Internal Auditing& Modern Accounting

1:__________ is a systematic examination of the books and records or a

business?
 Auditing

B. Vouching

C. Verification

D. Checking

2: The term ‘Audit’ is derived from a Latin word “audire” which

means___________?
A. To inspect

B. To examine

 C. To hear

D. To investigate

3: The main object of an audit is ___________?

A. Expression of opinion

B. Detection and Prevention of fraud and error

C. Both (A) and (B)

 D. Depends on the type of audit.

4: An auditor is like a_______________?

A. Blood haunt

 B. Watch dog

C. May both according to situation

D. None of these

5: Process of verifying the documentary evidences of transactions are known

as___________?
A. Auditing

B. Testing

 C. Vouching

D. Verification
6: Auditing is compulsory for____________?

B. Partnership firms

 C. Joint stock Companies

7: Concealment of shortage by delaying the recording of cash receipts is

known as_____________?
A. Embezzlement

B. Misappropriation

 C. Lapping

D. None of these

8: The fundamental objective of the audit of a company is to_____________?

A. Protect the interests of the minority shareholders

B. Detect and prevent errors and fraud

C. Assess the effectiveness of the company’s performance

 D. Attest to the credibility of the company’s accounts

9: The concept of stewardship means that a company’s

directors________________?
A. Are responsible for ensuring that the company complies with the law

B. Are responsible for ensuring that the company pays its tax by the due date

 C. Safeguard the company’s assets and manage them on behalf of the shareholders

D. Report suspected fraud and money laundering to the authorities

10: Why do auditors concentrate their efforts on material items in accounts?

A. Because they are easier to audit

B. Because it reduces the audit time

 C. Because the risk to the accounts of their being incorrectly stated is greater

D. Because the directors have asked for it

11: Which of the following is NOT the responsibility of a company’s directors?

 Reporting to the shareholders on the accuracy of the accounts

B. Establishment of internal controls

C. Keeping proper accounting records

D. Supplying information and explanations to the auditor

12: International auditing standards are issued by the______________?
. B. Financial Accounting Standards Board

 C. International Standards Board

D. Auditing Practices Board

Which of the following is not true about opinion on financial statements?

A. The auditor should express an opinion on financial statements.

B. His opinion is no guarantee to future viability of business

 C. He is responsible for detection and prevention of frauds and errors in financial statements

D. He should examine whether recognized accounting principle have been consistently

13: A sale of Rs. 50.000 to A was entered as a sale to B. This is an example

of____________?
A. Error of omission

 B. Error of commission

C. Compensating error

D. Error of principle

14: When an auditor is proposed for removal from office, which one of the
following is he NOT permitted to do?
A. Circulate representations to members

 B. Apply to the court to have the proposal removed

C. Speak at the AGM/EGM where the removal is proposed

D. Receive notification of the AGM/EGM where the removal is proposed

15: Which one of the following is NOT a duty of the auditor?

 Duty to report to the company’s bankers

B. Duty to report to the members

C. Duty to sign the audit report

D. Duty to report on any violation of law

16: Assuming that it is not the first appointment of the auditor, who is
responsible for the appointment of the auditor?
 The shareholders in a general meeting

B. The managing director

C. The board of directors in a board meeting

D. The audit committee

18: The independent auditor’s primary responsibility is to______________?

A. the directors

B. the company’s bank

 c. the shareholders

19: How long is the auditor’s term of office?

A. Until the audit is complete

B. Until the financial statements are complete

 C. Until the next AGM (Annual General Meeting)

D. Until the directors remove them

20: Which of the following is correct in relation to materiality?

A. A matter is material only if it changes the audit report

B. A matter is material if the auditor and the directors both decide that further work needs to be done in the area
under question

C. A matter is material only if it affects directors’ emoluments

 D. A matter is material if its omission or misstatement would reasonably influence the decisions of an addressee
of the auditors’ report

21: Which one of the following is NOT considered to be part of planning?

A. Background i.e. industry

B. Previous year’s audit i.e. any qualifications in the report

C. Considering the work to be done by the client staff e.g. internal audit

 D. Considering whether the financial statements show a true and fair view

22: Audit risk is composed of 3 factors. Which of the following is NOT one of
those factors?
 Compliance risk

B. Detection risk

C. Control risk

D. Inherent risk
23: Which of the following should NOT be considered at the planning stage?
A. The timing of the audit

B. Analytical review

C. Last year’s written representation letter

 D. Obtaining written representations

24: At the planning stage you would NOT consider____________?

