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LOGO HEREAuditing Theory raeIntroduction to Assurance and Non-assurance Engagements Which of the following Philippine Standards are to be applied to compilation engagements, agreed-upon procedures and other related standards as specified by the AASC? a. PSAs b. PSREs c. PSAEs d. PSRSs These are issu...

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Auditing Theory: Review of Audit Process

LOGO HERE Auditing Theory

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Introduction to Assurance and Non-assurance Engagements 1. Which of the following Philippine Standards are to be applied to compilation engagements, agreed-upon procedures and other related standards as specified by the AASC? a. PSAs b. PSREs c. PSAEs d. PSRSs 2. These are issued to provide interpretative guidance and practical assistance to professional accountants in implementing PSAs and to promote good practice. a. Practice statements b. PREPSs, and PRSPSs c. PAPSs and PREPSs d. PAPSs 3. Assurance engagement a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. b. Is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. c. Is an engagement in which the auditor provides a moderate level of assurance that the information subject to the engagement is free of material misstatement. d. Is an engagement 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. 4. The single feature that most clearly distinguishes auditing, attestation, and assurance is a. Type of service. c. Training required to perform the service b. Scope of services. d. CPA's approach to the service 5. It refers to the auditor's satisfaction as to the reliability of an assertion being made by one party for use by another party. a. Confidence b. Reasonableness c. Assurance d. Tolerable 6. The three types of attestation services are: a. Audits, review, and compilations b. Audits, compilations, and other attestation services c. Reviews, compilations, and other attestation services d. Audits, reviews, and other attestation services 7. Assurance engagement include the following, except a. An engagement conducted to provide a high level of assurance that the subject matter conforms in all material respects with identified suitable criteria. b. An engagement conducted to provide a moderate level of assurance that the subject matter is plausible in the circumstances. c. An engagement in accordance with the Philippine Standard on Assurance Engagement(s) issued by the Auditing and Assurance Standard Council as approved by the Board of Accountancy/Professional Regulation Commission. d. An engagement to perform agreed-upon procedures. 8. Which of the following is an objective of a review engagement? a. Expressing a positive opinion that the financial information is presented in conformity with generally accepted accounting principles. b. Expressing a limited assurance to users who have agreed as to procedures that will be performed by the CPA. c. Reporting whether material modifications should be made to such financial statements to make them conform with generally accepted accounting principles. d. Reporting that the financial statements, in all materials respects, fairly present the financial position and operating results of the client. 9. Not all engagements performed by professional accountants are assurance engagements. Other engagements frequently performed by professional accountants that are not assurance engagements include the following, except a. Agreed-upon procedures c. Management consulting b. Compilation of financial or other information d. Examination of prospective financial information 10. Unlike consulting services, assurance services: a. Make recommendations to management c. Report on quality information b. Report on how to use information d. Are two-party contracts 11. The primary goal of the CPA in performing the attest function is to a. Detect fraud

