creditors, such as suppliers and vendors, may also rely on financial audits to assess the creditworthiness and financial stability of their customers (the companies they are dealing with).
• An audited financial statement provides valuable information about the company's ability to meet its financial obligations and can impact trade credit terms.

The need for a financial audit arises as the control of the company is vested in the hands of the management of the company.

• This Statement is true. 
• The need for a financial audit arises because the financial statements are prepared and presented by the company's management, and there is a potential conflict of interest.
• An independent audit helps to enhance the credibility and reliability of the financial statements by providing an unbiased assessment.

The correct answer is Substantive tests designed to study relationships between financial and nonfinancial.

Key Points

Analytical Procedure: 

• The evaluation of financial information using trends, ratios, or the rationality of data in connection to other financial and non-financial data are known as analytical techniques.
• Auditors analyse the data in this situation to see if it agrees with other pertinent information and if the variation is within their expectations.

 Important Points

• At the planning stage, auditors must employ analytical methods as risk assessment procedures to understand the client and its business environment.
• They might thus help them determine the nature, timing, and scope of the audit procedures to address the risks of significant misstatements by pointing out high-risk areas that they are unaware of.
• For example, by comparing the current period or the industry average, auditors may utilise analytical processes to examine the relationship between sales and cost of goods sold. This would aid them in determining the likelihood of fraud or serious error affecting the sales statistics in the financial accounts.
• An essential step in the auditing process is the analysis of financial data through the investigation of tenable connections between financial and nonfinancial information.
• Planning analytical procedures might be done along with conducting substantive tests or as part of the audit's overall assessment.

Hence, it can be concluded that the correct answer is option 3. 

The Correct Answer is Supplementary audit

Key Points

Supplementary Audit:

• Supplementary audit is an additional audit that is conducted by the Comptroller and Auditor General (CAG) after the completion of the regular audit of the accounts of a government entity.
• Supplementary audit refers to the examination of financial statements of an organization, which has already been audited before by another auditor. This is typically done in case there are any questions, doubts, or uncertainties about the accuracy and reliability of the original audit.
• The purpose of a supplementary audit is to verify the accuracy and completeness of the information provided in the regular audit report.

Additional Information

• Complete audit - Complete audit is a comprehensive audit of all financial transactions and accounts of an entity, and is typically conducted during the first year of an audit engagement.
• Interim Audit - Interim audit is conducted during the year, usually halfway through, to review the financial transactions and accounts of an entity.
• Investigation - Investigation is a separate process initiated in cases where there is suspicion of fraud, embezzlement, or misappropriation of funds, and is not a type of audit.

The correct answer is: Health Audit

Key Points

• Health Audit is not a type of audit.
• Health audit is a term that is sometimes used to refer to a type of assessment or evaluation of an organization's health and safety practices or conditions.

Important Points

• Interim Audit is an audit conducted during the fiscal year, between the regular annual audits.
• Efficiency Audit is an audit that examines the effectiveness and efficiency of an organization's operations, with the goal of identifying opportunities for improvement.
• Propriety Audit is an audit that evaluates whether an organization's financial and operational activities comply with laws, regulations, and ethical principles.

The correct answer is Examination of Account books

Key Points

Auditing is a systematic and independent examination of books, records, documents, and financial statements of an organization to provide an opinion on their accuracy, reliability, and compliance with applicable laws and regulations.

Important Points

• Auditing can be defined as the examination of account books.
• It involves the thorough review and scrutiny of financial records, transactions, and supporting documentation to assess their completeness, accuracy, and adherence to accounting principles and relevant regulations.
• The purpose of auditing is to provide an independent and objective assessment of the financial information presented by an organization, enabling stakeholders to have confidence in the reliability and credibility of the financial statements.

Additional Information

• Preparation of Account books: Auditing is not related to the preparation of account books. The preparation of account books is the responsibility of the company or organization's accounting personnel, who record and maintain financial transactions and records in accordance with applicable accounting standards and principles.
• Rendering expert advice to management regarding accounting matters: Auditing focuses on examining and verifying financial information to express an opinion on its reliability, rather than providing expert advice. While auditors may provide recommendations, the primary purpose is not to provide advisory services to management.
• Detection and prevention of errors: Auditing involves detecting and preventing errors, but it goes beyond just that. It involves assessing financial statements, evaluating internal controls, ensuring compliance with laws and regulations, and providing an opinion on the fairness and accuracy of financial information.

The correct answer is Owned by the auditor.

Key Points

Working papers:

• Working papers, also known as audit documentation, are the records and documents prepared by the auditor during the course of an audit.
• They serve as evidence of the audit work performed, procedures followed, and conclusions reached by the auditor.

Important Points

• The working papers or audit documentation are owned by the auditor.
• As part of the financial statements audit, the auditor prepares working papers that contain detailed information about the audit procedures performed, the results of those procedures, and the conclusions reached.
• The working papers include items such as the audit plan, audit programs, test results, supporting calculations, correspondence, and any other relevant documentation related to the audit.
• These working papers provide a documented trail of the auditor's work and support the opinion expressed in the audit report.
• The auditor retains ownership of these working papers and should maintain them in a secure and confidential manner to ensure their integrity and availability for future reference or review.

