AUDITING ASSURANCE PRINCIPLES AND CONCEPTS

Introduction to Assurance and Auditing

True/False
Indicate whether the statement is true or false.
1. The need for assurance services arises because the interests of the users of information may be different from
that of the interests of those responsible for providing information. True
2. An audit of financial statements is a form of attestation service. True
3. Independence is an attribute necessary to perform assurance services. True
4. A bank using Milton Company's financial statements to determine the creditworthiness of a potential loan to Milton is
a good example of the need for unbiased reporting. True
5. Independence is only required for assurance service providers. True
6. A CPA automatically qualifies as an assurance provider in all areas of business. False
7. Attestation services are a subset of assurance services and always involve a report that goes to a third party. True
8. The Philippine Institute of Certified Public Accountants has the primary authority to set auditing standards. False
9. The audit function is unique because it exists to perform services on a "client" on behalf of shareholders, directors and
other parties. True
10. Auditing is the process of attesting to assertions about economic actions and events. True
11. Auditing is the process of verifying the accuracy of the financial statements. False
12. Internal auditing only provides assurance services to clients. False
13. Auditing exists because users need unbiased information on which to assess management performance and make
economic decisions. True
14. Users prefer management's financial statements over audited financial statements because few users have direct
knowledge of the company's operations and management is the most knowledgeable about operations. False
15. Users rely on auditors' independent assessment of financial statement presentation because few users have direct
knowledge of the company's operations. True
16. An assertion is a positive statement about an action, event, condition, or performance over a specified time period.
True
17. Management is required to comment on the fairness of the company's financial presentation. This reduces the
auditor's legal responsibility for the opinion rendered on the financial statements. False
18. Audited financial statements should be free from all errors and fraud. False
19. Audited financial statements should be presented fairly according to the substance of GAAP. True
20.Audited financial statements should be presented fairly according to the substance of GAAS. False
21. Being free from material errors is the same as being free from all errors. False
22. Attestation is confined to an audit of client financial statements. False
23. An auditor must have a good understanding of the risks associated with a client's industry in order to ensure that the
financial statements reflect the underlying substance of accounting transactions and the economic effects of such
transactions. True
24. Philippine Institute of Certified Public Accountant provides the criteria against which the auditor measures the
fairness of financial statement presentation. False
25. Generally accepted accounting principles provide the criteria against which the auditor measures the fairness of
financial statement presentation. True
26. Businesses that use independent auditors do not need the use of internal auditors. False
27. CPA certificates for auditors are issued by state boards of accountancy. True
28. Internal auditing is an objective evaluation function established within an organization. True
29. Operational audits are designed to determine if the company’s financial statements are prepared in compliance with
GAAP. False
30. Governmental auditors perform operational and financial statement audits. True
31. The internal audit profession adheres exclusively to standards set by the Security Exchange Commission. FALSE
32. The execution of solutions to issues brought to light by internal auditors are the responsibility of management of the
organization. TRUE

33. Governmental audit standards are developed by the Department of Finance. FALSE
34. The Philippine Institute of CPAs sets auditing standards for non-publicly traded companies. FALSE
35. Though often relying on the PRC - BOA - FRSC, the SEC has authority to establish GAAP for publicly traded companies.
TRUE
36. The SEC has authority to establish GAAP for all business enterprises. FALSE
37. Auditors of public companies need not adhere to the requirements of statutory or regulatory organizations. FALSE
38. When the auditor has no reservations about management’s financial statements, then the report issued is called a
modified (or qualified) report. FALSE
39. Auditors need only understand the rules of accounting as the principles are outdated. FALSE
40. An audit is a form of an attestation service. TRUE
41. An audit and an assurance service both require a report to a third party. FALSE
42. The purpose of assurance services is to improve the quality of the information provided. TRUE
43. The internal auditor is a primary provider of assurance services. TRUE

44. The internal auditor is a primary provider of operational audits. TRUE

45. The client in the audit of a public company is management. FALSE

Generally Accepted Auditing Standards

Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. The first general standard requires that the audit of financial statements be performed by a person or persons having
adequate technical training and
A. Objectivity as an auditor. C. Exercising professional care.
B. Proficiency as an auditor. D. Independence from the client.
2. Which of the following best describes what is meant by generally accepted auditing standards?
A. Acts to be performed by the auditor on every audit engagement.
B. Measures of the quality of an auditor's performance.
C. Procedures used to gather evidence to support financial statements.
D. Objectives for audit engagements.