Page 1 of 44 AT by Raymund Francis A. Escala, CPA, MBA

AT – 11th Batch – HQ02

Auditing Theory: Review of Audit Process

b. Examine individual transactions so that the auditor may certify as to their validity c. Determine whether the client's assertions are fairly stated d. Assure the consistent application of correct accounting procedures 12. Which of the following criteria is unique to the independent practitioner's attest function? a. General competence c. Independence b. Due professional care d. Familiarity with the particular industry of each client 13. Ultimately, the decision about whether or not an practitioner is independent must be made by a. Practitioner b. Public c. Client d. Reguators 14. With regard to independence, which of the following statements is correct? a. In case of audits of financial statements, the Code of Ethics requires member of the assurance team, the firm but not network firms to be independent of the client. b. Only the engagement partner is required by the Code of Ethics to be independent from their assurance clients. c. Audit engagements provide assurance to a wide range of potential users; consequently, both independence in mind and independence in appearance are of particular importance. d. In case of audits of financial statements, the Code of Ethics requires the auditor to be independent from their assurance team from the start of performing procedures required by the engagement up to the issuance of the report. 15. Which of the following statements least likely a characteristic to be possessed by responsible party? a. may or may not be the only intended user b. may nor may not be the engaging party to the practitioner c. may or may not be from the same organization with the intended users d. may be responsible to both or either the subject matter or the subject matter information 16. According to Preface on Assurance Engagements, these are the standards or benchmarks used to evaluate or measure the subject matter of an assurance engagement: a. Criteria c. Assertions b. Engagement process d. Generally accepted auditing standards 17. The criteria for evaluating quantitative information vary. For example, in the audit of historical financial statements by CPA firms, the criteria are usually a. International accounting standards c. Regulations of the BIR b. Generally accepted accounting principles d. Regulations of the SEC 18. The decision of whether the criteria are suitable involves considering whether the subject matter of the assurance engagement is capable of reasonably consistent evaluation or measurement using such criteria. Which of the following characteristics is not considered necessary in determining whether the criteria are suitable? a. Relevance b. Sufficiency c. Neutrality d. Reliability 19. Which of the following statements is/are correct? Statement 1: The practitioner considers the relationship between the cost of obtaining evidence and the usefulness of the information obtained. Statement 2: The difficulty and the expense involved are valid basis for omitting an procedure for which there is no alternative. Statement 3: The practitioner relies on evidence that is persuasive rather than conclusive. Statement 4: The practitioner uses professional judgment and exercise professional skepticism to determine the sufficiency and appropriateness of evidence. a. Only one statement is correct c. Only three statements are correct b. Only two statements are correct d. All statements are correct 20. The following statements are correct, except: a. The greater the risk of misstatement, the more evidence is likely to be required. b. The higher the quality of evidence, the less may be required. c. Obtaining more evidence will compensate for its poor quality. d. The sufficiency and appropriateness of evidence are interrelated. 21. The Philippine Framework for Assurance Engagements identifies two types of assurance engagement a practitioner is permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Which of the following is the objective of a reasonable assurance engagement? a. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a negative form of expression of the practitioner’s conclusion. Page 2 of 44

AT by Raymund Francis A. Escala, CPA, MBA

AT – 11th Batch – HQ02

Auditing Theory: Review of Audit Process

b. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as a basis for a disclaimer of the practitioner’s conclusion. c. A reduction in assurance engagement risk to an acceptably low level that is acceptable in the circumstances of the engagement as a basis for a positive form of expression of the practitioner’s conclusion. d. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a qualified form of the practitioner’s conclusion. 22. In an engagement to perform agreed –upon procedures, an auditor is engaged to a. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information. b. 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. 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. 23. Which of the following is true of the report based on agreed-upon-procedures? a. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in the financial information. b. The report states that the auditor has not recognized any basis that requires revision of financial statements. c. The report is restricted to those parties who have agreed to the procedures to be performed. d. The report should state that the procedures performed are limited to analytical procedures and inquiry. 24. According to Philippine Standard on Auditing, the procedures employed in doing compilation are: a. Designed to enable the accountant to express a limited assurance. b. Designed to enable the accountant to express a negative assurance. c. Not designed to enable the accountant to express any form of assurance. d. Less extensive than review procedures but more extensive than agreed-upon procedures. 25. Indicate the level of assurance provided by audit and related services. A B Audit High High Review Moderate None Agreed-upon procedures None None Compilation None None

C Negative Moderate None None

D Absolute High Limited None

Introduction to Auditing 1. The expertise that distinguishes auditors from accountants is in the a. Ability to interpret generally accepted accounting principles. b. Requirement to possess education beyond the Bachelor's degree. c. Accumulation and interpretation of evidence. d. Ability to interpret FRSC Statements. 2. Identify the following as financial audit (FA), compliance audit (CA), and operational audit (OA). 1) A supervisor is not carrying out his assigned responsibilities. 2) A company's tax return does not conform to income tax laws and regulations. 3) A municipality's financial statements correctly show actual cash receipts and disbursements. 4) A company's receiving department is inefficient. a. CA, CA, FA, OA b. OA, CA, CA, OA

c. OA, CA, FA, OA d. CA, CA, FA, CA

3. Independent auditing can best be described as a a. Branch of accounting b. Discipline that attests to the results of accounting and other operations and data c. Professional activity that measures and communicates financial and business data d. Regulatory function that prevents the issuance of improper financial information 4. Which of the following types of audit uses as its criteria laws and regulations? a. Operational audit b. Compliance audit c. FS audit d. Internal audit 5. An operational audit is designed to a. Assess the efficiency and effectiveness of management's operating procedures b. Assess the presentation of management's financial statements in accordance with generally accepted accounting principles c. Determine whether management has complied with applicable laws and regulations d. Determine whether the audit committee of the board of directors is effectively discharging its responsibility to oversee management's operations Page 3 of 44

