1
CHAPTER
1
An Introduction to
Assurance, Auditing,
and Related Services
A. ASSURANCE SERVICES
1. Which of the following statements best describes assurance
services?
A. Irrdependent professional services that are intended to
enhance the credibility of information to meet the needs
of an intended user.
B. Services designed to express an opinion on the fairness
of historical financial statements based on the results of
an audit.
C. The preparation of financial statements or the collection,
classification, and summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.
2
CPA EXAMINATION REVIEWER: AUDITING THEORY
Assurance engagements performed by professional accountants are intended to enhance the credibility of information about a subject matter by evaluating whether the
subject matter conforms in all material respects with suitable criteria, thereby improving the likelihood that the information will meet the needs of an intended user.
The level of assurance provided by the professional accountant's conclusion conveys the degree of confidence that
the intended user may place in the credibility of the subject
matter.
2. Which of the following is not an assurance service?
A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information
Services performed by professional accountants that are not
assurance engagements include the following:
1. Agreed-upon procedures
2. Compilation of financial or other information
3. Preparation of tax returns where no conclusion is
expressed, and tax consulting
4. Management consulting
5. Other advisory services
3. Which of the following professional services would be considered an assurance engagement?
A. A management consulting engagement to provide IT advice to a client.
B. An engagement to report on compliance with statutory
requirements.
C. An income tax engagement to prepare tax returns.
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An Introduction to Assuraoce, Auditing, and Related Services
3
D. A compilation of financial statements from a client's accounting records.
4. Which of the following best describes the objective of an assurance engagement?
A. Improve the company's outcomes.
B. Compare the company's information and policies with
those of other entities.
C. Enhance the credibility of information in order to improve
the likelihood that the information will meet the needs of
an intended user.
D. Assist in preparing the company's financial statements.
The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject matter
that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides
the intended user with a level of assurance about the subject
matter.
An assurance engagement is intended to enhance the credibility of information about a subject matter by evaluating
whether the subject matter conforms in all material respects
with suitable criteria, thereby improving the likelihood that
the information will meet the needs of an intended user.
5. Assurance services differ from consulting services in that
they
I. Focus on providing advice.
II. Involve monitoring of one party by another.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
CPA EXAMINATION REVIEWER: AUDITING THEORY
4
Assurance services differ from consulting services in that
they:
1. Focus on enhancing the credibility of information rather than providing advice.
2. Typically involve situations in which one party wants
to monitor another.
Consulting services are usually two-party arrangements
that focus on providing advice on how to use the information for better outcomes.
6. How many separate parties are involved in an assurance engagement?
A. 2
4
B. 3
D. 5
c.
An assurance engagement involves three (3) separate parties:
1. A practitioner,
2. A responsible party, and
3. Intended users.
7. An assuranc~ engagement should have which of the following elements?
Subject matter
Criteria
A.
Yes
No
B.
No
Yes
Yes
Yes
c.
D.
No
No
An assurance engagement should have the following elements:
1. A three-party relationship involving:
a. a professional accountant;
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An Introduction to Assurance, Auditing, and Related Services
2.
3.
4.
5.
5
b. a responsible party; and
c. intended users
A subject matter
Suitable criteria
Sufficient appropriate evidence
An assurance report
8. The Philippine Framework for Assurance Engagements
A. Contains basic principles, essential procedures, and re.,.
lated guidance for the performance of assurance engagements.
.
B. Defines and describes the elements and objectives of an
assurance engagement, and identifies engagements to
which PSAs, PSREs, and PSAEs apply.
C. Provides a frame of reference for CPAs in public practice
when performing audits, reviews, and compilations of
historical financial information.
D. Establishes standards and provides procedural requirements for the performance of assurance engagements.
The Framework defines and describes the elements and objectives of an assurance engagement and identifies engagements to which PhilipJJine Standards on Auditing (PSAs),
Philippine Standards on Review Engagements (PSREs), and
Philippine Standards on Assurance Engagements (PSAEs)
apply.
The Framework does net itself establish standards or provide procedural requirements for the performance of assurance engagements. PSAs, PSREs, and PSAEs contain basic
principles, essential procedures and related guidance, consistent with the concepts in the Framework, for the performance of assurance engagements.
6
CPA EXAMINATION REVIEWER: AUDITING THEORY
9. CPAs in public practice who perform assurance engagements
are governed by the following, except
A. Philippine Framework for Assurance Engagements
B. Code of Ethics for Professional Accountants in the PhiliP.pines
C. Philippine Standards on Related Services
D. Philippine Standards on Quality Control
The Philippine Standards on Related Services (PSRSs) are to
be applied to non-assurance engagements such as compilation and agreed-upon procedures engagements.
10. In an assurance engagement, the responsible party and the
intended users
A. Should be from different entities.
B. Should be from the same entity.
C. May be from the same entity or different entities.
D. Are both responsible for determining the nature, timing
and extent of the procedures to be performed.
According to the Philippine Framework for Assurance Engagements, the responsible party and the intended users
may be from different entities or the same e'ntity.
Answer Dis incorrect because the practitioner is responsi·
ble for the determining the nature, timing and extent of procedures to be performed.
11. The subject matter of an assurance engagement may include
A.
B.
c.
Financial
Information
Yes
Internal
Controls
Yes
Compliance
with Regulation
Yes
No
No
No
Yes
Yes
No
CHAPTER
D.
1
An lntrod1:1ction to Assurance, Auditing, and Related.Services
No
Yes
7
No
According to the Philippine Framework for Assurance En~
gagements, an assurance engagement's subject matter may
include the following:
• Financial performance or conditions, such as historical
or prospective financial position, financial performance,
and cash flows.
• Non-financial performance or conditions, for example,
performance of an entity.
• Physical characteristics, for example, capacity of a facility.
• Systems and processes, for example, an entity's internal
control or IT system.
• Behavior, such as corporate governance, compliance
with regulation, and human resource practices.
1Z. For assurance engagements regarding historical financial
information, reasonable assurance engagements are called
A. Audits
C. Compilations
B. Reviews
D. Examinations
For assurance engagements regarding historical financial information, reasonable assurance engagements are called
audits, while limited assurance engagements are called reviews.
.
13. When performing an assurance service, professional accountants use standards or benchmarks to evaluate or
measure the subject matter of an assurance engagement.
These are referred to in the Framework as
A. Criteria
C. Conditions
B. Norms
D. Gauges
CPA EXAMINATION REVIEWER: AUDITING THEO.av
8
Criteria are the standards or benchmarks used to evaluate
or measure the subject matter of an assurance engagement
These are important because they establish and inform the
intended user of the basis against which the subject matter
has been evaluated or measured in forming the conclusion.
14. The criteria against which the subject matter of the assurance engagement is to be evaluated or measured should
possess which of the following characteristics?
Relevant
Concise
Neutral
A.
Yes
No
Yes
B.
No
Yes
No
C.
Yes
No
No
D.
No
Yes
Yes
According to the Philippine Framework for Assurance Engagements, suitable criteria should have the following characteristics:
1. Relevance
• Relevant criteria contribute to conclusions that assist decision-making by the intended users.
2. Completeness
•
•
Criteria are sufficiently complete when relevant factors that could affect the conclusions in the context
of the engagement are not omitted.
Complete criteria include, where relevant, benchmarks for presentation and disclosure.
3. Reliability
•
Reliable criteria allow reasonably consistent evaluation or measurement of the subject matter including,
where relevant, presentation and disclosure, when
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An Introduction to Assurance, Auditing, and Related Services
9
used in similar circumstances by similarly qualified
practitioners.
4. Neutrality
• Neutral criteria contribute to conclusions that are
free from bias.
5. Understandability
• Understandable criteria contribute to conclusions
that are clear, comprehensive, and not subject to significantly different interpretations.
15. Relevant criteria contribute to conclusions that are
A. Free from bias.
B. Clear and comprehensive.
C. Subject to different interpretations.
iD. Useful for decision making.
16. Criteria that are embodied in laws or regulations, or issued
by authorized or recognized bodies-of experts that follow a
transparent due process are called
A. Suitable criteria
B. Established criteria
C. Specifically developed criteria
D. General criteria
The Framework states that criteria can either be established
or specifically developed. Established criteria are those
that are embodied in laws or regulations, or issued by authorized or recognized bodies. Specifically developed criteria are those designed for the purpose of the engagement.
