Xavier University-Ateneo de Cagayan Department of Accountancy Auditing Theory

LT1: An Introduction to Assurance, Auditing and Related Services

Instructions: Please write all of your answers in the answer sheet provided. Write only the letter of your chosen answer. No erasures/alterations allowed in the Answer Sheet. If you have questions, do not ask your classmates but ask the proctor. God Bless!

1. Which of the following best describes relationships among auditing, attest and assurance services? a. Attest is a type of auditing service b. Auditing and attest services represent two distinctly different type of services c. Assurance is a type of attest service d. Auditing is a type of assurance service 2. Which of the following would not represent one of the primary problems that create the demand for independent audits of a companys financial statements? a. Management bias in preparing the financial statements b. The downsizing of business and financial markets c. The complexity of transactions affecting financial statements d. The remoteness of the user from the organization and thus the inability of the user to directly obtain financial information from the company 3. The independent auditor lends credibility to clients financial statements by a. Stating in the auditors management letter that the examination was made in accordance with generally accepted auditing standards b. Maintaining a clear-cut distinction between managements representations and the auditors representation c. Attaching an auditors opinion to the clients financial statements d. Testifying under oath about clients financial statements 4. In determining the primary responsibility of the external auditor for the audit of a companys financial statements, the auditor owes primary allegiance to a. The audit committee of the company being audited because that committee is responsible for coordinating and reviewing all audit activities within the company. b. The management of the company being audited because the auditor is hired and paid by management c. The SEC because it determines accounting principles and audit responsibilities d. Stockholders, creditors, and the investing public 5. Auditing is based on the assumption that financial data and statements are a. In conformity with an acceptable financial reporting frameworks such as PAS/PFRS b. Verifiable c. Presented fairly d. Consistently applied 6. The review of a companys financial statement by a CPA firm: a. Is substantially less in scope of procedures than an audit b. Requires detailed analysis of the major accounts c. Is of similar scope as an audit and adds similar credibility to the statements d. Culminates in issuances of a report expressing the CPAs opinion as to the fairness of the statements 7. Performing inquiry and analytical procedures is the primary basis for an accountant to issue a a. Review report on comparative financial statements for a non-public entity in its second year of operations

b. Review report on prospective financial statements that present an entitys expected financial position, given one or more hypothetical assumptions c. Report on compliance with covenants in a long-term loan agreement d. All of the above 8. Which of the following statements is correct concerning both an engagement to compile and an engagement to review an entitys financial statements? a. The accountant does not contemplate obtaining an understanding of the internal control system b. The accountant must be independent in fact and in appearance c. The accountant expresses no assurance on the financial statements d. The accountant should obtain a written management representation letter 9. The primary objective of the ordinary examination of financial statements by a CPA is the expression of an opinion on a. The competence of management in accounting matters which is implied by whether the opinion is qualified or not b. The conformity of the statements with the books of account c. The conformity of the financial statements with generally accepted auditing standards applied on a basis consistent with that of the preceding year d. The fairness which the financial statements present financial position and results of operations 10. Which of the following statements does not describe a condition that creates a demand for auditing? a. Conflict between information preparer and 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 11. According to PSA 120, a compilation presents information, in the form of financial statements, that is, the representation of management. The accountant who prepares the compilation undertakes to express a. Limited assurance on the statements b. Minimal assurance on the statements c. No assurance on the statements d. Full assurance on the statements 12. Which of the following procedures is not included in a review engagement of a non-public entity? a. Inquiries of management b. Inquiries regarding events subsequent to the balance sheet date c. Any procedures designed to identify relationships among data that appear to be unusual d. A study and evaluation of internal control 13. The primary reason for an audit of financial statements is to a. Satisfy government regulatory requirements b. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be detected c. Relieve management of responsibility for the financial statements d. Provide increased assurance to users as to the fairness of the financial statements 14. Most of the independent auditors work in formulating an opinion on financial statements consists of a. Studying and evaluating internal control b. Obtaining and examining evidential matter c. Examining cash transactions d. Comparing recorded accountability with assets 15. Which of the following statements is true regarding the provision of assurance services? i. The third party who receives the assurance generally pays for the assurance received ii. Assurance services always involve a report by one person to a third party on which an independent organization provides assurance iii. Assurance services can be provided by either on information or on process

a. b. c. d.