AT by Raymund Francis A. Escala, CPA, MBA

AT – 11th Batch – HQ02

Auditing Theory: Review of Audit Process

6. A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a (n) a. FS Audit b. Operational audit c. Compliance audit d. Production audit 7. Which one of the following is more difficult to evaluate objectively? a. Efficiency and effectiveness of operations. b. Compliance with government regulations. c. Presentation of financial statements in accordance with generally accepted accounting principles. d. All three of the above are equally difficult. 8. A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include Program results Compliance Economy and efficiency a. Yes Yes No b. Yes Yes Yes c. No Yes Yes d. No No Yes 9. An audit designed to determine the extent to which the desired results of an activity established by the legislative or other authorizing body are being achieved is a (an) a. Economy audit b. Efficiency audit c. Program audit d. Financial related audit 10. Which of the following best describes what is meant by the term PSA? a. Rules acknowledged by the accounting profession because of their universal application. b. Pronouncements issued by the Auditing Standards Board. c. Measures of the quality of the auditor's performance. d. Procedures to be used to gather evidence to support financial statements. 11. A financial statement audit: a. Confirms that FS assertions are accurate. b. Guarantees that FS are presented fairly.

c. Assures that fraud had been detected. d. Lends credibility to the FS.

12. Which of the following best describes the objective of an audit of financial statements? a. To express an opinion whether the financial statements are prepared in accordance with prescribed criteria. b. To express an assurance as to the future viability of the entity whose financial statements are being audited. c. To express an assurance about the management's efficiency or effectiveness in conducting the operations of entity. d. To express an opinion whether the financial statements are prepared, in all material respect, in accordance with an identified financial reporting framework. 13. Which of the following accurately depicts the auditor's responsibility with respect to Philippine Standards on Auditing? a. The auditor is required to follow the guidance provided by the Standards, without exception. b. The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware. c. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective. d. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures. 14. Which of the following is responsible for an entity's financial statements? a. The entity's management c. The entity's audit committee b. The entity's internal auditors d. The entity's board of directors 15. The best statement of the responsibility of the auditor with respect to audited financial statement is: a. The audit of the financial statements relieves management of its responsibilities b. The auditor's responsibility is confined to his expression of opinion about the audited financial statements. c. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements. d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion. 16. For an entity's financial statements to be presented fairly in conformity with PFRS, the principles selected should: a. Be applied on a basis consistent with those followed in the prior year. b. Be approved by the Auditing Standards Board or the appropriate industry subcommittee. c. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. d. Match the principles used by most other entities within the entity's particular industry. Page 4 of 44

AT by Raymund Francis A. Escala, CPA, MBA

AT – 11th Batch – HQ02

Auditing Theory: Review of Audit Process

17. As used in auditing, which of the following statements best describes "assertions"? a. Assertions are the representations of management as to the reliability of the information system. b. Assertions are the auditor's findings to be communicated in the audit report. c. Assertions are the representations of management as to the fairness of the financial statements. d. Assertions are found only in the footnotes to the financial statements. 18. The auditor communicates the results of his or her work through the medium of the a. Engagement letter b. Audit report c. Management letter

d. Financial statements.

19. Which of the following least likely limits the auditors ability to detect material misstatement? a. Most audit evidences are conclusive rather than being persuasive. b. The inherent limitations of any accounting and internal control system. c. Audit is based on testing d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in detecting intentional misstatements. 20. Which of the following statements does not describe a condition that creates a demand for auditing? a. Conflict between an information preparer and a user can result in biased information. b. Information can have substantial economic consequences for a decision maker. c. Expertise is often required for information preparation and verification. d. Users can directly assess the quality of information. 21. Because an examination in accordance with generally accepted auditing standards is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of a. Professional responsiveness c. Objective judgment b. Conservative advocacy d. Professional skepticism 22. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the following is not a postulate of auditing? a. No long-term conflict exists between the auditor and the management of the enterprise under audit. b. Economic assertions can be verified. c. The auditor acts exclusively as an auditor. d. An audit has a benefit only to the owners. 23. An audit can have a significant effect on a. Information Risk b. The risk-free interest rate

c. Business Risk d. All of these

24. The main way(s) to reduce information risk include the following, except a. To have the user verify the information b. To have the financial statements audited c. To have the management prepare the financial statements d. To have the user share the information risk with management 25. Which of the following is an appraisal activity established within an entity as a service to the entity? a. External auditing b. Internal auditing c. Financial auditing d. Compliance auditing 26. The scope and objectives of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal auditing activities include one or more of the following: A. B. C. D. Establishment and review of the accounting and Yes Yes No No internal control systems Examination of financial and operating information Yes Yes No Yes Revie...