17. In an assurance engagement, the perso·n or persons, either
as individuals or representatives of an entity, responsible for
the subject matter is the
A. Intended user -
10
CPA EXAMINATION REVIEWER: AUDITING THEORY
B. Responsible party
C. Professional accountant
D. Client
The responsible party is the one responsible for the subject matter of an assurance engagement. For example, an
entity's management is responsible for the preparation and
presentation of financial statements or the establishment
and implementation of internal control.
The responsible party may or may not be the party who engages the professional accountant.
18. In an assurance engagement, the person or class of persons
for whom the professional accountant prepares the report
for a specific use or purpose is the
A. Intended user
B. Responsible party
C. Management
D. Client
The intended user is the person or class of persons for
whom the professional accountant prepares the report for a
specific use or purpose.
19. In an assurance engagement, the outcome of the evaluation
or measurement of a subject matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
The term "subject matter information" is used in the
Framework for Assurance Engagements to mean the outcome of the evaluation or measurement of a subject matter.
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11
According to the Framework, it is the subject matter information about which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report.
20. In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form
of an assertion by the responsible party that is ma~e available to intended users. These engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements
21. The following are characteristics of "direct reporting" assurance engagements, except
A. The subject matter information is in the form of an assertion by the responsible party that is made available to
the intended users.
B. The subject matter information is provided to the intended users in the assurance report.
C. The practitioner either directly performs the evaluatiof!
or measurement of the subject .matter or obtains a representation from the responsible party that has performed the evaluation or measurement.
D. The representation of the responsible party that has performed the evaluation or measurement of the subject
matter is not available to the intended users.
22. What type of assurance engagement is involved when the
practitioner expresses a positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assprance engagement
12
CPA EXAMINATION REVIEWER: AUDITING THEORY
D. Absolute assurance engagement
According to the Framework, the objective of a reasonable
assurance engagement is a reduction in assurance engagemen t risk to a n acceptably low level in the c ircumsta nces of th e e ngagement as th e basis for a positive forn1
of e xpressi o n of the practiti o ne r's conclus ion.
23. What type of assurance engagement is involved when the
practitioner expresses a negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
According to the Fra mew o r k, the objecti ve of a limited as;:i re d uction in assura nce engageme nt ri s k lo a level that is acceptable in th e circumstances
of t he engage ment, but w he re the r is k is greate r tha n fo r a
re <lsona ble assura nce e ngagem e nt, as t he b asis fo r a negative fo rm of expression of the pra ctitioner's conclusion.
surance engagement is
24. A practitioner's assurance report contains the following conclusion :
'·Based on our work described in thi s report, 11othing has come to
our attention that caust!s us to believe that internal contro l is not effecti ve, in all material respects, based on ABC criteria.'·
What type of assurance engagement was performed?
A. Limited assurance engagement
B. Reasonable assurance engagement
C. Negative assurance engagement
D. Positive assurance engagement
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13
25. In assertion-based assurance engagements, the evaluation
or measurement of the subject matter against criteria is performed by the
A. Intended users
C. Practitioner
B. Responsible party
D. AASC
In assertion-based assurance engagements, th~ evaluation
or meas urem ent of the subject matter against criteria is performed by the responsible party a nd the subj e ct matter information (outcome) is in the form of an assertion by the responsible party that is made available to the intended users.
26. The following statements relate to the three parties involved
in an assurance engagement. Whic;h is correct?
A. The responsible party and the intended users should be
from different entities.
B. A practitioner should decline
proposed assurance engagement when the subject matter requires· specialized
skills and knowledge beyond those ordinarily possessed
by the practitioner.
C. A responsible ptirty is the person who is responsible for
t~e subject matter or the subject matter information.
D. The responsible party, not the intended users, determines the nature of the procedures to he performed.
a
According ~o the Framework, the res ponsible party is the
p'erson (or persons) wlto:
• rn a direct reporting engagement, is responsible for
the subject matter; or
• In an assertion-based engagement, is resl'Jonsible for
the subject matter information (the assertion), and
may be responsible for the subject matter.
14
CPA EXAMINATION REVIEWER: AUDITING THEORY
27. A proposed assurance engagement can be accepted when
the practitioner's preliminary knowledge about the engagement circumstances indicates that relevant ethical requirements will be satisfied and
I. The subject matter of the engagement is appropriate.
II. The criteria to be used are suitable and are available to
the intended users.
III. The practitioner has access to sufficient appropriate evidence to support the conclusion.
IV. The conclusion is to be contained in a written report.
V. There is a rational purpose for the engagement.
A. I, II,
B. I, II,
C. I, II,
D. I, II,
and III only
IV, and V only
III, and IV only
III, IV, and V
A proposed assurance engagement can be accepted whei:t
the practitioner's preliminary knowledge of the engagement
circumstances indica tes that relevant ethical requirements
such as independence and professional competence will be
met and the engagement exhibits all of the characteristics
described in statements I to V.
28. A practitioner should accept an assurance engagement only
if
A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended.
users.
C. The practitioner's conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the practitioner.
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An Introduction to Assurance, Auditing, and Related Services
15
29. Which of the following statements is true concerning evidence in an assurance engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its reliability and persuasiveness.
C. The reliability of evidence is influenced not by its nature
but by its source.
D. Obtaining more evidence may compensate for its poor
quality.
Sufficiency is the measure of the quantity of evid'ence. The
quantity of evidence needed is affected by the quality of
such evidence (the higher the quality, the less may be required). However, merely obtaining more evidence may not
compensate for its poor quality.
Appropriateness is the measure of the quality of evidence,
that is, its relevance and its reliability. The reliability of
evidence is influenced by its source and by its nature.
30. Assurance engagement risk is the risk
A. That the practitioner expresses an inappropriate conclusion when the subject matter information is materidlly
misstated.
B. Of expressing an inappropriate conclusion when the subject matter information iG not materially misstated.
C. Through loss from litigation, adverse publicity, or other
events arising in connection with a subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or
not materially misstated.
31. The following are components of assurance engagement
risk, except
16
CPA EXAMINATION REVIEWER: AUDITING THEORY
C. Detection risk
D. Business risk
A. Inherent risk
B. Control risk
Assurance engagement
c;;/< has
the following components:
1. The risk that the subject matter information is materially misstated. This consists of:
a. Inherent risk - the susceptibility of the subject matter information to a material misstatement, assuming that there are no related controls; a nd
b. Control risk - the risk tha t a r!lisstatement. that
could occur will not be prevented, or detected and
corrected, on a timely basis by related internal controls.
2. Detection risk - the risk th at the practitioner will not
detect a material misstatement that exists.
32. An unqualified conclusion is not appropriate for either reasonable or limited assurance engagement when
A. Circumstances prevent the practitioner from obtaining
evid2nce required to reduce assurance engagement risk
to the appropriate level.
·
B. The responsible party or the engaging party imposes a
restriction that prevents the practitioner from obtaining
evidence required to reduce assurance engagement risk
to the appropriate level.
C. Both A and H.
D. Neither A nor B.
According to the Framework, an unqualified conclusion is
not appropriate for either type of assurance engagement in
the case of a material limitation on the scope of the practitioner's work, whether imposed by the engagement circumstances or the engaging party or the responsible party.
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17
· 33. The following statements relate to the performance of a.n
assurance engagement other than an audit or review of historical financial information covered by PSAs and PSREs.
Which is incorrect?
A. Those persons who are to p.erform the engagement
should collectively possess the necessary professional
competence.
8. The practitioner is precluded from using the work of persons from other professional disciplines.
C. The practitioner should consider materi.ality and assurance engagement risk when planning and performing an
. assurance engagement.
D. The assurance report should be in writing and should
contain a clear expression of the practitioner's conclusion
about the subject matter information.
The subject matter and related criteria of some assurance
engagements may include aspects requiring specialized
knowledge and skills in the accumulation and evaluation of
evidence. The standards allow a practitioner to eng~ge persons from other professional disciplines, referred to as ex-
perts.
34. Reducing assurance engagement risk to zero is very rarely
attainable or cost beneficial ·as a result of the following factors, except
A. The use of selective testing.
8. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive.
C. The practitioner may not have the required assurance
knowledge and skills to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence.
CPA EXAMINATION REVIEWER: AUDITING THEORY
18
35. After accepting an assurance engagement, a practitioner is
not allowed to change the engagement to a non-assurance
engagement, or from a reasonable assurance engagement
to a limited assurance engagement, except when there is
reasonable justification for the change. Which of the following ordinarily will justify a request for a change in the engagement?