I and III II only III only I,II and III

16. Which of the following statements best describes assurance services? a. Independent 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 17. Assurance engagements encompass the following types of services, except a. Attestation services b. Audit of historical financial statements c. Review engagements d. Management consulting 18. 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 clients accounting records 19. Which of the following best describes the objective of an assurance engagement? a. To improve the companys outcomes b. To compare the companys information and policies to those of other entities c. To enhance the credibility of information in order to improve the likelihood that the information will meet the needs of an intended user d. None of the above 20. 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 c. Both I and II b. II only d. Neither I nor II 21. The Philippine Framework for Assurance Engagements a. Contains basic principles, essential procedures, and related guidance for the performance of assurance engagements b. Defines and prescribes 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 22. An assurance engagement should involve three separate parties; practitioner, responsible party and intended users. Which of the following statements concerning these parties is incorrect? a. The responsible party and intended users may be from different entities or the same entity b. An entitys senior management (the responsible party) may engage a practitioner to perform an assurance engagement on a particular aspect of the entitys activities that is the immediate responsibility of a lower level of management (the intended user) c. The term practitioner as used in the Framework for Assurance Engagements is broader than the term Auditor as used in PSAs and PSREs d. In an assertion-based engagement the responsible party is responsible for the subject matter information (the assertion), and may be responsible for the subject matter 23. The subject matter of an assurance engagement may include I. Historical or prospective financial information II. Internal controls III. Compliance with regulation

a. I and II only b. I and III only

c. II and III only d. I, II and III

24. For assurance engagements regarding historical financial information, reasonable assurance engagements are called a. audits b. reviews c. compilations d. examinations 25. When performing an assurance service, professional accountants use standards or benchmarks to evaluate or measure the subject matter of an assurance engagement. This element of an assurance engagement is called a. Criteria b. Conclusion c. PFRS d. Assertion 26. Suitable criteria are required for reasonably consistent evaluation or measurement of the subject matter of an assurance engagement. Which of the following statements concerning the characteristics of suitable criteria is correct? a. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations b. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. c. Neutral criteria contribute to conclusions that are free from bias d. Criteria are sufficiently complete when they contribute to conclusions that are clear, comprehensive, and not subject to different interpretations 27. Suitable criteria are required for reasonably consistent evaluation or measurement of a subjetmatter within the context of professional judgment. Which of the following is not a characteristic of suitable criteria? a. comparability b. neutrality c. relevance d. compleness 28. Which of the following statements concerning the intended user of a professional accountants report is incorrect? a. The intended user should be established by agreement between the practitioner and the responsible party or those engaging or employing the practitioner b. In some circumstances, the intended user may be established by law c. The responsible party may also be one of the intended users d. The responsible party and the intended user may both be within the organization 29. 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 30. 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 evaluation or measurement of the subject matter or obtains a representation from the responsible party that has performed the evaluation of measurement d. The representations of the responsible party that has performed the evaluation or measurement of the subject matter is not available to the intended users 31. A practitioners assurance report contains the following conclusion: Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on ABC criteria.

What type of assurance engagement was performed? a. b. c. d. Limited assurance engagement Reasonable assurance engagement Negative assurance engagement Positive assurance engagement

32. The following statements relate to the three parties involved in an assurance engagement. Which is correct? a. The responsible party and the intended users should always be different entities b. A practitioner should not accept an assurance engagement when the subject matter of the engagement requires specialized skills and the knowledge beyond those ordinarily possessed by the practitioner c. A responsible party is the person who is responsible for the subject matter or the subject matter information d. In all assurance engagements, the responsible party is the engaging party, i.e., the party that engages the practitioner 33. A proposed assurance engagement can be accepted when the practitioners 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 and III only b. I, II, IV and V only c. I, II, III and IV only d. I, II, III, IV and V 34. 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 35. An unqualified conclusion is not appropriate for either reasonable or limited engagement when I. Circumstances prevent the practitioner from obtaining evidence required to reduce assurance engagement risk to the appropriate level II. 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 a. b. c. d. I only II only Either I or II Neither I nor II