A. the timing of the audit

 B. whether corrections from the inventory count have been implemented

C. last year’s audit

D. the potential use of internal audit

25: Which of the following describes sampling risk?

A. The risk of the auditor carrying out a test the wrong way round

B. The risk of reliance on unsuitable audit evidence

 C. The risk that the sample does not reflect the population

D. The risk of the auditor reaching the wrong conclusions from testing

26 Which of the following is NOT an accepted method of selection in

sampling?
A. Systematic selection

 B. Pervasive selection

C. Random selection

D. Haphazard selection

27: Which of the following are you unlikely to see in the current file of
auditors’ working papers?
 Memorandum & articles of association

B. Audit planning memorandum

C. Summary of unadjusted errors

D. Details of the work done on the inventory count

28” According to ISA 500, the strength of audit evidence is determined by

which two qualities?
A. Appropriateness & competence
 B. Sufficiency & appropriateness

C. Reliability & extensiveness

D. Objectivity & independence

29: Which of the following is normally the most reliable source of audit
evidence?
A. Internal audit

 B. Suppliers’ statements

C. Board minutes

D. Analytical review

30: The degree of effectiveness of an internal control system depends on:

 The design of the internal control system and the implementation of the controls

B. The design of the internal controls and the implementation of the control system

C. The implementation of the controls and the correctness of the accounting records

D. The design of the internal control system and the correctness of the accounting records

31: According to ISA 315, which of the following is NOT an element of the
control environment?
A. Participation of management

 B. Information processing

C. Commitment to competence

D. Human resource policies and practices

32: According to ISA 315, which of the following is NOT a control activity?
A. Performance reviews

B. Physical controls

 C. Organizational structure

D. Segregation of duties

33: Lapping is also known as___________?

 Teeming and lading

B. Looping

C. Embezzlement

D. Hacking
34: Goods sent on approval basis’ have been recorded as ‘Credit sales’. This
is an example of____________?
 Error of principle

B. Error of commission

C. Error of omission

D. Error of duplication

35: Which of the following statements is not true?

A. Management fraud is more difficult to detect than employee fraud

 B. Internal control system reduces the possibility of occurrence of employee fraud and management fraud

C. The auditor’s responsibility for detection and prevention of errors and frauds is similar.

D. All statements are correct.

36: Internal audit is undertaken:

A. By independent auditor

B. Statutorily appointed auditor

 C. By a person appointed by the management

D. By a government auditor

37: The scope of internal audit is decided by the___________?

A. Shareholders

 B. Management

C. Government

D. Law

39 : Audit of banks is an example of_____________?

A. Statutory audit

B. Balance sheet audit

C. Concurrent audit

 D. All of the above

40: Concurrent audit is a part of____________?

A. Internal check system

B. Continuous audit

 C. Internal audit system

D. None of these

41: Audit in depth is synonymous for____________?

A. Complete audit

B. Completed audit

C. Final audit

 D. Detailed audit

42: Institute of Chartered Accountants of Pakistan was established

in____________?
A. 1949

B. 1956

 C. 1961

D. 1972

43: Which of the following statements is not true about continuous audit?
A. It is conducted at regular interval

B. It may be carried out on daily basis

 C. It is needed when the organization has a good internal control system

D. It is expensive

44: Internal check is carried on by___________?

A. Staff specially appointed for the purpose

B. Internal auditor

C. Supervisor of the staff

 D. Members of the staff

45: Errors of Omission are _____________?

 Technical errors

B. Errors of principle

C. Compensating errors

D. None of the above

46: Window dressing implies _______________?

A. Curtailment of expenses

B. Checking of Wastages
C. Under valuation of assets

 D. Over Valuation of assets

47: Test Checking refers to___________?

A. Testing of accounts and records

 B. Checking of selected number of transactions

C. Examination of adjusting and closing entries

D. Checking of all transactions recorded

48: Which of the following statements is not correct about materiality?

