ASUPRIN

ACTIVITY WORKSHEET

Compiled by: A. S. MALQUISTO No. 001

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Name: SUDARIO, PEARL ISABELLE T. Time & Schedule: 9:00 am – 11:00 Tth

I. SHORT ANSWER QUESTIONS: Answer each question in a clear and organized paragraph. One or two sentences
that directly answer the short-answer question. Each question is worth 2 points.

1. What additional expertise must an auditor possess beyond that of an accountant?

 In addition to understanding accounting, the auditor must possess expertise in the accumulation and
interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants.

2. Explain what is meant by information risk, and give at least two (2) causes of this risk.

 Information risk is the risk that information obtained will be misleading or inaccurate. This might happen
when the information is manipulated to achieve desirable results. The primary causes of information
risk can be complex and large volumes of data that are hard to comprehend in the right way. Second
cause of information risk is the personal bias where the data is adjusted to achieve desirable results and
motives.

3. Many people confuse the responsibilities of the independent auditors and the client's management with
respect to audited financial statements. Describe management's responsibility and auditors’ responsibility
regarding audited financial statements.

 Management's responsibility is for the fairness of the financial statements. The auditors are responsible
for performing an independent audit of the financial statements and issuing a report on them in
accordance with generally accepted auditing standards.

4. Explain the concept of “Reasonable Assurance” in the context of financial statement audit.

 Reasonable assurance includes the understanding that there is a remote likelihood that material
misstatements will not be prevented or detected on a timely basis. To achieve reasonable assurance, the
auditor needs to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low
level.

5. What is the major difference between auditing services and assurance services?

 The difference between auditing and assurance services is that assurance services relate to the basic
aims of these procedures, while the auditing services ensure that the financial reports are presented
fairly, ethically, accurately, and comply with the accounting standards/principles.

II. TRUE OR FALSE: Write the word TRUE for each correct statement; otherwise, write FALSE.

1. FALSE Objectivity is not required when performing audit engagements.

2. FALSE Accounting begins where auditing ends.
3. FALSE An independent audit aids in the communication of economic data because the audit guarantees that
financial data are fairly presented
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 4. TRUE Compliance audits are used to determine the adherence to rules and regulations set by the auditor.
5. TRUE The essence of an independent audit is to determine whether client’s financial statements complied
with generally accepted auditing standards.
6. FALSE The term practitioner is narrower in scope compared to the term auditor.
7. TRUE The responsible party may also be one of the intended users.
8. FALSE Evidence obtained directly by the practitioner is less reliable than evidence obtained indirectly or by
inference.
9. FALSE Compared to the auditor of the past, the auditor of today focuses on the detection of fraud and error.
10. FALSE Independent audit provides absolute assurance.

III. MULTIPLE CHOICE QUESTIONS: Read each item carefully. Select the correct/best answer for each of the following
questions and write the letter of your choice before the number.

C 1.The American Accounting Association has formulated a general definition of auditing. What is not a
characteristic of this general definition?

A. Auditing is a systematic process.

B. Auditors are responsible for objectively obtaining and evaluating evidence regarding assertions about
economic actions and events.

C. Auditors are responsible for financial management and the investment of corporate assets.

D. Auditors are responsible for communicating the results of audits to interested users.

D 2.The primary purpose of an independent audit of financial statements is to:

A. Provide a basis for assessing management’s performance.
B. Comply with laws and regulations.
C. Assure management that the financial statements are unbiased and free from material misstatements.
D. Provide users with an unbiased opinion about the fairness of information presented in the financial
statements.

A 3. Which of the following is responsible for an entity’s financial statements?

A. Entity’s management C. Entity’s internal auditors
B. Entity’s audit committee D. Entity’s board of directors

B 4. The auditor communicates the results of his or her work through the medium of the
A. Engagement Letter C. Management Letter
B. Independent Auditor’s Report D. Financial Statements

C 5. Professional skepticism requires that an auditor assume that management is

A. Honest, in the absence of fraud risk factors.
B. Dishonest until completion of audit tests.
C. Neither honest nor dishonest.
D. Offering reasonable assurance of honesty.

D 6. Absolute assurance is generally not attainable as a result of such factors as:

A. The use of selective testing C. The use of judgment
B. The inherent limitations of controls systems D. All of these.

B 7. Which of the following would not represent one of the primary problems that create the demand for
independent audits of a company’s financial statements?
A. Management’s bias in preparing financial statements.
B. The downsizing of business and financial markets.
C. The complexity of transactions affecting financial statements.
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 D. The remoteness of the user from the organization and thus the inability of the user todirectly obtain financial
information from the company.

B 8. Which of the following services provide the lowest level of assurance on a financial statement?
A. An audit.
B. A review.
C. Neither service provides assurance on financial statements.
D. Each service provides the same level of assurance on financial statements.

B 9. Which of the following types of auditing uses laws and regulations as its criteria?
A. Operational audit C. Financial statement audit
B. Compliance audit D. Independent audit

B 10. Which of the following is the broadest concept?

A. Audits of financial statements C. Internal control audit
B. Assurance services D. Attestation services

IV. SITUATIONAL PROBLEM (10 points)

You recently attended your five-year college reunion. At the main reception, you encountered an old friend,
Pedro Quarantina, who recently graduated from law school and is now practicing with a large law firm in town.
When you told him that you were an independent auditor and employed by a regional audit firm, he made the
following statement and snickered. “You know, if a statutory audit requirement did not exist, no one would be
interested in having an audit performed. You auditors are just creatures of regulation.” Since you did not wish to
cause a scene at the reunion, you let his comment pass. You and Pedro agreed to have lunch the following week to
talk over old times. However, you were still unhappy with Pedro’s comment.

Required:
In preparation for your luncheon with Pedro Quarantina, create a concept map or a graphic organizer that
highlights your thoughts about why auditors are not “creatures of regulation”. Cite any relevant evidence of a
demand for audit services outside of legal and regulatory requirements. Focus on the value that auditing provides.
Be sure to consider the concept of information risk.

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 AUDITORS ARE NOT “CREATURES OF REGULATION

Auditors are not creatures of regulation. The auditing role is to determine whether
the report prepare by the manager conform the contract’s provision. Thus, auditor’s
verification of the financial information adds credibility to the report and reduces
information risk, potentially benefiting both the owner and the manager .

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