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Answer-KEY Audit Ireneo 2018 ed CH1-9
Auditing and Assurance Principles (Far Eastern University)
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ANSWER KEY – CHAPTER 1 : Fundamentals of Assurance Services
1-1 TRUE OR FALSE
1 TRUE
2 TRUE
3 FALSE Assurance refers to the practitioner’s satisfaction
4 TRUE
5 FALSE There are five, not six, elements
6 FALSE The responsible party and the intended user need not be from separate organizations.
7 TRUE
The term practitioner is broader in scope compared to the term auditor.
8 FALSE
A professional accountant shall not agree to perform an assurance engagement which they
are not competent to carry out.
9 TRUE
10 FALSE
The intended user may be the one who engages the professional accountant.
11 FALSE
See note in number 10. The intended user is the person or class of persons for whom the
practitioner prepares the report.
12 TRUE
13 TRUE
14 TRUE
15 FALSE The criteria in an FS audit is PFRS or GAAP.
16 FALSE Appropriateness refers to quality, while sufficiency refers to quantity...
17 FALSE Evidence obtained directly by the practitioner is more reliable...
18 FALSE The practitioner expresses a conclusion that provides a level of assurance...
19 FALSE This statement describes a direct reporting assurance engagement.
20 TRUE
21 FALSE Absolute assurance is generally not attainable...
22 FALSE CPAs may perform non-assurance engagements.
23 FALSE Agreed-upon procedures lack a written assurance report or conclusion. It is a nonassurance
engagement.
24 FALSE Compliance audits are classified as assurance engagements.
25 TRUE
1-2 MULTIPLE CHOICE
1A
2C
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3 B Engagement process is an element according to the superseded PSA 100.
4 D Auditors must be alert regarding inconsistent evidence
5B
6C
7 D Subject matter may include financial or non-financial information, physical characteristics,
systems and processes, and behavior.
8A
9 D Sufficiency is an attribute of audit evidence.
10 A Efficiency and effectiveness may involve subjective factors.
11 C
12 C
13 D Compilations are non-assurance engagements.
14 B Choice C refers to Business Risk Assessment service.
15 C
16 D
17 A
18 A
19 B
20 D
ANSWER KEY – CHAPTER 2 : Audits of Financial Statements : An Introduction
2-1 TRUE OR FALSE
1 TRUE
2 FALSE ...complied with generally accepted accounting principles or PFRS
3 FALSE This refers to operational audits.
4 FALSE Preparation of financial statements is the responsibility of management.
5 TRUE
6 FALSE An audit aids in the communication of economic data because it provides reasonable
assurance that the financial statements are fairly stated.
7 FALSE The financial statements remain management’s responsibility.
8 TRUE
9 TRUE
10 TRUE
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11 FALSE The most cost-beneficial option to reduce information risk is to have the financial
statements audited.
12 FALSE An audit does not provide assurance regarding the prevention of fraud.
13 TRUE
14 FALSE The auditor of the past focused on detecting fraud, while the auditor of today focused on
expressing an opinion on the fairness of financial statements.
15 TRUE
16 FALSE The rules and regulations are set by a higher authority (such as legislation).
17 TRUE Note however, that external auditing may also refer to operational audits and compliance
audits that are performed by independent auditors.
18 TRUE
19 FALSE Internal audits are intended to serve the needs of management, not to aid the external
auditor.
20 FALSE The major beneficiary of internal audits is management.
21 FALSE
22 FALSE Auditing requires that data should be verifiable.
23 TRUE
24 TRUE
25 FALSE The main difference between auditors and accountants is the ability to gather and evaluate
evidence.
2-2 MULTIPLE CHOICE
1 D Degree of correspondence between assertions and established criteria.
2C
3D
4D
5 B This refers to the completeness assertion
6B
7B
8B
9C
10 D
11 C
12 B Choice A is wrong because independent auditing is not a branch of accounting. Choice C
refers to accounting. Choice D is incorrect because auditing cannot assure the accuracy of
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financial statements.
13 A
14 A Line functions are positions that exercise decision-making powers or responsibilities.
15 B
16 A
17 D
18 B
19 C
20 C
21 B
22 A Information risk is the likelihood that information presented is false or misleading.
23 B The best reason for audits is the conflict of interest between preparers and users of financial
statements.
24 B Choice B refers to the objective of a financial statement audit, not a reason for audits.
25 C
26 B Statement 1 is false because CPAs have as their primary responsibility the performance of
the audit function on published financial statements of publicly traded corporations.
