UNIVERSIDAD DE DAGUPAN

Arellano Street, Dagupan City

School of Business and Accountancy

MIDTERM EXAMINATION
AUDITING AND ASSURANCE PRINCIPLE

1. Which is correct concerning the framework for assurance engagements?

A. It provides a frame of reference against which audit engagements are evaluated
B. It establishes specific guidelines and procedural requirements for the performance of assurance engagements
C. It provides a frame of reference for accountants in public practice when performing assurance
engagements
D. It is intended for reference of public accountants only

2. Evaluate the following statements:

I. Assurance services help information users make decisions based on more credible information.
II. Assurance services can enhance the usefulness of information.
A. Both are true C. Both are false
B. True, false D. False, true

3. Evaluate the following statements:

I. Philippine Standards on Related Services is applicable to non-assurance services.
II. Non-assurance services lack one or more element(s) of an assurance engagement.
A. Both are true C. Both are false
B. True, false D. False, true

4. Evaluate the following statements:

I. Audit engagements are non-assurance services.
II. Review engagements are non-assurance services.
A. Both are true C. Both are false
B. True, false D. False, true

5. Which is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of
the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter
against criteria?
A. Assurance engagement C. Attestation engagement
B. Audit engagement D. Management consulting engagement

6. Identify which is an element of an assurance engagement:

I. Sufficient and appropriate evidence
II. Professional fees
A. Both C. I only
B. Neither D. II only

7. Classify the following parties relevant to an assurance engagement:

 Management of an audit client
 Auditor
A. Both are responsible parties C. Responsible party, practitioner
B. Both are intended users D. Intended user, practitioner

8. Classify the following potential subject matters in an assurance engagement:

 Cash flows of an entity
 Effectiveness of an online payment system
A. Both are financial C. Financial, systems and processes
B. Both are systems and processes D. Systems and processes, financial

9. Classify the following statements:

 Zero customer complaints and product recall.
 Performance of an entity
A. Both are subject matters (SM) C. SM, SMI
B. Both are subject matter information (SMI) D. SMI, SM

10. Classify the following statements:

 Adherence to SEC regulations
 Report on an entity’s observance of the SEC regulations
A. Both are subject matters (SM) B. Both are subject matter information (SMI)
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 C. SM, SMI D. SMI, SM

11. Evaluate the following statements:

 Evidential matters are benchmarks used to evaluate or measure the subject matter including, where relevant,
benchmarks for presentation and disclosure.
 Criteria refer to the information obtained by the practitioner in arriving at the conclusions on which the conclusion
is based.
A. Both are true C. Both are false
B. True, false D. False, true

12. A criterion that is relevant

A. Contributes to conclusions that assist decision-making by the intended users.
B. Is sufficiently complete when relevant factors that could affect the conclusions in the context of the engagement
circumstances are not omitted. Complete criteria include, where relevant, benchmarks for presentation and
disclosure
C. Allows reasonably consistent evaluation or measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by similarly qualified practitioners
D. Contributes to conclusions that are clear, comprehensive, and not subject to significantly different interpretations

13. Evaluate the possibility of obtaining the following levels of assurance:

I. Absolute
II. Reasonable
III. Limited
A. All are possible C. Only I is possible
B. All are impossible D. Only I is impossible

14. Evaluate the following reasons why a perfect level of assurance is not possible:
 The use of selective testing
 Much of the evidence available to the practitioner is conclusive rather than persuasive.
A. Both are true C. Both are false
B. True, false D. False, true

15. Classify the following statements as to the level of assurance:

 The aim is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the
engagement as the basis for a positive form of expression of the practitioner’s conclusion.
 The aim is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the
engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative
form of expression of the practitioner’s conclusion.
A. Limited, Absolute C. Limited, Reasonable
B. Reasonable, Limited D. Absolute, Limited

16. Classify the following statements as to the form of the conclusion related to the assurance given:
I. In our opinion internal control is effective, in all material respects, based on XYZ criteria.
II. 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 XYZ criteria.
A. Negative, Positive C. Limited, Reasonable
B. Reasonable, Limited D. Positive, Negative

17. Which of the following procedures ordinarily performed during an audit are also performed in a review engagement?
A. Assessment of accounting and internal control systems.
B. As if doing something (AIDS)
C. Tests of records and responses to inquiries.
D. Inquiry and analytical procedures.

