CHAPTER 1 AN INTRODUCTION TO ASSURANCE, AUDITING, AND RELATED
SERVICES
1. Which of the following statements best describes assurance services?
a. Independent professional services that are intended to enhance
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. 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
3. 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
4. In an engagement to perform agreed-upon procedures, an auditor is engaged to
a. Carry out those procedures of an audit 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 expertise 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.
5. The purpose of an audit of financial statements is to
a. Relieve management or those charged with governance of the responsibility
for the preparation and presentation of the financial statements.
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.
d. Assure the future viability of the entity by expressing an opinion on the entity’s
financial statements.
6. 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.
7. 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 adviser
8. 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
9. Which of the following elements does not relate to audit quality?
a. Audit competence
b. Audit fees
c. Independence
d. Due diligence
10. 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 made available to
intended users. These engagements are called
a. Direct reporting engagements
b. Assertion-based engagements
c. Non-assurance engagements
d. Recurring engagements
11. 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.
d. A compilation of financial statements from a client’s accounting records.
12. How many separate parties are involved in an assurance engagement?
a. 2
b. 3
c. 4
d. 5
13. The Philippine Framework for Assurance Engagements
a. Contains basic principles, essential procedures, and related 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.
14. 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.
15. A financial statement audit aids in the communication of economic data because
the audit
a. Assures the readers of financial 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.
16. Which of the following is the most appropriate action to be taken by a CPA who has
been asked to perform a consulting services engagement concerning the analysis
of a potential merger if he/she has little experience with the industry involved?
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 in Auditing (PSAs).
17. The form of communication with a client in a consulting 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 boards of
directors.
18. Governmental auditing often extends beyond examinations leading to the
expression of opinion on the fairness of financial presentation and includes audits
of efficiency, economy, effectiveness, and also
a. Accuracy
b. Compliance
c. Evaluation
d. Internal Control
19. The auditor is required to comply with all PSAs relevant to the audit of an 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
20. 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.
21. In assertion-based assurance engagements, the evaluation or measurement of
the subject matter against criteria is performed by the
a. Intended users
b. Responsible party
c. Practitioner
d. AASC
22. In an assurance engagement, the outcome of the evaluation or measurement of a
subject matter against criteria is called
a. Subject matter of information
b. Subject matter
c. Assurance
d. Conclusion
23. For assurance engagements regarding historical financial information, reasonable
assurance engagements are called
a. Audits
b. Reviews
c. Compilations
d. Examinations
24. 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
b. Norms
c. Conditions
d. Gauges
25. 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.
26. 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.
27. 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
28. 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 existence.
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.
29. 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.
30. The following statements relate to internal auditing? Which is incorrect?
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 judgements are subordinated to those of
management.
d. Internal auditing has evolved into a highly professional activity that extends
beyond the appraisal of the efficiency and effectiveness of an entity’s
operations.
31. 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.
32. 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 in
conducting such an audit?
a. Identify of 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.
d. Evaluate the system used to measure results.
33. CPA’s 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 Philippines
c. Philippine Standards on Related Services
d. Philippine Standards on Quality Control
34. Relevant criteria contribute to conclusions that are
a. Free from bias.
b. Clear and comprehensive.
c. Subject to different interpretations.
d. Useful for decision making.
35. Which of the following statements is not true in respect of 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.
36. 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
37. 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.
38. 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 activities.
39. 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.
40. 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.
41. What is the proper organizational role of internal auditing?
a. To serve 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.
42. 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.
43. Which is not one of the three phases in an operational audit?
a. Evidence accumulation and evaluation
b. Planning
c. Reporting and follow-up
d. Training and supervising employees
44. 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
45. 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
46. Independent auditing can best be described as
a. A branch of accounting.
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.
47. The internal auditing profession has advanced primarily as a result of
a. Increased interest by BSA graduates and experienced auditors.
b. Job qualification specifications that include added emphasis on background
knowledge and skills.
c. The limitation of financial statement audit scope.
d. Increased complexity and sophistication of business operations.
48. 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