27 B
28 C
29 D
30 B Some evidence supporting peso representations in the financial statements must be
obtained by oral or written
ANSWER KEY – CHAPTER 5 : Quality Controls
5-1 TRUE OR FALSE
1 TRUE
2 FALSE The firm’s partners assumes ultimate responsibility...
3 FALSE At least annually
4 FALSE A familiarity threat occurs...
5 TRUE Smaller firms may employ less formal...
6 TRUE
7 FALSE Consultation is a normal part of a CPA’s engagements, and applies in particular to
contentious or difficult matters.
8 TRUE
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9 FALSE An engagement quality control review is required for all audits of listed entities.
10 FALSE The engagement partner may consult with the engagement quality control reviewer...
11 FALSE ...include at least one engagement for each engagement partner over an inspection cycle.
12 FALSE Audit working papers are the property of the auditor.
13 TRUE
14 FALSE PSA 220 follows the classification of elements of quality control mentioned in PSQC No. 1
15 FALSE PSA 220 applies to audits of historical financial information, while PSQC No. 1 applies to
assurance services in general.
5-2 MULTIPLE CHOICE
1D
2B
3 C Engagement quality control review applies to engagements prior to issuance of the report,
while inspections apply to completed engagements.
4B
5 D Monitoring is the responsibility of the leaders of the firm.
6C
7D
8C
9A
10 C Rotation of senior personnel (i.e., partner) is done every five years, as mandated by the
Code of Ethics.
11 D
12 D The Code of Ethics does not require continuance of the engagement.
13 C ...coaching by more experienced staff.
14 A Choice B is incorrect because supervision includes considering the capabilities and
competence of individual members of the assurance team. Choice C is incorrect because
supervision includes addressing significant issues... Choice D is incorrect because
supervision includes identifying matters for consultation or consideration by more
experienced engagement team members.
15 B
16 A
17 B
18 A
19 D
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20 A
21 D
22 C
23 C
24 B
25 D
CHAPTER 7 : The Financial Statements Audit Process
7-1 : True or False
1 FALSE Professional competence and due care is obtained through a combination of education and
experience. It cannot be obtained through education alone.
2 TRUE
3 FALSE Materiality is one of the major factors considered in determining transactions that would be
reviewed.
4 FALSE Risk of material misstatement is greater when transactions and balances involved estimates
5 TRUE
6 TRUE
7 TRUE
8 TRUE
9 TRUE
10 FALSE The successor auditor has the duty to initiate communication with the predecessor auditor,
since the latter is bound by the duty of confidentiality.
11 TRUE
12 FALSE The primary objective of the study and evaluation of internal control is to determine the
nature, extent and timing of substantive tests to be performed.
13 TRUE
14 TRUE
15 TRUE
7-2 : Multiple Choice
1 A Please change choice A to Fairness and reliability of accounting data.
2C
3B
4A
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5A
6C
7A
8B
9B
10 A
11 C
12 C
13 D
14 C
15 A
16 B
17 A
18 D
19 D
20 B
21 C
22 D
23 D
24 C
25 C
26 A
27 A
28 D
29 C
30 D Choice A refers to Existence. Choice B refers to Completeness. Choice D refers to rights
and obligations.
CHAPTER 8 : Audit Planning
8-1 : True or False
1 FALSE Planning assists in proper assignment of work to assistants.
2 FALSE The type of opinion to be expressed is not a consideration in determining the extent of
planning.
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3 TRUE
4 TRUE
5 FALSE Client’s consent should be obtained before the successor auditor can make inquiries with
predecessor auditor and accept an engagement from a new client.
6 FALSE The objective of performing analytical procedures in planning an audit is to obtain an
understanding of the transactions and events that are reflected in the financial statements,
and determining unusual items which could indicate possible misstatements in the financial
statements.
7 FALSE Should focus on understanding the client’s business environment
8 TRUE
9 TRUE
10 FALSE An audit does not normally include audit procedures specifically designed to detect illegal
acts that have an indirect but material effect on the financial statements.
11 TRUE
12 TRUE
13 FALSE An auditor should design the written audit program so that the specific audit objectives of
the engagement are achieved.
14 TRUE
15 TRUE The client’s management is expected to have a deeper understanding of the entity and its
environment.
16 FALSE Risk assessment procedures are audit procedures designed to obtain an understanding of
the entity and its environment.
17 FALSE It is not necessary for all team members to have a comprehensive knowledge of all aspects
of the audit. What is important is that collectively, they possess the needed knowledge.
18 TRUE
19 FALSE Strategies are operational approaches by which management intends to achieve its
objectives. Objectives are the overall plans for the entity.