A. Materiality is a relative concept

B. Materiality judgments involve both quantitative and qualitative judgments

C. Auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of an informed
decision maker who will rely on the financial statements

 D. At the planning state, the auditor considers materiality at the financial statement level only

49: ______the audit risks _______the materiality and _________the audit

effort.
 Lower, Higher, Lower

B. Lower, Lower, Higher

C. Higher, Lower, Lower

D. Lower, Higher, Higher

50: When issuing unqualified opinion, the auditor who evaluates the audit
findings should be satisfied that the___________?
A. Amount of known misstatement is documented in working papers

B. Estimates of the total likely misstatement is less than materiality level

 C. Estimate of the total likely misstatement is more than materially level

D. Estimates of the total likely misstatement cannot be made

51: In determining the level of materiality for an audit, what should not be
considered?
A. Prior year’s errors

 B. The auditor’s remuneration

C. Adjusted interim financial statements

D. Prior year’s financial statements

52: Analytical procedures issued in the planning stage of an audit, generally

A. Helps to determine the nature, timing and extent of other audit procedures

B. Directs attention to potential risk areas

C. Indicates important aspects of business

 D. All of the above

53: Which of the following statements is most closely associated with

analytical procedure applied at substantive stage?
A. It helps to study relationship among balance sheet accounts

B. It helps to discover material misstatements in the financial statements

C. It helps to identify possible oversights

 D. It helps to accumulate evidence supporting the validity of a specific account balance

54: Verification refers to_________?

 Examining the physical existence and valuation of assets.

B. Examining the journal and ledger

C. Examination of vouchers related to assets.

D. None of the above.

55: Stock should be valued at_________?

A. Cost

B. Market price

 C. Cost or Market price whichever is lower.

D. Cost less depreciation.

56: Floating assets are valued at____________?

A. cost

B. Market price

 C. Cost or market price whichever is lower

D. Cost less depreciation

57: Goods sold on the basis of ‘sales or return ‘ should:

 Be included in the stock

B. Not be included in the stock

C. Not be checked by auditor

D. None of the above

58: Of the following, which is the least persuasive type of audit evidence?
A. Bank statements obtained from the client

B. Documents obtained by auditor from third parties directly.

 C. Carbon copies of sales invoices inspected by the auditor

D. Computations made by the auditor

59: Which of the following statements is, generally, correct about the
reliability of audit evidence?
A. To be reliable, evidence should conclusive rather than persuasive

 B. Effective internal control system provides reliable audit evidence

C. Evidence obtained from outside sources routed through the client

D. All are correct.

60: In an audit of financial statements, substantive tests are audit

procedures that ________?
A. May be eliminated for an account balance under certain conditions

B. Are designed to discover significant subsequent events

C. Will increase proportionately when the auditor decreases the assessed level of control risk

 D. May be test of transactions, test of balance and analytical procedures

61: The nature, timing and extent of substantive procedures is related to

assessed level of control risk
A. Randomly

B. Disproportionately

 C. Directly

D. Inversely

62: Which of the following factors is most important in determining the

appropriations of audit evidence?
 The reliability of audit evidence and its relevance in meeting the audit objective

B. The objectivity and integrity of the auditor

C. The quantity of audit evidence

D. The independence of the source of evidence

63: When is evidential matter, generally, considered sufficient?

A. When it constitutes entire population

 B. When it is enough to provide a basis for giving reasonable assurance regarding truthfulness

C. When it is objective and relevant

D. When auditor collects and evaluates it independently

64: Which of the following is not corroborative evidence?

A. Minutes of meetings

B. Confirmations from debtors

C. Information gathered by auditor through observation

 D. Worksheet supporting consolidated financial statements

65: What would most appropriately describe the risk of incorrect rejection
in terms of substantive testing?
A. The auditor concludes balance is materially correct when in actual fact it is not

 B. The auditor concludes that the balance is materially misstated when in actual fact it not

C. The auditor has rejected an item for sample which was material

D. None of the above

66: Which of the following affects audit effectiveness?

A. Risk of over reliance

B. Risk of incorrect rejection

C. Risk of incorrect acceptance

 D. Both A and C

67: What would most effectively describe the risk of incorrect acceptance in terms of substantive audit testing?

 The auditor has ascertained that the balance is materially correct when in actual fact it is not

B. The auditor concludes the balance is materially misstated when in actual fact is not

C. The auditor has rejected an item from sample which was not supported by documentary evidence

D. He applies random sampling on data which is inaccurate and inconsistent

68: Audit programme is prepared by____________?