I. A change in circumstances that affects the intended users' requirements.
II. A misunderstanding concerning the nature of the engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
B. AUDITING AND RELATED SERVICES
36. Which of the following standards are to be applied, as appropriate, in the audit of historical financial information?
A. PSREs
C. PSRSs
B. PSAEs
D. PSAs
The Philippine Standar~s on Auditing (PSAs) are to be applied, as appropriate, in the audit of historical financial information.
37. Which of the following standards are to be applied to compilation engagements, engagements to apply agreed-upon
procedures to information, and other related services engagements as specified by the AASC?
A. PSRSs
C. PSAEs
B. PSAs
D. PSREs
The Philippine Standards on Related Services (PSRSs) are to
be applied to compilation engagements, engagements to ap-
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19
ply agreed-upon procedures to information, and other related services engagements as specif~ed by the AASC.
38. The Philippine Standards on Review Engagements (PSREs)
are to be applied in
A. The audit of historical financial information.
B. Assurance engagements dealing with subject matters
other than historical financial information.
C. The review of historical financial information.
D. The review of both historical and prospective financial information.
39. PSRE 2400 (Engagements to Review Financial St~tements),
as amended by the AASC in February 2008, applies to
A. Reviews of any historical financial information .of an audit
client.
B. Reviews of any historical financial information by a practitioner other than the entity's auditor.
C. Reviews of historical financial or other information by a
practitioner other than the entity's auditor.
D. Rev~ews of historical financial or other information of an
audit client.
PSRE 2400 (Engagements to Review Financial Statements)
and PSRE 2410 (Review of Interim Financial Information
Performed by the Independent Auditor of the Entity) were
amended by the AASC in February 2008. The objective of
the amendments made is to clarify to which engagements
each of the standards is to be applied.
The effect of the amendments is sumfllarized as follows:
• PSRE 2400 applies to reviews of historical financial
information by a practitioner other than the entity's .
auditor.
20
CPA t;XAMINATION REVIEWER: AUDITING THEORY
•
•
PSRE 2410 applies to reviews of historical financial
information by the entity's auditor.
Reviews of other historical information fall under
PSAE 3000 (Revised), Assurance Engagements other
than Audits or Reviews of Hb torical Financial Information.
40. The Philippine Standards on Assurance Engagements
(PSAEs) are to be applied in
A. Assurance engagements dealing with subject matters
other than historical financial information.
B. Compilation engagements and agreements to apply
agreed-upon procedures to information.
C. The audit or review of historical financial information.
D. Assurance engagements dealing with historical fir.ancial
information.
41. The Philippine Standards on Quality Control (PSQCs) are to
be applied to
A. Assurance engagements only.
B. Review engagements only.
C. Compilation and review engagements only.
D. All services that fall under the AASC's engagement
standards.
PSAs, PSREs, PSAEs, and PSRSs are collectively referred to
as the AASC's Engagement Standards. PSQCs are to be applied for all services under these Engagement Standards.
42. These statements are issued by the MSC to provide interpretive guidance and practical assistance to auditors in the
implementation of PSAs and to promote good practice.
A. PREPSs
C. PAEPs
B. PAPSs
D. PRSPSs
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1 An Introduction to Assurance, Auditing, and Related Services
21
The AASC issues Prartice Statements to provide fo terpretive
guidance and practical assistance to practitioners in implementing the Engagement Standards and to promote good
practice. The following are the AASC engagement standards
and the related Practice.Statements.
Engagement Standards
Practice Statements
1. Philippine Standards on Auditing (PSAs)
Philipine Auditing Practice
Sfatements (PAPSs}
2. Philippine Standards on Review
Philippine Review Engagement
Practice Statements (PREPSs)
Engagements (PSREs)
3. Philippine Standards on Assurance
Engagements (PAEPSs)
Philippine Assurance::
EngagemP.nt Practice
Statements (PAEPSs)
4. Philippine Standards on Related
Services (PSRSs)
Philippine Related Services
Practice Stal'. nents (PRSPSs)
43. The auditor's satisfaction as to the reliability of an assertion
being made by one party for use ,by another party is called
A. Opinion
C. Examination
B. Assurance
D. Verification
The term "assurance" means the practitioner's satisfaction
as to the reliability of an assertion being made by one party
for use by another party. The level of assurance that may b.e
provided depends on the procedures performed and the evidence collected by the practitioner.
44. What level of assurance is provided by the auditor in an audit engagement?
A. Absolute
B. High, but not absolute
C. Moderate
D. No assurance
22
CPA EXAMINATION REVIEWER: AUDITING THEORY
In an audit engagement, the auditor provides a high, but not
absolute level of assurance that the financial statements are
free of material misstatement. This is expressed positively
in the audit report as reasonable assurance.
45. What level of assurance is provided by the practitioner in a
review engagement?
A. No assurance
C. Reasonable
B. High, but not absolute
D. Moderate
In a review engagement, the practitioner provides a moderate level of assurance that the information subject to review
is free of material misstatement. This is expressed in the
form of a negative (also called limited) assurance.
46. For the purpose of expressing negative assurance in the review report, the practitioner should obtain sufficient appropriate evidence primarily through
A. Inquiry and confirmation
B. Analytical procedures and substantive tests of details of
transactions and account balances
C. Confirmation and tests of controls
D. Inquiry and analytical procedures
47. In reviewing a company's financial statements, a practitioner
is required to
A. Send bank confirmations.
B. Obtain knowledge of the client's industry.
C. Obtain a signed engagement letter from the client.
D. Observe client's physical inventory.
48. In a review engagement, the practiti0ner performs which of
the following?
CHAPTER
A.
B.
c.
D.
1 An Introduction to Assurance, Auditing, and Related Se:vices
Obtain an understanding
of internal control
Yes
Yes
No
No
Tests of
controls
Yes
No
Yes
No
23
Tests of
transactions
No
Yes
Yes
No
49. A practitioner's review of an entity's financial statements
does not provide assurance that he/she will become aware
of all significant matters that would be disclosed in an audit.
However, if the practitioner has become aware that information coming to his/her attention may be materially misstated, the practitioner should
.
A. Carry out additional or more extensive procedures as are
necessary to achieve limited assurance.
B. Withdraw immediately from the engagement.
C. Perform a complete audit and issue a modified auditor's
report.
D. Downgrade the engagement to a compilation and issue
the appropriate report.
According to PSRE 2400, if the practitioner has reason to believe that the information subject to review may be materially misstated, he/she should carry ou.t additional or more
exLensive procedures as are necessary to be able to express
negative assurance or to confirm that a modified report is
required.
50. The following statements relate to a review of financial
statements. Which is incorrect?
A. The objective of a review of financial statements is to
enable a practitioner to state whether anything has come
to the practitioner's attention that causes the practitioner
to believe that the financial statements are not prepared
24
CPA EXAMINATION REVIEWER: AUDITING THEORY
in accordance with an identified financial reporting
framework.
B. A review comprise~ inquiry and analytical procedures
which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party.
C. A review ordinarily involves an assessment of accounting
and internal control systems.
D. The level of assurance provided in a review report· is less
than that given in an audit report.
Whil e a review invo lves the application of audit skills and
techniq ues and the gathe ring of evidence, it does not ordinaril y invo lve rin assessment of acco unting and internal control systems, tests of records and of responses to inquiries
by obtai ning co 1-robo rating evid ence through inspection,
observation, confirmation, and computation which are pro·cedure·- ordina rily performed during an audit.
51. The following statements relate to a review of interim financial information performed by the entity's independent auditor. Which is incorrect?
A. Similar to a financial statement audit, a review of interim
financial information is designed 'to obtain reasonable assurance that the interim financial information is free from
q1aterial misstatement.
B. A review of interim financial information does not provide
a basis for expressing an opinion whether the financial
information is presented fairly, in all material respects, in
accordance wilh an applicable financial reporting framewo~.
·
C. In a review of inlerim financial information, the auditor
should have an understanding of the entity and its environment, including its internal control.
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25
D. A review of interim financial information may bring significant matters affecting the interim financial information to the· auditor's attention, but it does not provide
all of the evidence that would be required in an audit.
In contrast to an audit, a review of interim financial information is not designed to obtain reasonable assurance that
the interim financial information is free from materia.l misstatement.
