1. **Responsibilities**: An auditor has discovered a significant error in

the financial statements of a client company. What should be the auditor's

next step?

 A) Ignore the error as it may not be material.

 B) Inform the company's management and ensure it is corrected.

 C) Adjust the financial statements without informing the company.

 D) Terminate the audit engagement immediately.

 **Answer: B**. The auditor's responsibility is to inform the

management about the error and ensure that it is corrected, as it could

affect the fairness of the financial statements.

2. **Independency**: Which of the following situations most likely

compromises an auditor's independence?

 A) Having a close relative working in the finance department of the

audit client.

 B) Performing both auditing and consulting services for the same client.

 C) Owning a small number of shares in the audit client's business.

 D) All of the above.

 **Answer: D**. Each situation mentioned can potentially compromise

an auditor's independence and objectivity.

3. **Reporting**: In which scenario would an auditor issue an adverse

opinion?

 A) When there is a disagreement with management regarding

accounting policies.

 B) When there are limitations on the scope of the audit.

 C) When financial statements are free from material misstatements.

 D) When financial statements contain material misstatements that

pervasively affect their interpretation.

 **Answer: D**. An adverse opinion is issued when financial statements

contain material misstatements that are so significant that they pervade the

financial statements.

4. **Audit Process**: What is the primary purpose of performing

analytical procedures in planning an audit?

 A) To detect fraud within the company.

 B) To understand the client's industry and business.

 C) To assess the company's ability to continue as a going concern.