A. The auditor

B. The client
C. The audit assistants

 D. The auditor and his audit assistants

69: The working papers which auditor prepares for financial statements
audit are___________?
A. Evidence for audit conclusions

B. Owned by the client

 C. Owned by the auditor

D. Retained in auditor’s office until a change in auditors

70: The quantity of audit working papers complied on engagement would

most be affected by__________?
A. Management’s integrity

 B. Auditor’s experience and professional judgment

C. Auditor’s qualification

D. Control risk

71: Which of the following best describes the primary purpose of audit
programme preparation?
A. To detect errors or fraud

B. To comply with GAAP appropriate evidence

 C. To gather sufficient

D. To assess audit risk

71: Which of the following is not an advantage of the preparation of working

paper?
A. To provide a basis for review of audit work

B. To provide a basis for subsequent audits

C. To ensure audit work is being carried out as per programme

 D. To provide a guide for advising another client on similar issues

72: The auditor’s permanent working paper file should not normally,
include__________?
 Extracts from client’s bank statements

B. Past year’s financial statements

C. Attorney’s letters

73: For what minimum period should audit working papers be retained by
audit firm?
A. For the time period the entity remains a client of the audit firm.

B. For a period of ten years

 C. For a period auditor opines them to be useful in servicing the client

D. For the period the audit firm is in existence.

74: Which of the following factors would least likely affect the quantity and
content of an auditor’s working papers
A. The assessed level of control risk

B. The possibility of peer review

C. The nature of auditor’s report

 D. The content of management representation letter

75: Which of the following statement is true regarding an auditor’s working

papers?
A. They document the level of independence maintained by the auditor

 B. They should be considered as the principle support for the auditor’s report

C. They should not contain details regarding weaknesses in the internal control system

D. They help the auditor to monitor the effectiveness of the audit firm’s quality control

76: Which of the following statement best describes the understanding with
respect to ownership and custody of working papers prepared by an auditor?
 The working papers may be obtained by third parties when they appear to be relevant to issues raised in
litigation

B. The safe custody of working papers is the responsibility of client, if kept at his premises

C. The working papers must be retained by an audit firm for a period of 10 years

D. Successor auditors may have access to working papers of the predecessor auditors. The approval of client is not
required.

77: The current file of the auditor’s working papers, generally, should
include____________?
A. A flowchart of the internal controls

B. Organization charts
 C. A copy of financial statements

D. Copies of bond and debentures

78: Auditing is what?