The objective of an engagement to review an entity's inter··
im financial inform ation is to en able the auditor to express a
conclusion whether, on the basis of the review, anythjng has
come to the auditor's attention that causes the auditor to believe that the interim financial information is not prepared,
in all material respects, in accordance with an applicable financial reporting framework.
52. In a compilation engagement, the accountant is engaged to
use accounting expertise as opposed to auditing expertise to
collect, classify, and summari;ze financial information. What
type of assurance is provided by the accountant when
he/she performs this engagement?
A. Positive assurance
B. Negative assurance
C. No assurance
D. Limited assurance
A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information.
26
CPA EXAMINATION REVIEWER: AUDITING THEORY
The procedures employed are not designed and do not enable the accountant to express any assurance on the financial
information.
However, the accountant's involveme nt provides some benefit to users of compiled financial information ·because the
work has been performed with due professional skill and
care.
53. Which of the following statements concerning compilation
engagement is incorrect?
A. In a compilation engagement, the accountant is engaged
to use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information.
B. The procedures employed in a compilation engagement
enable the accountant to express a moderate level of assurance on the compiled financial information.
C. Users of the compiled financial information derive some
benefit as a result .of the accountant's involvement because the service has been performed with due professional skill and care.
D. A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable form
without a requirement to test the assertions underlying
that information.
The procedures employed in a compilation engagement are
not designed and do not enable the accountant to express
any assurance on the financial information.
54. When performing a compilation engagement, the accountant
is required to
A. Assess· internal controls.
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An Introduction to Assurance, Auditing, and Related Services
27
B. Make inquiries of management to assess the reliability
and completeness of the information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.
According to PSRS 4410 (Engagements to Compile Financial
Information), "The accountant should obtain a general
knowledge of the business and operations of the entity and
should be familiar with the accounting principles and practices of the industry in which the entity operates and with
the form and content of the financial information that is appropriate in the circumstances."
The standard 'further provides that, "The accountant ordinarily obtains knowledge of these matters through experience with the entity or inquiry of the entity's personnel."
PSRS 4410, par. 13, provides that the accountant is not ordinarily required to:
a) make any inquiries of management to assess the reliability and.completeness of the information provided;
b) assess internal controls;
c) verify any matters; or
d) verify any explanations.
55. Each page of the financial information compiled by the ac ..
countant should include the following reference, except
A. "Unaudited"
B. "Compiled without Audit or Review"
C. "Refer to Compilation Report"
D. "Compiled, Negative Assurance Expressed"
28
CPA EXAMINATION REVIEWER: AUDITING THEORY
According to PSRS 4410 (Engagements to Compile Financial
Information), the financial information compiled by the accountant should contain a reference such as:
• Unaudited;
• Compiled without Audit or Review; or
• Refer to Compilation Report
on each page of the financial information or on the front of
the complete set of financial statements.
56. An accountant who performs a compilation engagement
A. Should read the compiled information and consider
whether it appears to be appropriate in form and free
from obvious material misstatements.
B. Should use his/her auditing expertise in testing th~ assertions underlying the compiled financial information.
C. Include in his/her report a listing of the specific procedures performed.
D. Need not obtain an ackr:iowledgment from management
of its responsibility for the appropriate presentation of
the financial information.
57. What assurance is provided by the auditor in an agreedupon procedures engagement?
A. Reasonable
C. Moder.ate
B; Absolute
D. No assurance
In an agreed-upon procedures engagement, the auditor
simply provides a report of the factual findings and expresses no assurance in his/her report. U$ers of the report
make an assessment of the procedures (lnd findings reported by the auditor and draw their own/Conclusions from the
auditor's work.
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58. In an engagement to perform agreed-upon procedures, an
auditor is engaged to
A. Carry out those procedures of an audit nature to which
the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.
B. Use accounting expertise as opposed to auditing ~xper­
tise to collect, classify, and summarize financial information.
C. Provide a moderate level of assurance that the information is free of material misstatement.
D. ·Provide a high, but not absolute, level of assurance that
the information is free of material misstatement.
In an engagement to perform agreed-upon procedures, an
auditor is engaged to carry out those procedures of an audit
nature to which the auditor and the entity and .any appropriate third parties have agreed and to report on factual
find.ings.
The report contains no assurance and is restricted to those
parties that have agreed to the procedures to be performed,
since others, unaware of the reasons for the procedures,
may misinterpret the results. Users of the report must form
their own conclusions from the auditor's work.
59. A report may be based upon applying agreed-upon procedures to sp~cified elements, accounts, or items of a financial
statemerit~ The users of the report should participate in establishi'ng the procedures to be performed. If the auditor
cannot discuss the procedures with all the parties who will
r£:ceive the report, he/she may
I. Discuss the procedures to be applied with appropriate
representatives of the parties involved.
·
30
CPA EXAMINATION REVIEWER: AUDITING THEORY
II. Review relevant correspondence from the parties involved.
·
III. Distribute a draft of the type of report that will be issued to the parties involved.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
PSRS 4400 (Engagements on Agreed-upon Procedures)
states, "In certain circumstances, for example, when the
procedures have been agreed to betvveen the regulator, industry representatives and representatives of the accounting profession, the auditor may not be able to discuss the
procedures with all the parties who wilt receive the report.
In such cases, the auditor may consider, for example, discussing the procedures to be applied with appropriate rep:
resentatives of the parties involved, reviewing relevant correspondence from such parties or sending them a draft of
the type of report that will be issued."
60. An auditor may accept an engagement to perform specified
procedures on the specific subject matter of specified elements, accounts, or items of a financial sta~ement if
A: The report does not list the procedures performed.
B. The financial statements are prepared in accordance with
a special purpose framework.
C. Use of the report is restricted.
D. The auditor is also the entity's continuing auditor.
PSRS 4400 states that the report is restricted to those partiP.s .that have agreed to the procedures to be performed ·
since others, unaware of the r~asons for the procedures,
may misinterpret the results.
CH,C.,PTER
1 An Introduction to Assurance, Auditing, and Related Services
31
Answer A is incorrect because the report should include a
listing of the specific procedur~s performed.
Answer B is incorrect because the financial statements need
not be prepared in accordance with a special purpose
framework.
Answer D is incorrect because the auditor need not. be the
entity's continuing auditor.
61. Reports on agreed-upon procedures are intended to be distributed
A. To only the involved parties, who are aware of the reasons for the procedures.
B. Only to the stockholders of the entity.
C. To any party to whom the client wishes.
D. Only to the entity's management.
62. An engagement to perform agreed-upon procedures may ·
involve the auditor in performing certain procedures concerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.
A. I and II only
B. II and III only
C. I and III only
D. !, II, and III
63. The report on an agreed-upon procedures engagement
should contain
A. Identification of the purpose for which the agreed-upon
procedures were performed.
B. An expression of positive assurance based on the specific
procedures performed.
c. A statement that the auditor is independent of. the entity.
32
CPA EXAM/Nkf/ON REVIEWER: AUDITING.THEORY
D. A general description of the procedures performed.
According to PSRS 4400, the report on an agreed-upon procedures engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient detail to enable the users of the report to understand the nature and extent of the work performed.
Answer B is incorrect because the report should include a
statement that the procedures performed do not constitute
either an audit or a review and, as such, no assurance is
expressed.
Answer C is incorrect because the report should contain a
statement that the auditor is not independent of the entity if
such is the case.
Answer D is incorrect because the report should include a
listing of the specific procedures performed.
64. Which of the following engagements does not require compliance with independence requirements?
A. Compilation of financial information.
B. Review of financial statements.
C. Examination of prospective financial information.
D. Audit of financial statements.
Independence is not a requirement for compilation and
agreed-upon· procedures engagements. However, where the
accountant or auditor is not independent, a statement to
that effect would be made in the report.
65. Which of the following services, if any, may a practitioner
who is not independent provide?
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1 An Introduction to Assurance, Auditing, and Related Services
33
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures b1;1t not compilations.
66. A practitioner is associated with financial information when
I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a
professio~al connection.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
A practitioner is associated with financial information when
the practitioner attaches a report to that information or
consents to the use of his/her name in a professional connection. If the practitioner is not associated in this manner,
third parties can assume no responsibility of the practitioner.
C. DIFFERENT TYPES OF AUDITS
FINANCIAL STATEMENT/INDEPENDENT AUDITING
67. The .purpose of ari audit of financial statements is to
A. Relieve management or those charged with governance
of the responsibility for the preparation and presentatie>n
of the financial statem·ents.