18. This is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially
misstated.
A. Audit risk C. Assurance engagement risk
B. Detection risk D. Practitioner’s risk

19. Which of the following is true about non-assurance services?

A. Audit engagements are non-assurance services
B. Review engagements are non-assurance services
C. Non-assurance services lack one or more element(s) of an assurance engagement
D. All of the above are true about non-assurance services

20. 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. Provide a moderate level of assurance that the information is free of material misstatement.
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 C. 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.
D. Provide a high, but not absolute level of assurance that the information is free of material misstatement.

21. Which of the following statements refers to the definition of auditing?

A. A service activity which function is to provide quantitative information primarily financial in nature about
economic entities that is intended to be useful in making economic decisions.
B. The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and
events which are in part at least of a financial character and interpreting the results thereof.
C. The process of identifying, measuring and communicating economic information to permit informed judgment
and decisions by users of the information.
D. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between these assertions and established
criteria and communicating the results thereof.

22. Classify which relates more to auditing than accounting:

I. Recording of financial transactions, culminating in the preparation of the financial statements.
II. Evaluation of evidence supporting an assertion.
A. Both C. I only
B. Neither D. II only

23. Classify the following statements related to the underlying theories behind the necessity for audit services:
I. Managers generally have more information about the financial position and operations of the entity compared to
other stakeholders Assurance services can enhance the usefulness of information.
II. In theory, the will and wishes of the shareholders should be operationalized by management but problems exist
with respect to goal congruence.
A. Both are related to the agency theory
B. Both are related to the information asymmetry theory
C. Agency theory, information asymmetry
D. Information asymmetry, agency theory

24. Which best describes the representations by management, explicit or otherwise, that are embodied in the financial
statements, as used by the auditor to consider the different types of potential misstatements that may occur.
A. Financial statement assertions C. Audit evidence
B. Notes to the financial statements D. Disclosure requirements

25. Which is a type of audit is performed to determine whether an entity’s financial statements are fairly presented in
accordance with an identified financial reporting framework.
A. Financial statement audit C. Operating audit
B. Compliance audit D. Internal audit

26. The auditor communicates the results of his or her work through the medium of the:
A. Audit engagement letter. C. Audit report.
B. Management letter. D. Notes to the financial statements.

27. Financial statements need to be prepared in accordance with one, or a combination of:
A. PRFS C. IFRS
B. Other authoritative basis D. All of the answers

28. Evaluate the following statements related to the purpose of audit engagements:
I. Provide government agencies, such as BIR with basis for assessments.
II. To prove accuracy and reliability of financial statements.
III. Enhance the degree of confidence of intended users of the financial statements.
IV. To obtain reasonable assurance about whether the financial statements are free from material misstatements, due to
fraud and error.
A. All statements are true C. Only I and II are true
B. All statements are false D. Only III and IV are true

29. Classify the following types of audits:

I. This type of audit involves a review of an organization’s procedures and methods for the purpose of evaluating
efficiency and effectiveness of operations, identifying areas for improvement, and making recommendations to
improve performance.
II. This type of audit involves a review of an organization’s procedures to determine whether the organization has
adhered to specific procedures, rules or regulations set down by some higher authority.
A. Both are operations audit C. Operations, compliance
B. Both are compliance audit D. Compliance, operations

30. Which is/are overall responsibilities of the internal audit function?

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 I. Serve as an independent assurance and consulting activity designed to add value and improve the company's
operations.
II. Assess the company's methods for safeguarding its assets and, as appropriate, verify the existence of the assets.
A. Both C. I only
B. Neither D. II only

31. Which internal audit activity directly contributes to the improvement of the organization’s governance process?
I. Evaluating the effectiveness of internal controls over financial reporting
II. Evaluating the design of ethics-related activities
A. Both C. I only
B. Neither D. II only

32. Classify BEST the following reporting structures (ultimate) related to the external and internal auditor:
I. Shareholders or members who are outside of the organization’s governance structure.
II. Board of directors and senior management, when appropriate, who are within the organization’s governance
structure.
A. Both pertain to internal auditors C. Internal, external
B. Both pertain to external auditors D. External, internal

33. Classify the following types of audits:

 This is an independent appraisal activity established within an entity as a service to the entity.
 This type of audit goes beyond the usual financial statement audit, to include audits of compliance with laws and
regulations, operations of governmental entities, and the proper disbursement and management of public funds.
A. Both are operations audit C. Operations audit,
B. Both are government audit government audit
D. Government audit, operations
audit

34. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most
likely should report to
A. Board of Directors. C. Corporate Controller.
B. Vice-President for Finance. D. Corporate Stockholders

35. An operating committee of a company's board of directors that is in-charge of overseeing financial reporting and
disclosure.
A. Governance C. Control environment
B. Audit committee D. Management

36. In government auditing, the three elements of expanded scope auditing are:
A. Goal analysis, audit of operations, audit of systems.
B. Financial and compliance, economy and efficiency, program results.
C. Pre-audit, post-audit, internal audit.
D. National government audit, local government audit, corporation audit.