3. The three generally accepted auditing standards classified as general standards can be described as criteria for the
A. Competence, independence, and professional care of individuals performing the audit.
B. Content of the financial statements and related footnote disclosures and the consistency standard.
C. Content of the auditor's report, study of internal control, and planning.
D. Planning and supervision of the audit engagement.

4. The first general standard requires that a person or persons have adequate technical training and proficiency as an
auditor. This standard is partially addressed by
A. Obtaining sufficient competent evidential matter during the engagement.
B. Planning to test internal controls.
C. Issuing an audit report for the client.
D. Having education and experience in auditing.

5. An objective of the fourth generally accepted standard of reporting, relating to the expression of the auditor's
opinion, is to
A. Prohibit the auditor from issuing a report that does not include an opinion on the financial statements taken as a
whole.
B. Inform users that the financial statements and related notes are the joint responsibility of the auditor and
management.
C. Prevent users of financial statements from misinterpreting the degree of responsibility assumed by the
auditor.
D. Ensure adequate informative disclosures by management in the financial statements.

6. The generally accepted standards of reporting encompass all of the following except
A. Consideration of an entity's system of internal control.
B. Consistent application of accounting principles.
C. Informative disclosures.
D. Conformity of the financial statements with GAAP.
7. Which of the following elements underlies the standards of both fieldwork and reporting?
A. Materiality and risk. C. Corroborating evidence and independence.
B. Internal control and planning. D. Reasonable assurance and due professional care.

8. The overall purpose of the fourth standard of reporting, which requires an auditor to render a report whenever an
auditor's name is associated with financial statements, is to
A. Assure the reader that the auditor is independent with respect to the financial statements audited.
B. Indicate the character of the engagement and the degree of responsibility assumed by the auditor.
C. State that the audit has been conducted in accordance with generally accepted auditing standards.
D. Express as opinion as to whether the accounting principles used in preparing the financial statements have been
applied consistently as compared to the prior period.

9. An auditor is most likely to consider the three general auditing standards in determining
A. Whether the auditor should undertake a particular audit engagement.
B. The scope of auditing procedures to be performed on an engagement.
C. The tests of internal control to be performed.
D. The nature of an audit report qualification.

10. The generally accepted standards of fieldwork relate to

A. The competence, independence, and professional care of persons performing the audit.
B. Criteria for the content of the auditor's report on financial statements.
C. Audit planning and evidence gathering.
D. The need to maintain independence in mental attitude.

11. What is the meaning of the generally accepted auditing standard that requires that the auditor be independent?
A. The auditor may have a direct ownership interest in the client's business if it is not material.
B. The auditor must adopt a critical attitude toward management during the audit.
C. The auditor's responsibility is to assess management's competence for use by third parties.
D. The auditor should have no vested financial or personal interest in the results of the audit.

12. The third general standard states that due care is to be exercised in the performance of an audit and should be
interpreted to mean that an auditor who undertakes an engagement assumes a duty to perform
A. With reasonable diligence and without fault or error.
B. As a professional who will assume responsibility for losses consequent upon error of judgment.
C. To the satisfaction of the client and third parties.
D. As a professional possessing the degree of skill commonly possessed by others in the field.

13. Which of the following is mandatory for an auditor to comply with the general standards of the generally accepted
auditing standards?
A. To possess adequate technical training as an auditor.
B. To issue a report on the financial statements.
C. To state that accounting principles are consistent with the prior year.
D. To adequately plan and supervise the engagement.

14. Which of the following statements best describes the primary purpose of International (Philippine) Standards on
Auditing?
A. Requirements for specific procedures to be performed on audits.
B. Outlines intended to narrow the areas of inconsistency and divergence of audit opinions issued by auditors.
C. Authoritative statements intended to limit the degree of judgment utilized by the auditor.
D. Interpretations intended to clarify the meaning of generally accepted auditing standards.

15. The auditor's judgment concerning the overall fairness of the presentation of the financial statements is applied
within the framework of
A. Quality control.
B. Generally accepted auditing standards.
C. The auditor's evaluation of the audited company's internal controls.
D. Generally accepted accounting principles that include the concept of materiality.