B. Obtain an absolute level of assurance that the financial
statements as a whole are free from material misstatement.
C. Enhance the degree of confidence of intended users in
the financial statements.
34
CPA EXAMINATION REVIEWER: AUDITING THEORY
D. Assure the future viability of the entity by expressing an
opinion on the entity's financial statements.
An audit is conducted primarily to enhance the degree of
confidence of intended users in the financial statements.
·This purpose is achieved by the auditor's expression of an
opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable financial reporting framework.
Answer A is incorrect because the financial statements subject to the audit are those of the entity, prepared and presented by its management, with oversight from those
charged with governance.
Answer B is incorrect because the PSAs require the auditor
to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
whether caused by fraud or error. Reasonable assurance is
a high level of assurance, but not an absolute level of assurance.
Answer D is incorrect because the. auditor's opinion on the
finan cial statements does not assure the future viability of
the entity.
68. The auditor is required to comply with all PSAs rel~vant to
the audit of ah entity's financial statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only
B. II only
C. Either I or II
D. Both I and II
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A PSA is relevant when it is in effect and the circumstances
addressed by the· PSA exist.
69. The overall objectives of the auditor in conducting an audit
of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or
error.
A. I and II only
B. II and IV only
C. I, II, and III only
D. I, II, III, and IV
The overall objectives of the auditor in conducting an audit
of financial statements are:
1. To obtain reasonable assurance about whether the finan- ·
cial statements as a whole are free from material misstatement, whether cause9 by fraud or error, to enable
the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
2. To report on the financial statements, and cbmmunicate
as required by the PSAs, in accordance with the auditor's
findings.
70. The auditor is required to obtain reasonable assurance about
whether the fioancial statements are free of material misstatement, whether due to fraud or error. In all cases when
36
CPA EXAMINATION REVIEWER: AUDITING THEORY
reasoi:iable assurance cannot be obtained, the auditor's report should contain a/an
A. Unmodified opinion
B. Qualified or adverse opinion
C. Qualified or disclaimer of opinion
D. Disclaimer of opinion
The standard provides that in all cases when reasonable assurance cannot be obtained and a qualified opinion is insufficient in the circumstances for purposes of reporting to the
intended users of the financial statements, the auditor
should disclaim an opinion or withdraw from the engagement, where withdrawal is legally permitted.
71. An audit in accordance with PSAs is performed on the premise that management and, where appropriate, those charged
with governance have responsibilities that are fundamental
to the conduct of the audit. Which of the following is not
one of those responsibilities?
A. To comply with all relevant PSAs in the preparation and
presentation of the entity's financial statements.
B. To provide the auditor with all information, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements.
C. To provide unrestricted access to those within ~he entity
from whom the auditor determines it necessary to obtain
audit evidence.
D. To design, implement, and maintain internal control relevant to the preparation and presentation of financial
statements that are free from material misstatement,
whether caused by fraud or error.
Management, and where appropriate, those charged with
governance, have responsibility for the preparation and
CHAPTER
1 An Introduction to Assurance, Auditing, and Related Services
37
presentation of the financial statements in accordance with
the applicable financial reporting framework. The auditor
has the responsibility to conduct the audit . of financial
s.tatements in accordance with relevant PSAs.
72. The auditor is required to maintain professional skepticism
throughout the audit. Which of the following statements
concerning professional skepticism is false?
A. A belief that management and those charged with governance are honest and have integrity' relieves the auditor of the need to maintain professional skepticism.
B. Maintaining professional skepticism throughout the audit
reduces the risk of using inappropriate assumptions in
determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
C. Professional skepticism . is necessary to the critical assessment of audit evidence.
D. Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained.
The auditor is required to plan and perform the audit with
professional skepticism. As defined in the standard, professional skepticism is an attitude that includes a questioning
mind, being alert to co"nditions ·.vhich may indicate possible
misstatement due to error or fraud, and a critical assessment of audit evidence.
According to the standard, maintaining professional skepticism red.uces the risks of:
• Overlooking unusual circumstances.
• Over generalizing when drawing conclusions from audit
obsP.rvations.
38
CPA EXAMINATION REVIEWER: AUDITING THEORY
• Using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the results thereof.
Although the a uditor cannot be expected to disregard past
experience of the honesty and integrity of the entity's managem ent a nd those charged with governance, a belief that
they are hon es t and have integrity does not relieve the auditor to maintain professional skepticism in conducting the
audit.
73. Professional judgment
A. Should be exercised in planning and performing an audit
of financial statements but need not be documented.
B. Can be used as the justification for the decisions made
by t he auditor that are not supported by the facts and
circumstances of the engagement.
C. Is necessary in the evaluation of management's judgments in applying the entity's applicable financial report..
ing· framework.
D. Is not used in making decisions about materiality and
a_u dit risk.
Accord ing to the sta ndard, professional judgment is necessary to the proper conduct of an audit. The auditor exercise professional judgment in making decisions about:
• Materiality and audit risk.
• The nature, timing, and extent of audit procedures to be
performed in gathering audit evidence.
• Evaluating whether sufficient appropriate audit evidence
has been obtained.
• Evaluating ma1tagement's judgments in applying the entity's applicable fin ancial reporting framework.
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39
• Conclusions to be drawn based on the audit evidence
gathered.
The auditor is required to document the exercise of professional judgment. The documentation should enable an experienced auditor, having no previous connection with the
audit, to understand the significant' professional judgments
made in reaching conclusions on significant matters that
arise during the audit.
Professional judgment is not to he used as the justification
for decisions that are not otherwise supported by the facts
and circumstances of the engagem·e nt or sufficient appropriate audit evidence.
74. The primary reason for a financial statement audit by an independent CPA is to
A. Provide increased assurance to users as to the fairness
of the financial statements.
·
B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered.
C. Satisfy governmental regulatory requirements.
D. Relieve management of responsibility for the financial
statements.
The objective of a financial statement audit is to express an
opinion as to whether an entity's financial statements present fairly, in all material respects, its financial position, performance, and cash flows in accordance with an applicable
fi~ancial reporting framework.
75. Independent auditing can best be describea as
A. A branch of accounting.
40
CPA EXAMINATION REVIEWER: AUDITING THEORY
B. A professional activity that measures and communicates
financial and business data.
C. A discipline which attests to the · results of accounting
and other functional operations and data.
D. A regulatory function that prevents the issuance of improper financial information.
The objective of an independent audit is to attest to (express
an opinion on) accounting information.
76. Which of the following statements is correct concerning an
auditor's responsibilities regarding financial statements?
A. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's.
opinion.
B. The fair presentation of audited financial statements in
accordance with an applicable financial reporting framework is an implicit part of the auditor's responsibilities.
C. Making suggestions that are adopted about the form and
content of an entity's financial statements impairs an auditor's independence.
D. The auditor's report should provide an assurance as to
the future viability of the entity.
The auditor's responsibility for the financial statements is
confined to the expression of his/her opinion on them.
77. A financial statement audit aids in the communication of
economic data because the audit
A. Assures the readers of final")cial statements that any
fraudulent activity has been corrected.
B. Guarantees that financial data are fairly presented.
C. Lends credibility to the financial statements.
D. Confirms the accuracy of management's financial representations.
CHAPTE_R
1 An Introduction to Assurance, Auditing, and Related Services
4\
In a financial st_a tement audit, the auditor expresses an opinion on the fairness of the audited financial statements. The
auditor's opinion helps establish the credibility of the financial statements.
78: Which of the following best describes the reason why an independent auditor reports on financial statements?
A. A poorly designed internal control system may be in ex_
istence.
B. Different interests may exist between the company preparing· the statements and the persons using the statements.
C. A misstatement of account balances may exist and is
generally corrected as the result of the independent auditor's work.
D. A management fraud may exist and it is more likely to be
detected by independent auditors.
In making decisions, external financial statement users are
interested in financial statements that present as closely as
possible the true financial position, performance, and cash
flows of the company.
Management, knowing that its stewardship function is to be
·evaluated on the basis 1of the financial statements, may have
incentives to resort tq fraudulent financial reporting. Thus,
. a possible conflict of interest may be assumed between
management and users of financial statements.
I
The a~ditor's role is.Jto lend credibility to the audited financial statements by expressing an opinion on the fairness of
presentation of the financic1l position, performance, and
cash flows ofthe company.