37. 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.
A. Economy audit C. Efficiency audit
B. Program results audit D. Financial-related audit

38. In conducting an audit of financial statements, the overall objective of the auditor is/are:
I. To obtain reasonable assurance about whether the financial statements are free from material misstatement, whether
due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting framework
II. To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor’s
findings
A. I only C. II only
B. Both I and II D. Neither I nor II

39. After an audit, the financial statements are the responsibility of:
I. the independent auditor
II. the management of the reporting company
A. I only C. Both I and II
B. II only D. Neither I nor II

40. Statement I: The financial statements subject to audit are those of the entity, prepared and presented by management of
the entity with oversight from those charged with governance.

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 Statement II:PSAs do not impose responsibilities on management or those charged with governance and do not override
laws and regulations that govern their responsibilities.
A. True, true C. False, true
B. True, false D. False, false

41. Statement I: Those charged with governance refers to person(s) or organization(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.
This includes overseeing the financial reporting process.

Statement II: Management refers to person(s) with executive responsibility for the conduct of the entity’s operations.
A. True, true C. False, true
B. True, false D. False, false

42. With respect to applicable financial reporting framework, the term “fair presentation framework”:
I. Acknowledge explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be
necessary for management to provide disclosures beyond those specifically required by the framework.
II. Acknowledge explicitly that it may be necessary for management to depart from a requirement of the framework
to achieve fair presentation of the financial statements; such departures are expected to be necessary only in
extremely rare circumstances.
A. I only C. II only
B. Both I and II D. Neither I nor II

43. Reports on special purpose frameworks are issued in conjunction with

I. cash basis
II. income tax basis
III. regulatory basis of accounting
A. I and III only C. II and III only
B. I and II only D. I, II, and III

44. Which of the following is correct with regard to an auditor’s report on compliance?
I. An auditor’s report would be designated a report on compliance when it is issued in connection with compliance
with aspects of regulatory requirements related to audited financial statements.
II. An auditor’s report on compliance does not involve the auditor giving positive assurance regarding compliance
with regulatory requirements.
A. I only C. Both I and II
B. II only D. Neither I nor II

45. Reports on special purpose frameworks, also known as special reports, include auditor’s reports on:
I. compliance with reporting requirements to be filed with a specific regulatory agency
II. cash basis financial statements
A. I only C. Both I and II
B. II only D. Neither I nor II

46. There are three broad categories of assertion. Which is not?

A. Assertions about classes of transactions and events for the period under audit
B. Assertions about account balances at the period end
C. Assertions about presentation and disclosure
D. Assertion about classes of transactions and events at period end

47. Which of the following is an assertion under the category of classes of transactions?
I. Cutoff
II. Completeness
III. Occurrence
A. II and III only C. I and III only
B. I only D. I, II, and III

48. Accounts receivable affects one or more assertions. Which of the following assertions relates to accounts receivable?
I. Existence
II. Valuation
III. Rights and Obligations
A. I, II, and III C. I and II only
B. II and III only D. I and III only

49. Accounts receivable affects one or more assertions. Which of the following assertions relates to accounts receivable, net of
allowance for doubtful accounts?
I. Existence
II. Valuation
A. I only B. II only
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 C. Both I and II D. Neither I nor II

50. The risk that the client’s financial statements may be materially false and misleading is referred to as the
A. Business risk D. Risk assessment
B. Information risk
C. Client risk
51. The underlying conditions that create demand by users for reliable information include the following, except
A. Transactions that are numerous and complex.
B. Users separated from accounting records by distance and time.
C. Financial decisions that are not important to investors and users.
D. Decisions are time sensitive.