20 TRUE
21 TRUE
22 TRUE
23 TRUE
24 TRUE
25 TRUE
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8-2 : Multiple Choice
1D
2C
3A
4B
5A
6D
7 A Representation letters are considered at audit completion.
8 A The most costly procedure is test of balances.
9C
10 D
11 C
12 A
13 C This is already a further audit procedure (performed after planning).
14 C
15 B Note that the client under consideration is a continuing audit client.
16 B Comparison of actual results versus budgeted figures is known as variance analysis.
17 D
18 C
19 D
20 C
21 C PSA 550 covers related parties. Related parties are indicated by transactions which have
abnormal terms of trade.
22 B
23 A
24 A
25 C Client management is expected to have a deeper understanding of the entity’s operations.
The auditor is expected to obtain an understanding of the entity sufficient for him/her to
perform the audit effectively, but not so much as to be comparable to the level of
operational knowledge possessed by management.
26 B This procedure is a substantive test.
27 D
28 A
29 D Most business risks do have financial consequences.
30 B
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CHAPTER 9 : Study and Evaluation of Internal Control
9-1 : True or False
1 FALSE Obtain understanding of internal controls related to financial statements audit
2 FALSE Internal control does not address all business risks (only those risks which have been
identified by management).
3 TRUE It is the auditor’s secondary consideration - - to provide constructive suggestions.
4 TRUE Smaller entities use less formal means and simpler processes.
5 TRUE
6 TRUE
7 TRUE
8 FALSE Risk assessment is the identification and analysis of relevant risks to achievement of the
objectives, forming a basis for determining how the risks should be managed.
9 FALSE Financial statements are prepared in accordance with GAAP.
10 TRUE
11 FALSE Control activities may also be applied in a computerized environment.
12 TRUE
13 TRUE
14 TRUE Note however that monitoring is mainly performed for the purpose of determining the
adequacy and effectiveness of internal controls.
15 TRUE
16 FALSE Not all controls are relevant to the audit.
17 TRUE
18 FALSE Obtaining an understanding of internal controls involves evaluating the design and
implementation (or operation) of controls.
19 FALSE A weakness in internal control that could have a material effect on the financial statements
is known as a material weakness in internal control.
20 TRUE
21 FALSE If controls are not effective, control risk is assessed at HIGH.
22 TRUE
23 TRUE
24 FALSE Further audit procedures include tests of controls and substantive tests only.
25 TRUE
26 FALSE Tests of controls are performed only when the preliminary control risk assessment is HIGH.
27 TRUE
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28 FALSE Assessment of control risk is subject to possible revision in light of subsequent
developments during the audit.
29 TRUE
30 FALSE Lack of segregation of duties is not an inherent limitation of internal control.
9-2 : Multiple Choice
1A
2 C Choice A is incorrect because the auditor must still obtain an understanding of the
accounting system and control procedures of an entity. Choice B is incorrect because
control procedures (relevant to the audit) also require the auditor’s consideration. Choice D
is incorrect because not all control procedures are considered by the auditor (only those
relevant to the audit).
3C
4D
5 C The internal control system of a company is broader in scope compared to the accounting
system of the entity.
6B
7C
8 B Not all controls are relevant to the auditor’s risk assessment (only those which may affect
the entity’s ability to produce fairly stated financial statements).
9A
10 D Choice A refers to risk assessment process. Choice B refers to the information system.
Choice C refers to control activities.
11 C
12 B Specific authorization is required for non-routine transactions, while general authorization is
required for routine transactions.
13 D Risk arises from change. Choice D shows stability (no change).
14 D
15 B
16 B
17 A See 9-1 number 18
18 A The understanding of internal control is used to determine the control risk, not inherent risk.
19 B
20 D See number 17.
21 B
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22 A
23 B
24 B
25 D
26 A The basis for the control risk assessment is documented only when the control risk
assessment is Less than High.
27 A Choice B is incorrect because the preliminary assessment of control risk is done before tests
of controls. Choice C is incorrect because the preliminary assessment of control risk for a
financial statement assertion is normally HIGH, unless the auditor is able to identify controls
that are potentially reliable.
28 D Choice A is incorrect (see comment in number 26). Choice B is incorrect because
substantive tests cannot be eliminated, regardless of the control risk assessment. Choice C
is incorrect because evidence regarding the operation of controls in a prior period may be
considered during the current audit.
29 C Choice A is incorrect because tests of controls are used to verify effectiveness of controls
not management assertions. Choice B is incorrect because analytical procedures cannot be
used to validate control risk, and substantive tests are not used to validate control risk.
Choice D is incorrect because the assessment of control risk has already been performed
(see question).
30 D Tests of controls will not be performed since there are missing controls.
31 A Choices B, C and D are substantive tests.
32 A
33 B Choice B is evidence obtained during the performance of substantive tests.
34 C
35 C See comment for Choice B in number 29.
36 D
37 C
38 C As the acceptable level of detection risk decreases, the auditor relies on more stringent
substantive testing.
39 B
40 A
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