Additional Information

• Evidence for audit conclusions: This is not entirely accurate because while the working papers do serve as evidence for audit conclusions, they are more than just evidence. Working papers are comprehensive records that document the entire audit process, including planning, risk assessment, procedures performed, and conclusions reached.
• Owned by the client: Working papers are not owned by the client. Although the client may provide certain information and records to the auditor, the working papers themselves are the auditor's work product and remain the property of the auditor.
• Owned by both client and auditor: While the client may have an interest in the information contained in the working papers, they do not have ownership rights over the actual working papers.

The Correct Answer is an independent person

Key Points

• A company auditor is an independent person appointed by the shareholders of a company to examine the financial statements of the company and provide an independent opinion on whether they are true and fair.
• The auditor is not an employee or an officer of the company and is expected to maintain independence and objectivity throughout the audit process.
• The auditor's role is to provide an unbiased assessment of the company's financial position, and to report any irregularities or discrepancies that may have been identified during the audit.

The correct answer is 4) Board of directors.

Key Points

• Internal audit is a process of independent and objective review of an organization's financial, operational and managerial controls, systems, processes and compliance procedures.
• After conducting the audit, the internal auditor prepares a report highlighting the findings and recommendations.
• This report is submitted to the Board of Directors, who are responsible for overseeing the company's operations, financial reporting and internal controls.
• The Board of Directors reviews the report and takes appropriate actions to address the issues raised by the internal auditor.
• The report is confidential and not shared with external stakeholders such as government, shareholders or creditors.

 The correct answer is caution to management and employees.

Key Points

Auditing:

• An audit is a process of examining and evaluating the financial statements of an organization to ensure that they are accurate and compliant with applicable laws and regulations.
• Audits are typically conducted by a qualified auditor, who is an independent professional who is not affiliated with the organization being audited.

Important Points Limitations of audit are:

The auditor expresses only his opinion:

• The auditor's opinion is based on the examination and evaluation of the financial statements and supporting evidence.
• It is not a guarantee or absolute assurance of the accuracy of the financial statements.
• The auditor's opinion provides reasonable assurance but is limited by factors such as inherent limitations of audit procedures, reliance on sampling, and the possibility of undetected errors or fraud.

All frauds are not necessarily disclosed by audit:

• While auditors perform audit procedures to detect material misstatements, including fraud, it is not always possible to uncover all frauds.
• Fraud may involve intentional concealment, collusion, or manipulation of records, making it challenging to detect through standard audit procedures.
• Therefore, the auditor's opinion does not guarantee the absence of fraud, but rather provides reasonable assurance based on the audit procedures performed.

Audit is not a servant's honesty certificate:

• The auditor's opinion does not provide a blanket certification of the honesty or integrity of management or employees.
• The auditor's focus is on evaluating the financial statements and related controls, rather than making a statement about the honesty of individuals.
• The audit is conducted based on professional standards and procedures and is not intended to provide absolute assurance against fraud or unethical behavior.

Additional Information

• Caution to management and employees cannot be termed as a limitation of audit.
• Rather, it can be seen as a desirable outcome or benefit of the audit, where the auditor's findings and recommendations may serve as a cautionary message to management and employees regarding financial reporting, internal controls, and areas for improvement.

The correct answer is Reserved opinion.

Key Points
The four types of audit opinions are:

• Unqualified opinion - It is given when the auditor concludes that the financial statements are free from any material misstatements and present a true and fair view of the company's financial performance and position.
• Qualified opinion - It is given when the auditor concludes that overall, the financial statements are fairly presented, except for a particular misstatement that is identified.
• Adverse opinion - It is given when the auditor concludes that the financial statements as a whole are materially misstated and do not present a true and fair view of the company's financial performance and position.
• Disclaimer opinion - It is given when the auditor is unable to obtain sufficient appropriate audit evidence and is unable to form an opinion on the financial statements.

Therefore, the correct answer is Reserved opinion, as it is not a type of audit opinion.

The correct answer is 1) by employees.

Key Points

• In internal check, the work is performed by the employees of the organization itself.
• It is an ongoing process that involves the checks and balances of transactions and operations by employees at various levels to ensure accuracy and completeness of financial and accounting data.
• The objective of internal check is to reduce the possibility of errors and frauds, and to ensure that the business operations are running smoothly and efficiently.
• Internal check is a part of the internal control system of an organization, and the internal auditor plays an important role in assessing the effectiveness of the internal check system. 

The correct answer is Regular audit

Key Points

• Continuous audit refers to an audit approach where the auditor performs ongoing and regular audit procedures throughout the year.
• It involves conducting periodic and systematic reviews of financial transactions, controls, and processes, rather than conducting a single audit at the year-end.

Important Points

• Continuous audit is synonymous with regular audit.
• In a continuous audit approach, the auditor performs audit procedures at regular intervals throughout the year, instead of conducting a single audit at the end of the financial period.
• The purpose of a continuous audit is to provide real-time monitoring and assessment of financial transactions and controls, allowing for timely detection of errors, irregularities, or control weaknesses.
• It helps in maintaining a higher level of assurance over financial reporting throughout the year, rather than relying solely on a single year-end audit.

Additional Information

• Interim audit: Interim audit refers to an audit conducted during the financial year before the completion of the full-year financial statements.
• Internal audit: Internal audit refers to an independent and objective assurance activity within an organization that evaluates and assesses the effectiveness of internal controls, risk management processes, and governance structures.