CAF-8 · Chapter 1
Concept and Need for Audit MCQs with Answers
10 multiple-choice questions on Concept and Need for Audit for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Mr. Zaid, the CEO of Delta Manufacturing, believes that an external audit acts as a complete guarantee that no fraud exists within the company. What concept does Mr. Zaid's belief illustrate?
- A) The assurance matrix
- B) The expectation gap
- C) The materiality threshold
- D) The professional skepticism principle
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Answer: B) The expectation gap
The expectation gap refers to the difference between the public's perception of an auditor's role (e.g., providing absolute guarantees against fraud) and the auditor's actual statutory responsibilities.
Question 2
Which of the following is an inherent limitation of an audit that prevents the auditor from providing absolute assurance?
- A) The auditor's lack of independence from the client.
- B) The requirement to review 100% of all transactions.
- C) The use of sampling techniques and the fact that most audit evidence is persuasive rather than conclusive.
- D) The auditor's inability to communicate with those charged with governance.
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Answer: C) The use of sampling techniques and the fact that most audit evidence is persuasive rather than conclusive.
Auditors cannot test every transaction due to time and cost constraints, so they use sampling. Additionally, evidence gathered is usually persuasive rather than absolute, and management may collude to conceal fraud.
Question 3
Under the Companies Act, 2017, what is the required timeframe for the appointment of the first external auditor by the directors of a newly incorporated company?
- A) Within 30 days of incorporation
- B) Within 60 days of incorporation
- C) Within 90 days of incorporation
- D) At the first Annual General Meeting
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Answer: C) Within 90 days of incorporation
According to Section 246 of the Companies Act, 2017, the first auditors must be appointed by the directors within a period of ninety days from the date of incorporation of the company.
Question 4
An assurance engagement consists of a three-party relationship. Who are the three parties involved in a statutory audit?
- A) The tax authorities, the management, and the auditor
- B) The internal auditor, the external auditor, and the shareholders
- C) The practitioner (auditor), the responsible party (management), and the intended users (shareholders)
- D) The board of directors, the regulatory commission, and the general public
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Answer: C) The practitioner (auditor), the responsible party (management), and the intended users (shareholders)
An assurance engagement relies on a three-party relationship: the practitioner who performs the evaluation, the responsible party who prepares the subject matter, and the intended users who rely on the report.
Question 5
An auditor identifies a misstatement in the financial statements of Horizon Ltd. The auditor must determine if it is material. Information is considered material if:
- A) It exceeds 1% of the total revenue regardless of its nature.
- B) Its omission or misstatement could reasonably influence the economic decisions of users taken on the basis of the financial statements.
- C) It relates strictly to cash balances and bank transactions.
- D) The management refuses to correct the specific error.
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Answer: B) Its omission or misstatement could reasonably influence the economic decisions of users taken on the basis of the financial statements.
Materiality is judged by whether an omission or misstatement would influence the economic decisions of the intended users relying on the financial statements.
Question 6
Throughout the audit of Silverline Corp, the audit team remains alert to conditions indicating possible fraud, despite having audited the company for five years without issues. This attitude is best described as:
- A) Professional competence
- B) Independence in appearance
- C) Professional skepticism
- D) Quality control monitoring
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Answer: C) Professional skepticism
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence, regardless of past positive experiences with management.
Question 7
Which of the following is NOT an element of an assurance engagement?
- A) A written assurance report
- B) Sufficient appropriate evidence
- C) Absolute verification of all transactions
- D) Suitable criteria
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Answer: C) Absolute verification of all transactions
The elements of an assurance engagement include a three-party relationship, subject matter, suitable criteria, evidence, and an assurance report. Absolute verification is not an element, as audits provide reasonable assurance.
Question 8
In the context of the financial statements, what does 'presentation' primarily refer to according to ISA 315?
- A) Ensuring assets are physically present at year-end.
- B) Ensuring transactions are appropriately aggregated, disaggregated, clearly described, and relevant disclosures are understandable.
- C) Presenting the audit report to the shareholders at the AGM.
- D) Formatting the management representation letter.
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Answer: B) Ensuring transactions are appropriately aggregated, disaggregated, clearly described, and relevant disclosures are understandable.
Presentation and disclosure assertions focus on whether financial information is appropriately classified, described, and disclosed in an understandable manner.
Question 9
Management is fundamentally responsible for which of the following?
- A) Issuing an opinion on the financial statements.
- B) Designing and implementing effective internal controls to prevent and detect fraud.
- C) Determining the sample sizes for substantive audit testing.
- D) Selecting the external audit team members.
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Answer: B) Designing and implementing effective internal controls to prevent and detect fraud.
It is the responsibility of management and those charged with governance to design, implement, and maintain internal controls, and to prevent and detect fraud.
Question 10
A statutory audit is mandated by law. According to the Companies Act 2017, what happens if a company fails to appoint its first auditor within the prescribed time?
- A) The company's incorporation is immediately revoked.
- B) The Securities and Exchange Commission of Pakistan (SECP) shall appoint the auditor.
- C) The Chief Financial Officer assumes the role of the auditor.
- D) The existing board of directors faces criminal prosecution without warning.
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Answer: B) The Securities and Exchange Commission of Pakistan (SECP) shall appoint the auditor.
If a company fails to appoint an auditor at incorporation, in an AGM, or to fill a casual vacancy, the Commission (SECP) has the power to appoint the auditor.