52. Which of the following best describes the reason why an independent auditor reports on financial statements?
I. A management fraud may exist, and it is more likely to be detected by independent auditors.
II. Different interest may exist between the company preparing the statements and the persons using the
statements.
III. A misstatement of account balances may exist and is generally corrected as the result of the independent
auditor’s work.
IV. A poorly designed internal control system may be in existence.
A. I only C. II only
B. II and III D. I, II, III and IV

53. Which of the following is/are way(s) to reduce the information risk
I. The users verify the information
II. The users share the information risk with management
III. Financial statements audited
A. I only C. III only
B. II and III D. I, II and III

54. Which of the following is incorrect regarding the general principles of an audit?
A. The auditor should comply with the "Code of Ethics for Professional Accountants".
B. The auditor should conduct an audit in accordance with PSAs.
C. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.
D. The auditor would ordinarily expect to find evidence to support management representations and
assume they are necessarily correct.

55. Auditing is based on the assumption that the financial data are verifiable. Data are verifiable when two or more qualified
individuals:
I. Working independently, each reach essentially similar conclusions.
II. Working independently, can prove, beyond reasonable doubt, the truthfulness or accuracy of the data.
A. I only C. II only
B. Both I and II D. Neither I nor II

56. Which of the following are sources of procedures to be considered by the auditor to conduct an audit in accordance with
PSAs?
I. PSA
II. Legislation
III. Terms of Audit Engagement
IV. Type of Opinion
A. Yes No No No C. Yes Yes Yes Yes
B. No No Yes Yes D. Yes Yes Yes No

57. Evaluate the following statements:

I. Philippine Standards on Auditing (PSAs) should be looked upon by practitioners as ideals to strive for, but
which are not achievable.
II. The auditor's opinion enhances the credibility of the financial statements.
A. True, True C. False, False
B. True, False D. False, True

58. An audit has inherent limitations that affect the auditor’s ability to detect material misstatements. Which of the following is
among the factors that result to these inherent limitations?
A. Use of testing.
B. Inherent limitations of accounting and internal control system.
C. Evidence that is basically persuasive rather than conclusive.
D. All of the choices properly describe factors that result to inherent limitations of audits.

59. Which of the following best describes audit risk?

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 A. The risk that a misstatement that could occur in an account balance or class of transactions and that could be material
individually or in the aggregate, will not be prevented or detected and corrected on a timely basis by the company’s
internal control.
B. The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an account balance or
class of transactions that could be material, individually or when aggregated with misstatements in other balances or
classes.
C. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially
misstated.
D. The susceptibility of an account balance or class of transactions to misstatement that could be material, individually or
when aggregated with misstatements in other balances of classes, before consideration of any related controls.

60. Evaluate the following statements:

I. Inherent risk and control risk collectively are known as the risk of material misstatement which is a function of the
auditor.
II. Misstatement is defined under PSA 200 as the difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.
A. True, True C. False, False
B. True, False D. False, True

61. Statement I: The primary responsibility for the prevention of fraud and error rests with the company’s management and
those charged with governance if the auditor expresses an unqualified opinion.

Statement II: The primary responsibility for the detection of fraud and error rests with the company’s management and
those charged with governance regardless of the auditors’ opinion.
A. True, True C. False, False
B. True, False D. False, True

62. Which is/are the main purpose of audit planning?

I. To ensure appropriate attention is devoted to different areas of the audit.
II. To ensure the audit is completed within budget and time restraints.
A. I only C. Both I and II
B. II only D. Neither I nor II

63. Which of the following statements is/are correct with regard to the relationship between the audit plan and the audit strategy
for an external audit engagement?
I. The overall audit strategy should be more detailed than the audit plan.
II. The audit strategy should be established before the detailed audit plan is developed
A. I only C. Both I and II
B. II only D. Neither I nor II

64. Which is/are the main purpose of audit planning?

I. Substantive tests prior to the balance sheet date will be minimized.
II. The audit procedures selected will achieve specific audit objectives.
A. I only C. Both I and II
B. II only D. Neither I nor II

65. A person or firm possessing special skill, knowledge and experience in a particular field excluding accounting and
auditing.
A. Multiskilled personnel
B. Quality control reviewer
C. Taxation specialist
D. None of the above

66. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P10,000 would have a
material effect on an entity’s profit and loss, but that misstatements would have to aggregate P20,000 to materially affect
the statement of financial position. Which is/are true:
I. More procedures are to be performed by the auditor should materiality be set at P20,000
II. Less procedures are to be performed by the auditor should materiality be set at P10,000
A. I only C. Both I and II
B. II only D. Neither I nor II

67. Which is/are true?

I. Materiality is always based on turnover.
II. Materiality should only be calculated at the planning stage of the audit.
A. I only
B. II only
C. Both I and II
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 D. Neither I nor II

68. The relationship between materiality and audit risk is:

A. Direct.
B. Inverse.
C. Indeterminable.
D. None of these.

69. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit
strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
B. Procedures to be undertaken to discover litigation, claims, and assessments.
C. Pending legal matters to be included in the inquiry of the client’s attorney.
D. Timing of inventory observation procedures to be performed.