42
CPA EXAMINATION REVIEWER: AUDITING THEORY
79. Which of the following can be significantly affected by a financial statement audit?
A. Business risk
B. Information risk
C. Inherent risk
D. The risk-free interest rate
80. The primary responsibility for the adequacy of disclosure in
the financial statements rests with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Securities and Exchange Commission.
D. Auditor in charge of the field work.
Management is responsible for the fairness of the representations made through financial statements. The auditor's
responsibility is confined to the expression of opinion on the
fairness of management representations.
81. Which of the following elements does not relate to audit
quality?
A. Audit competence
B. Audit fees
C. Independence
D. Due diligence
Audit quality is an overall concept that encompasses adherence to independence, auditor competence, due diligence,
and quality control processes.
INTERNAL/OPERATIONAL AUDITING
82. The following statements relate to internal auditing? Which
is incorrect?
CHAPTER
1
An Introduction to AssuraAce, Auditing, and Related Services
43
A. Internal auditing is carried out within an entity by employees of the entity or by personnel contracted for the
purpose.
B. Internal auditing has become a function that evaluates
and improves an organization's risk management, control
.and governance processes to add value to the organization.
C. The internal auditor's judgments are subordinated to
those of management.
D. Internal au~iting has evolved into a highly professional
activity that extends beyond the appraisal of the efficiency and effectiveness of an entity's oper~tions.
83. Which of the following statements is an incorrect description of the role of internal auditors?
A. Internal auditors should review the means of minimizing .
risks and assist management processes.
_B. Internal auditors should assess risks within the business
operations and those from outside the business.
C. Internal auditors should appraise the economy and efficiency with which resources are employed.
D. Internal auditors should have authority and responsibility
for the activities they audit.
84. Which of the following statements is not true in respect of
the internal auditor?
·
A. The scope of audits performed by the internal auditor is
primarily in respect of financial report audits.
B. An internal auditor does not require a license to. practice.
C. Internal auditors are usually employed by companies and
government units.
D. Primary responsibility of the internal auditor is to the
-board of directors.
44
CPA EXAMINATION REVIEWER: AUDITING THEORY
85. . Which of the following groups could be involved in an operational audit?
Government
Internal
Auditors
Auditors
CPA Firms
Yes
Yes
A.
Yes
No
B.
No
Yes
Yes
c.
No
No
No
D.
Yes
Yes
' an operational au86. Which is not one of the three phases in
dit?
A.
B.
c.
D.
Evidence accumulation and evaluation
Planning
Reporting and follow-up
Training and supervising employees
87. In performing an operational audit, the auditor primarily relies on which of the following procedures?
A. Physical inspection
B. Analytical procedures
C. Inquiry and observation
D. Tracing and vouching
88. The term "efficiency" in performance auditing refers to
A. Using resources to maximize output for a given input, or
to minimize input for any given quantity and quality of
output.
B. The achievement of intended results of operations, programs or activities.
C. The achievement of objectives within a specified time
frame.
D. The acquisition of resources at appropriate times and
within a specified time frame.
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45
89. Before an effectiveness audit can be performed, there must
be
A. Specific criteria developed to define effectiveness.
B. A compliance audit performed by a government auditor.
C. A review performed by either an independent or internal
auditor.
D. A financial statement audit by an independent auditor.
90. Which of the following activities would generally account for
a significant proportion of an internal auditor's time?
A. Checking the company is complying ·with all of its rules
and regulations of operation.
B. Verifying all invoices before payment is made.
C. Ensuring-the company is operating within budget.
D. Evaluating the effectiveness and efficiency of .all phases
of an entity's operations.
91. Which of the following is a typical objective of an operational
audit?
A. To determine whether an entity's internal control system
is adequately operating as designed.
B. To determine whether an entity's operational information
is in accordance with PFRS.
C. To determine whether an entity's financial statements
present fairly the results of operations.
D. To determine whether an entity's specific operating units
are functioning efficiently and effectively.
92. The primary orientation of operational auditing is towards
A. Futur~ improvements to accomplish the goals of management.
B. The accuracy of the data reflected in management's financi~I records.
C. The verification that a company's financial report is fairly
presented.
46
CPA EXAMINATION REVIEWER: AUDITING THEORY
D. Past protection provided by existing internal control.
93. The purpose of an internal audit is
.
.
I. To evaluate the adequacy and effectiveness of company's internal controls.
II. To determine the extent to which assigned responsibilities are actually carried out.
III. To collect evidence on whether the company is continuing as a going concern .
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
94. What is the proper organizational role of internal auditing?
A. To ~erve as an independent, objective assurance and
consulting activity that adds value to operations.
B. To assist the external auditor in order to reduce external
audit fees.
C. To perform studies to assist in the attainment of more
efficient operations.
D. To serve as the investigative arm of the audit committee
of the board of directors.
Intern a l auditing is defined as "an independent, objective
assurance and consulting activity designed to add value and
improve an orga nization's operations. It helps an organization accomplish its objectives by bringing a systematic,· disciplined approach to evaluate a nd improve the effectiveness
of risk management, control, and governance processes."
Answer B is incorrect because while it is true that internal
audit work reduces external audit fees, it is not a reason for
having an internal audit department.
CHAPTER
1 An Introduction to Assurance, Auditing, and Related Services
47
Answer C is incorrect because the primary role of internal
auditing is not limited to assessing the efficiency of operations.
Answer D is incorrect because internal auditors serve not
only the audit committee of the board of directors but also
the entity's management.
95. Which of the following best describes the scope of internal
audi_
ting as it has developed to date?
A. Internal auditing involves appraising the economy and
efficiency with which resources are employed.
B. Internal auditing has evolved to verifying the existence
of assets and reviewing the means of safeguarding assets.
C. Internal auditing has evolved to more of an operational
orientation from a strictly financial orientation.
D. Internal auditing involves evaluating compliance with
policies, plans, procedures, laws, and regulations.
Internal auditin9 includes the audit of
1. Financial and operating information;
2. Compliance with policies, plans, procedures, laws, re~ula­
tions, and contracts;
3. The means of safeguarding assets and verifying their existence;
4. The economy and efficiency with which resources are
employed; and
5. Operations or programs to ascertain whether results are
consistent with established objectives and goals and
whether the,1 are being carried out as prescribed.
Answers A, B, and D are incomplete descriptions of the
scope· of internal auditing.
48
CPA EXAMINATION REVIEWER: AUDITING THEORY
96. Which of the following is considered a primary reason for
creating an internal audit department?
A. To evaluate and improve the effectiveness of control
processes.
B. To ensure the accuracy, reliability, and timeliness of financial and operating data used in management's deci·
sion making.
C. To relieve management of the responsibility for establishing effective controls.
D. To safeguard resources entrusted to the organization.
Internal auditing is defined as "an independent, objective
assurance and consulting activity designed to add value and
improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness
of risk management, control, and governance processes."
Answer B is incorrect because internal auditors do not ensure the accuracy, reliability,' and timeliness of information
used in decision making. They report on the status of operations.
Answer C is incorrect because management is responsible
for establishing and maintaining internal controls.
Answer D is incorrect because· prescribed controls-not
management-safeguard the organization's resources.
97. The internal auditing profession has advanced primarily as a
result of
.
A. Increased interest by Bachelor of Science in Accountancy
(BSA) graduates and experienced auditors.
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An Introduction to Assurance, Auditing, and Related Services
49
B. Job qualification specifications that indude added emphasis on background knowledge and skills.
C. The limitation of financial statement audit scope.
D. Increased complexity and sophistication of business operations;
Internal auditing is an appraisal control that measures and
evaluates other controls. The increased complexity and sophistication of business operations have required management to rely on this appraisal control.
Answer A is incorrect because increased interest by BSA
graduates and experienced auditors contributes to the advancement of the internal audit profession, but it is not the
primary reason for such advancement.
Answer B is incorrect because improved job qualification
specifications of internal auditors result from increased
complexity and sophistication of business operations.
Answer C is incorrect because the limitation of external 'audit scope does not contribute to the advancement of the internal audit profession.
98. Which of the following actions would be an appropriate response by companies to improve the public's perception of
their financial reporting?
A. Increased adoption of audit committees.
B. Keeping external and ·internal auditing work separated to
maintain independence.
c. Requiring internal auditors to report all significant findings of fraud and illegal activity to the company president.
D. None of the above.
50
CPA EXAMINATION REVIEWER: AUDITING THEORY
The audit committee is composed of outside directors who
are independent of management. The primary purpose is to
assure that the directors are exercising due care and external and internal auditors are independent of management.