36. The following statements relate to the performance of an 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 perform the engagement should collectively possess the necessary professional competence b. The practitioner is not allowed to use the work of persons from other professional disciplines c. The practitioner should consider materiality 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 practitioners conclusion about the subject matter information 37. 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 b. The fact 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 evaluation evidence and forming conclusions based on that evidence 38. 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. II. a. b. c. d. A change in circumstances that affects the responsible partys requirements A misunderstanding concerning the nature of the engagement I only II only Both I and II Neither I nor II

39. The Philippine Standards on Assurance Engagements 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 financial information 40. The following statements relate to a review of interim financial information performed by an entitys 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 material 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 with an applicable financial reporting framework. c. In a review of interim financial information, the auditor should have an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both annual and interim financial information, sufficient to plan and conduct the engagement d. A review of interim financial information may bring significant matters affecting the interim financial information to the auditors attention, but it does not provide all of the evidence that would be required in an audit. 41. Which of the following statement concerning compilation engagements 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 enables 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 accountants 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 42. 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 expertise to collect, classify, and summarize financial information c. Provide a moderate level of assurance that the information is free from material misstatement d. Provide a high, but not absolute, level of assurance that the information is free of material misstatement 43. A report may be used upon applying agreed-upon procedures to specified elements, accounts, or items of a financial statement. The users of the report should participate in establishing the procedures to be performed. If the auditor cannot discuss the procedures with all the parties who will receive the report, he/she may I. Discuss the procedures to be applied with appropriate representatives of the parties involved 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 andIII 44. Independence is not a requirement for which of the engagement? Compilation a. No b. No c. Yes d. Yes Review Yes No No Yes Agree-upon procedures No No Yes Yes

45. Which of the following engagements require compliance with the requirements of the Code of Ethics for Professional Accountants in the Philippines? Compilation a. Yes b. No c. No d. Yes Review Yes No No Yes Agree-upon procedures No Yes No Yes

46. 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 professional connection a. b. c. d. I only II only Either I or II Neither I nor II

47. 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 in accordance with the applicable financial reporting framework 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 entitys financial statements

48. The auditor is required to comply with all PSAs relevant to the audit of an entitys 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. b. c. d. I only II only Either I or II Neither I nor II

49. The overall objective of the auditor in conducting an audit of financial statements are I. To obtain a 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. b. c. d. I and II only II and IV only I, II and III only I, II, III, and IV

50. 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 entitys 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 the entity from whom the auditor determines it necessary to obtain evidence d. To design, implement, and maintain internal control relevant to the preparation and presentation of financial statements that are free from material misstatements, whether caused by error or fraud 51. 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 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 52. Professional judgment a. Should be exercised in planning and performing an audit of financial statements but need not to be documented b. Can be used as the justification for decisions made by the auditor that are not supported by the facts and circumstances of the engagement c. Is necessary for the evaluation of managements judgments in applying the entitys applicable financial reporting framework d. Is not used in making decisions about materiality and audit risk 53. Which of the following statements is correct concerning an auditors responsibilities regarding financial statements? a. An auditors responsibilities for audited financial statements are confined to the expression of the auditors opinion b. The fair presentation of audited financial statements in accordance with an applicable financial reporting framework is an implicit part of the auditors responsibilities c. Making suggestions that are adopted about the form and content of an entitys financial statement impairs an auditors independence d. The auditors should provide an assurance as to the future viability of the entity

54. 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 person using the statements c. A misstatement of account balances may exist and is generally corrected as the result of the independents auditors work d. A management fraud may exist and is more likely to be detected by independent auditors 55. 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 objectives within a specified time frame c. The acquisition of resources at appropriate times and within a specified time frame d. The acquisition of resources at appropriate times and within a specified time frame 56. 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 auditors independence b. Consulting services differ fundamentally from the CPAs function of attesting to the assertions of other parties c. Consulting services ordinarily involve external reporting d. Most CPAs, including those who provide audit and tax services, also provide consulting service to their clients Short Essay (2 points)- Answer the following question by at most five (5) sentences ONLY 1. How does the Audit risk model affect the audit work of a practitioner? 2. How are accounting and auditing related?