Bcom Bachelor of Commerce Auditing 1 — Questions and Answers
Question 1: What is the primary objective of an external financial statement audit?
- To express an opinion on whether financial statements are fairly presented in accordance with GAAP (Correct answer)
- To detect all fraud within a company
- To prepare the financial statements
- To certify that the company is profitable
Correct answer: To express an opinion on whether financial statements are fairly presented in accordance with GAAP
An external auditor's primary role is to provide reasonable assurance that financial statements are free of material misstatement and comply with applicable accounting standards.
Question 2: Which organization sets auditing standards for public companies in the US?
- Public Company Accounting Oversight Board (PCAOB) (Correct answer)
- American Institute of CPAs (AICPA)
- Financial Accounting Standards Board (FASB)
- Securities and Exchange Commission (SEC)
Correct answer: Public Company Accounting Oversight Board (PCAOB)
The PCAOB was established by the Sarbanes-Oxley Act of 2002 to oversee auditors of public companies and set auditing standards.
Question 3: What is 'audit risk'?
- The risk that an auditor issues an inappropriate opinion on materially misstated financial statements (Correct answer)
- The risk that a client commits fraud
- The risk that audit fees are too high
- The risk of losing a client to a competitor
Correct answer: The risk that an auditor issues an inappropriate opinion on materially misstated financial statements
Audit risk is the probability that an auditor will conclude the statements are fairly presented when they actually contain a material misstatement.
Question 4: What does 'materiality' mean in auditing?
- The magnitude of a misstatement that could influence the decisions of a reasonable financial statement user (Correct answer)
- The importance of an audit client to the firm
- The physical existence of an asset
- The relevance of audit evidence
Correct answer: The magnitude of a misstatement that could influence the decisions of a reasonable financial statement user
Materiality is a threshold used by auditors to assess whether errors or omissions are significant enough to affect users' economic decisions.
Question 5: Which type of audit opinion indicates that financial statements are fairly presented with no exceptions?
- Unqualified (clean) opinion (Correct answer)
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
Correct answer: Unqualified (clean) opinion
An unqualified opinion, often called a clean opinion, means the auditor found the financial statements to be fairly presented in conformity with GAAP.
Question 6: What is 'substantive testing' in an audit?
- Audit procedures designed to detect material misstatements in account balances and transactions (Correct answer)
- Testing the design of internal controls
- Reviewing management representations
- Analytical procedures comparing ratios
Correct answer: Audit procedures designed to detect material misstatements in account balances and transactions
Substantive tests directly examine transactions and account balances to gather evidence about whether they are materially misstated.
Bcom Bachelor of Commerce Auditing 1
What is the primary objective of an external financial statement audit?