The following are some of the audit committee's functions:
1. Select the external auditors.
2. Review the external auditor's overall audit plan.
3. Evaluate the results of external and internal audits·.
4. Review the internal auditing work schedule, budget, etc.
5. Meet regularly with the internal auditing director.
The above functions should increase public confidence on
the fair presentation of the company's financial statements.
99. Internal auditors review the adequacy. of the company's internal control system primarily to
A. Help determine the nature, timing, and extent of tests
necessary to achieve audit objectives.
B. Determine whether the internal control system provides
reasonable assurance that the company's objectives and
goals are met efficiently and economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Det,ermine whether the internal control system ensures
that financial statements are fairly presented.
Internal auditors review the adequacy of the company's internal control system primarily to ascertain whether the
system provides reasonable assurance that the company's
objectives and goals will be achieved efficiently and economically. Efficient performance implies the use of minimal
resources to meet the company's objectives and goals. Eco-
CHAPTER
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An Introduction to Assurance, Auditing, and Related Services
51
nomical performance is the accomplishment of objectives
and goals at a cost comm~nsurate with the task.
Answer A is incorrect because external auditors determine
and use the acceptable level of detection risk to determine
the nature, timing, and extent of substantive tests.
Answer C is incorrect because internal auditors do not have
authority to ensure that material weaknesses in the internal
control system are corrected.
Answer D is incorrect because the scope of internal auditing
includes, but is not limited to, determining the fairness of financial stat~ments.
100.· The internal auditing department's responsibility for deterring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention act[vities.
Internal auditors assist in the prevention of fraud by examining and evaluating the system ·of internal control.
Answers A and B are incorrect because management, not the
internal auditor, has the responsibility to establish and
maintain aH effective internal control system.
Answer D is incorrect because internal auditors are not allowed to assume operating re~ponsibilities.
52
CPA EXAMINATION REVIEWER: AUDITING THEORY
101. In conducting an appraisal of the economy and efficiency
with which company resources are used, an internal auditor's responsibility is to
A. Verify the accuracy of asset valuation.
B. Review the reliability of operating information.
C. Verify the existence of assets.
D. Determine whether operating standards have been established.
The company's management is responsible for setting operating standards. The internal auditor's responsibilities are
to determine that:
1. Management has established such standards.
2. The standards are being met.
3. Deviations from established standards are being identified and corrected.
4. Corrective action has been taken.
Answers A and Bare incorrect because they relate to the reliability and integrity of information.
Answer C is incorrect because verifying the existence of assets relates to the safeguarding of assets.
102. Internal auditors should review the means of physically
safeguarding assets from losses arising from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.
Internal auditors are required to review the means employed by the company to safeguard its assets from various
types of losses such as those r~sulting from fire, theft, un-
CHAPTER
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An Introduction to Assurance, Auditing, and Related Services
53
scrupulous or illegal · activities, and exposure to the elements.
I
Answers B and D are incorrect because they relate to ·efficiency of operations.
Answer C is incorrect because it relates to the reliability Of
information, not physical safeguards.
103. Operational audits generally have been conducted by internal and COA auditors, but may be performed by certified
public accountants. A primary purpose of an operational
audit is to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a company's top-level management.
C. Aid to the independent auditor, who is conducting the
examination of the financial statements.
D. A means of assurance that internal accounting controls
are functioning as planned.
Operational auditing involves a systematic review and evaluation of an entity's activities in relation to the efficient use
of its resources and the effectiveness in accomplishing its
objectives. The objective of operational auditing is to assess
performance, identify areas for improvement, and develop
recommendations.
GOVERNMENTAL AUDITING
104. Governmental auditing often extends beyond examinations
leading to the expression of opinion on the fairness of financia! presentation and includes audits of efficiency, economy,
effectiveness, and also
54
CPA EXAMINATION REVIEWER: AUDITING THEORY
A.
B.
C.
D.
-,Accuracy
Compliance
Evaluation
Internal Control
A governmental audit is typically designed to determine
whether the auditee has complied with applicable laws and
regulations.
105. A governmental audit may extend beyond an audit leading
to the expression of an opinion on the fairness of financial
presentation to include
Economy and
Program
Results
Compliance
Efficiency
A.
Yes
Yes
Yes
B.
Yes
Yes
No
C.
Yes
No
Yes
D.
No
Yes
Yes
The types of audits conducted by the Commission on Audit
(COA) are financial audit .and performance audit. Performance audits include economy, efficiency, and program audip;. Included in the scope of financial and performance audits is determining whether the entity has complied with
applicable laws and regulations.
106. An objective of a performance audit is to determine whether
an entity's
A. Operational information is in accordance with government auditing standards.
B. Specific operating units are functioning economically and
efficiently.
c. Financial statements present fairly ~e results of operations.
D. Internal control is adequately operating as designed.
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An Introduction to Assurance, Auditing, and Related Services
55
Performance audits include economy, efficiency, and program audits. Economy and efficiency audits determine
whether the entity's resources are utilized efficiend'y.
Program or effectiveness audits determine whether the entity has been effective in achieving the desired results or
benefits of the program or activity.
107. Which of the following statements is a standard applicable to
financial statement audits in accordance with Government
Auditing Standards?
A. An auditor should determine the extent to wh ich the entity's programs achieve the desired level of results.
B. An auditor should assess whetl1er the entity has reportable measures of economy and efficiency that are valid
and reliable.
C. An auditor should report on the scope of the auditor's
testing of internal control.
D. An auditor should briefly describe in the auditor's report
the method of statistical sampling used in performing
tests of controls and substantive tests .
Government auditors are : equired to prepare a written report on th.e entity's internal control and assessment of control risk made as part. of a financial sta teme nt audit. The
auditor's report should include the followin g:
1. The scope of the auditor's work in obtaining a n understanding of the entit_is nt ernal co ntrol and in his/her
assessment of control r isk.
2. The entity's significant con trols including those that
are established to ensure co mpli ance with laws and
regulations that have a material impac·t on the financial
statements.
56
CPA EXAMINATION REVIEWER: AUDITING THEORY
3. The conditions, including the identification of material
weaknesses, identified as a result of the auditor's
work.
108. Reporting on internal control under Government Auditing
Standards differs from reporting under generally accepted
auditing standards in that Government Auditing Standards
require a
A. Statement of positive assurance that internal control activities designed to detect material errors and fraud were
tested.
B. Written report describing the entity's internal control activities specifically designed to prevent fraud, abuse, and
illegal acts.
C. Statement of negative assurance that the internal control
activities not tested have an immaterial effect on the entity's financial statements.
D. Written report describing each reportable condition observed, including identification of those considered material weaknesses.
The Government Auditing Standards require auditors to
prepare a written report on the entity's internal control.
This report should include the conditions, including the
identification of material weaknesses, discovered as a result
of the auditor's work. However, the report should not give
any form of assurance on the design and effectiveness of the
entity's internal control.
109. yYhat is the responsibility of an auditor who is engaged to
audit the financial statements of a government entity?
A. Assess control risk with respect to each component of internal control.
B. Assume responsibility for assuring that the entity complies with applicable laws and regulations.
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An Introduction to Assurance, Auditing, and Related Services
57
C. Obtain an understanding of the possible financial statement effects of laws and regulations having direct and
mqterial effects on amounts reported.
D. Design the audit to provide reasonable assurance that
the statements are free of material misstatements resulting from illegal acts having direct or indirect effects.
Guv~tnment
auditors are required to obtain an understanding of the possible financial statement effects of laws and
regulations having direct and material effects on amounts
reported. Also, they are required to make an assessment
whether management has identified such Jaws that might
have such effects.
Answer A is incorrect because auditors assess control risk in
terms of financial statement assertions.
Answer B is incorrect because management is responsible
for assuring that the entity complies with applicable Jaws
and regulations.
Answer D is incorrect because auditors are primarily concerned with those that have direct and material effects on
financial statement amounts.
110. The objective of governmental effectiveness or program auditing is to determine if the desired results of a program are
being achieved. What is the first st~p in conducting such an
audit?
A. Identify the legislative intent of the program being audited.
B. Collect quantifiable data on the program's success or
failure.
C. Determine the time frame to be audited.
58
CPA EXAMINATION REVIEWER:
AUDITING THEORY
D. Evaluate the system used to measure results.
The audit of a government program involves obta ining information about th e costs, outputs, benefits, and effects of
the program . Auditors attempt to measure the accomplishments and relative success of the program based on the actual intent of the legislation that established the program.