A. Reporting the financial information

 B. Examination of financial statements

C. Preparation financial statements

Introduction to Accounting
Short Questions & Answers
Q.1. DEFINE BUSINESS?
Ans. Any legal activities in a country undertaken for earning profit is called business.
Ans: There are three kinds of business.
1. Manufacturing ii. Merchandise Trading iii. Service.
Q.3. DEFINE BUSINESS TRANSACTION?
Ans. Business transaction means dealing with two persons like acquiring and giving.
Q.4. WHAT IS CASH TRANSATION?
Ans. When cash is received or paid for commodities and goods, called cash transaction.
Q.5. WHAT IS CREDIT TRANSACTION?
Ans. When goods or services are bought or sold on credit it is called credit transaction.
Q.6. WHAT IS CAPITAL?
Ans. That amount and assets like machinery, Furniture invested in business by the owner is called
Capital.
Q.7. DEFINE DRAWINGS?
Ans. Goods or Cash taken away by the owner of the business for his domestic use is called
Drawings.
Q.8. DEFINE TERM PURCHASES?
Ans. Goods are bought in a business for earning profit is called purchases.
Q.9. DEFINE CASH PURCHASES?
Ans. When goods are purchased and Payment is made in cash is called Cash purchases.
Q.10. DEFINE CREDIT PURCHASES?
Ans. When goods are purchased from a business on account is called credit Purchases.
Q.11. DEFINE TERM PURCHASES RETURN?
Ans. When goods are not supplied by the supplier according to the sample. These are returned to
Supplier is called Purchases Return.
Q.12. DEFINE TREM SALES?
Ans. When merchandise are purchased for earning profit and these goods sold on credit or on
Cash is called Sales.
Q.13. DEFINE CASH SALES?
Ans. Goods are sold and Cash received, it is called Cash Sales.
Q.14. DEFINE CREDIT SALES?
Ans. When goods are sold on account to a person is called credit Sales.
Q.15. DEFINE TERM SALES RETURN?
Ans. Defective goods returned by a customer are called sales return.
Q.16. DEFINE TRADE DISCOUNT?
Ans. That amount which is paid or received less than list price is called trade discount. It is not
Recorded in the books of accounts.
Q.17. DEFINE CASH DISCOUNT?
Ans. Fewer amounts received from debtor or paid to creditor are called Cash discount. It is recorded in
The books of accounts.
Q.18. DEFINE COMMISSION?
Ans. When services are performed by one to another person is called commission.
Q.19. DEFINE EXPENDITURE?
Ans. That amount which is paid for purchase of Assets is called expenditure.
Q.20. DEFINE TERM EXPENSES?
Ans. That amount which is paid for operating the business is called expenses.
Q.21. DEFINE TERM DEBTOR/ACCOUNTS RECEIVABLE?
Ans. Total credit amount of a business receivable from different persons is called “Debtor.”
Q.22. DEFINE TERM CREDITOR/ACCOUNTS PAYABLE?
Ans. Total credit amount of a business payable to different peoples is called “Creditor”.
Q.23. DEFINE ASSETS?
 Ans. Some goods which are not for sale in a business is called assets like Machinery, Equipment
And furniture etc.
Q.24. DEFINE LIABILITIES?
Ans. That amount which is payable in a business to other and its owner is called liabilities.
Q.25. WHAT IS A VOUCHER?
Ans. All business transactions are recorded on a printed slip. This slip is called voucher and used for
Evidence.
Q.26. DEFINE GOODS OR PURCHASES?
Ans. Those goods which are purchased in a business for earning profit are called goods.
Q.27. DEFINE STOCK?
Ans. Those goods which are remained unsold at the end of each year are called stock.
Q.28. DEFIFNE EQUITY?
Ans. The persons have right to claim against the assets of a business is called equity.
Q.29. DEFINE ACCOUNTING?
Ans. Accounting is an art of recording, classifying and summarizing of a business transactions and
Events of a financial character and interpreting the results there of.
Q.30. WHAT ARE NAMES THE STAGES OR FUNCTIONS OF ACCOUNTING?
Ans. There are four functions of accounting.
Record ii. Classifying Summarizing 4Interpretation
Q.31. DEFINE RECORDING IN ACCOUNTING?
Ans. In this stage the transactions are recorded chronologically in the books of account.
Q.32. DEFINE CLASSIFYING IN ACCOUNTING?
Ans. In this point the transactions of the same or similar nature are classified and recorded
Separately.
Q.33. DEFINE SUMMERIZING IN ACCOUNTING?
Ans. All the necessary date and information are summarized on the basis or classified record of
Transactions and communicated to management and other interested people.
Q.34. DEFINE INTERPRETATION IN ACCOUNTING?
Ans. To k now the true position of a concern all the accounting data and information relating to a
Business is analyzed and interpreted.
Q.35. WHAT DO YOU MEAN BY BOOK KEEPING?
Ans. It is an art of recording business transactions in the books of account in a proper manner.
Q.36. WHAT ARE THE MAIN BRANCHES OF ACCOUNTING?
Ans. Three are three branches of accounting. i. Financial Accounting.
1. Cost Accounting iii. Management accounting
Q.37. DEFINE FINACIAL ACCOUNTING?
Ans. In this, main financial statements are prepared for the use of outsider like banks, financial
Institution and creditors etc.
Q.38. DEFINE COST ACCOUNTING?
Ans. In cost accounting the cost of product is calculated and it helps the management to control of
Price or cost.
Q.39. DEFINE MANAGEMENT ACCOUNTING?
Ans. That accounting which provides important information to the management for discharging its
Function.
Q.40. DEFINE REVENUE?
Ans. Those incomes which are earned, received or receivable in business.
Q.41. WRITE THE SYSTEMS OF ACCOUNTING?
Ans. There are two systems of accounting, i. Cash system. ii. Accrued system.
Q.42. DEFINE CASH SYSTEM OF ACCOUNTING?
Ans. In this system only those accounting entries are recorded when cash is received or paid.
Q.43. DEFINE ACCRUED SYSTEM OF ACCOUNTING?
Ans. In this system only those accounting entries are made on the basis of amount having become due
for payment or receipt.
Q.44. WRITE THE NAME OF PARTIES INTERESTED IN THE BUSINESS INFORMATION?
Ans. There are many parties interested in business information such as followings:
1. Proprietor ii. Creditor’s iii. Investors IV. Customers
2. Management VI. Employee’s vii. Government
Q.45. DEFINE DOUBLE ENTRY BOOK KEEPING?
Ans. When two aspects of a transaction are recorded in a business is called double entry book
Keeping.
Q.46. DEFINE SINGLE ENTRY BOOK KEEPING?
Ans. When only one aspect of a transaction is recorded is called single entry book keeping