Answers B, C, and D a re incorrect because the procedures
described are subsequent steps.
D. CONSULTING SERVICES
111. A pervasive characteristic of a CPA's role in a consulting services engagement is that of being a( an)
A. Independent practitioner
B. Computer expert
C. Confidential reviewer
D. Objective advisor
While maintaining objectivity a nd integrity, the CPA in a
consulting services e ngagement serves the client's interest
by pursuing the objectives established by the understanding
with the client.
112. Which of the following statements concerning consulting
services is false?
A. The performance of consulting services for audit clients
does not, in and of itself, impair the auditor's independence.
B. Consulting services differ fundamentally from the CPA's
function of attesting to the assertions of other parties.
C. Consulting services ordinarily involve external reporting.
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1 An Introduction to Assurance, Auditing, and Related Services
59
D. Most CPAs, including those who provide audit and tax ·
services, also provide consulting services to their clients.
The performance of consulting services is usually ·for the
sole use and benefit of.the client.
113. Which of the following are considered consulting services?
A.
B.
C.
D.
Advisory
Services
No
Yes
Yes
Yes
Transaction
Services
Yes
Yes
No
Yes
Assurance
Services
Yes
No ·
Yes
Yes
Assurance services are "independent professional services
that are intended to enhance the credibility of information
to meet the needs of an intended user." Assurance services
do not encompass consulting services. Advisory services
and transaction services are both consulting services.
114. The form of communication with a client in a cohsulting services engagement should be
·
·
A. Either written or oral.
B. Written, and a copy should be sent to management
alone.
C. Oral, with appropriate documentation in working papers.
D. Written, .and copies should be sent to both management
and the board of directors.
The form of communication with a client in a consulting
service may be written or oral depending on the:
1. Understanding with the client;
2. Need for a formal record;
3. ·Intended use of results;
60
CPA EXAMINATION REVIEWER: AUDITING THEORY
4. Significance or sensitivity of material covered; and
5. Degree results are communicated during the engagement.
115. Which of the following is the most appropriate action to be
taken by a CPA who has been QSked to perform a consulting
services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry in- .
valved?
A. Accept the engagement but he/she should conduct research or consult with others to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient
knowledge.
C. Accept the engagement and issue a report that contains
his/her opinion on the achievability of the results of the
merger.
D. Accept the engagement and perform it in accordance
with Philippine Standards on Auditing (PSAs).
A CPA is not precluded from accepting the engagement but
he/she should perform additional research or consult with
others to obtain a sufficient level of knowledge about the
subject of the engagement.
Answer Bis incorrect because the CPA need not decline the
engagement.
Answer C is incorrect because a CPA is required to always
include a caveat in his/her r.eport on prospective financial
information that the prospective results may not be
achieved.
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An Introduction to Assurance, Auditing, and Related Services
Answer D is incorrect because audits, not ·consulting services, are required to be performed in accordance with Philippine Standards
TRUE OR FALSE
1. As used in the Philippine Framework for. Assurance Engagements, the term "practitioner" refers to a CPA in public practice.
2. In a limited assurance engagemerit, the practitioner expresses his/her conclusion in positive form.
3. Common examples of assurance engagements are engagements to apply agreed-upon procedures and consulting.
4. When an assurance engagement is a part of a larger engagement (for example, a business acquisition consulting
engagement which includes a requirement to provide assurance on historical financial information), the Philippine
Framework for Assurance Engagements shall be applied only
to the assurance portion of the engagement ..
5. In some cases, the ethical requirement on professional competence can be satisfied by using the work of individuals
from other di.sciplines referred to in the standards as experts.
6. In a direct reporting engagement the re5Ponsible party is
responsible for the subject matter of the engagement.
/
7. Under all situations, the responsible party is the party who
engages the practitioner (i.e., the engaging party).
62
CPA EXAMINATION REVIEWER: AUDITING THEORY
8. The responsible party can pe one of those for whom the
practitioner prepares the assurance report.
9. In an ehgagement to provide assurance about the effectiveness of an entity's internal control, the subject matter is the ·
assertion of management about its effectiveness.
10. An appropriate subject matter is one that is capable of consistent evaluation or measurement against the identified criteria.
11. The criteria or benchmarks that are used to measure or
evaluate the subject matter of the assurance engagement
need not be available to the intended users.
12. The quantity of evidence is affected by the risk of the subject matter information being materially misstated and also
by the quality of such evidence (the greater the risk and the
higher the quality, the more evidence is likely to be required).
13. Assurance engagement risk is the possibility that the practitioner will express an inappropriate conclusion on a subject
matter information that is materially misstated.
14. The conclusion: "In our opinion, internal control is effective
in all material respects, based on x:YZ criteria." expresses a
reasonable assurance in positive form.
15. The practitioner's conclusion in an assertion-based engagement can be worded in terms of the intended users' assertion.
CHAPTER
1 An Introduction to Assurance, Auditing, and Related Services
63
16. PSA 120 (Framework of Philippine Standards on Auditing)
applies to audits and related services such as taxation and
consultancy.
17. In a review engagement, the auditor provides a high, but
not absolute level of assurance (expressed in the form of
negative assurance) that the information subject to review is
free of material misstatement.
18. For agreed-upon procedures and compilation engagements,
no assurance is expressed.
19. Because most of the evidence available to the auditor is
conclusive, rather than persuasive, in nature, absolute ass~rance in auditing is not attainable.
20. A review of financial statements normally involves an assessment of an entity's accounting and internal control sys- .
terns.
21. A practitioner engaged to perform related services such as
agreed-upon procedures, re\(iew, and compilation need not
be the auditor of the entity's financial statements.
22. A practitioner is associated with financial information when
he/she attaches a report to that information or consents to
the use of his/her name in a professional connection.
23. Independence is not a requirement for a compilation engagement.
24. In a financial statement audit, reasonable assurance is obtained when the auditor has gathered sufficient appropriate
audit evidence to reduce audit risk to an acceptably low lev-
el.
64
CPA EXAMINATION REVIEWER: AUDITING THEORY
25. In general, misstatements are considered to be material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of the financial statements.
26. Audit risk is the risk that the auditor will provide an unmodified opinion on financial statements that are, in fact, ma~eri­
ally misstated.
27. A practitioner's report expressing an opinion on an entity's
internal controls should state that the study and evaluation
of the internal controls was conducted in accordance with
Philippine Standards on Auditing (PSAs).
28. A summary of findings rather than assurance is most likely
to be included in an examination report.
29. The risk that information is misstated is referred to as information risk.
30. The work of internal auditors is primarily for· the benefit of
the entity's management and its board of directors.
CHAPTER
1
KEY
ANSWERS
65
An Introduction to Assurance, Auditing, and Related Services
1. A
24. A
47. B
70.
c
93. A
2. D
25. B
48. D
71. A
94. A
3. B·
26.
c
49. A
72. A
95.
4.
c
27. D
c
50.
c
c
c
96. A
74. A
97. D
c
98. A
99. B
73.
5. B
28.
6. B
29. A
52.
c
30. A
53. B
76. A
8. B
31. . D
54. D
77.
c
55. D
78. B
101. D
33. B
56. A
79. B
102. A
7.
51. A
c
75.
c
100.
c
c
c
32.
11. A
34.
c
57. D
80. B
103. A
12. A
35.
c
58. A
81. B
104. B
13. A
36. D
59. D
82.
c
105. A
14. A
37. A
60.
c
83. D
106. B
15. D
38.
c
61. A
84. A
107.
16. B
39. B
62. D
85. A
108. D
17. B
40. A
63. A
86. D
109.
18. A
41. D
64. A
87.
c
110. A
19. A
42. B
65. A
88. A
111. D
20. B
43. B
66.
89. A
112.
21. A
44. B
67.
c
c
90. D
113. B
c
45. D
68. D
91. D
114. A
23. D
46. D
69. A
92. A
115. A
9.
10.
22.
c
c
c
66
CPA EXAM/NATION REVIEWER: AUDITING THEORY
TRUE OR FALSE
1. True
7. False
13. True
19. False
25. True
2. False
8. True
14. True
20. False
26. True
3. False
9. False
15. False
21. True
27. False
4. True
10. True
16. False
22. True ·
28. False
5. True
11. False
17. False
23. True
29. True
12. False
18. True
24. True
30. True
6. True
.