70. Which of the following is not typically included in initial audit planning?
A. Client acceptance/continuation decisions.
B. Determination of the purpose of the audit.
C. Obtain an understanding with the client.
D. Perform analytical procedures as substantive tests.

71. Evaluate the following statements:

I. Audit planning precedes conclusion and reporting.
II. Audit planning precedes substantive testing.
Which is/are true?
A. I only C. Both I and II
B. II only D. Neither I nor II

72. Which of the following is/are considered in deciding whether to accept a new client or not?
I. Firm’s competency to perform the engagement and ability to comply with relevant ethical requirements
II. Client’s integrity including its standing in the business community and financial ability
III. Integrity of predecessor auditor
A. I only C. Both I and II
B. II only D. I, II, and III

73. Evaluate the following statements:

I. A successor auditor should make specific inquiries of the predecessor auditor regarding disagreements which the
predecessor had with the client concerning auditing procedures and accounting principles
II. If a client refuses to permit the predecessor to respond to the successor’s inquiry, then the successor auditor should
inquire as to the reasons for such refusal and consider the implications of this in deciding whether to accept the
engagement or not.
A. I only C. Both I and II
B. II only D. Neither I nor II

74. Where the client is changing auditors, PSA requires communication between the predecessor and successor auditors. The
burden of initiating the communication rests with:
I. The client
II. The predecessor auditor
A. I only C. Both I and II
B. II only D. Neither I nor II

75. Evaluate the following statements:

I. Independence must be considered in deciding whether to accept a company as an audit client.
II. Only partners and managers are required by the Code of Ethics to be independent from their assurance clients.
Which is/are true?
A. I only C. Both I and II
B. II only D. Neither I nor II

76. Evaluate the following statements regarding enhancing auditor’s independence.

I. Appointing a partner of the CPA firm conducting the audit to the corporation’s audit committee.
II. Having the independent auditor report to an audit committee of outside members of the board of directors
Which is/are appropriate?
A. I only C. Both I and II
B. II only D. Neither I nor II

77. Evaluate the following statements regarding the engagement letter.

I. State whether the CPA will perform audit, review or compilation services.
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 II. State any restriction to be imposed on the CPA’s work.
Which is/are included in the engagement letter?
A. I only C. Both I and II
B. II only D. Neither I nor II

78. Evaluate the following statements regarding the engagement letter.

I. Remind management that the primary responsibility for the FS rests with management.
II. Provide a written record of the agreement with the client as to the services to be provided.
Which is/are the primary purpose(s) of the document?
A. I only C. Both I and II
B. II only D. Neither I nor II

79. Which of the following is least likely to be included in an audit engagement letter?
I. Identification of specific audit procedures that the auditor needs to undertake.
II. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material
misstatements may remain undiscovered.
A. I only C. Both I and II
B. II only D. Neither I nor II

80. Which of the following is least likely to result into the auditor sending a new audit engagement letter?
I. Revisions or special terms of the engagement.
II. Recent change of middle management and rank and file organizational structure
A. I only C. Both I and II
B. II only D. Neither I nor II

81. If a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based on the
revised engagement:
I. Should qualify the opinion due to a scope limitation.
II. Omits reference to the original engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II

82. If a change in the type of engagement from higher to lower level of assurance is not justified, the auditor should:
I. Qualify the report on the original engagement.
II. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II

83. When the users of financial statements have confidence in the independence of the CPA, it is referred to as in independence
in

A. Fact. C. Conduct.
B. Appearance. D. Total.

84. When CPAs are able to maintain an independence attitude in fulfilling their responsibility, it is referred to as independence
in
A. Appearance. C. Fact.
B. Conduct. D. Total.

85. Which of the following are sources of procedures to be considered by the auditor to conduct an audit in accordance with
PSAs?
I. PSA
II. Legislation
III. Terms of Audit Engagement
IV. Type of Opinion
A. Yes No No No C. Yes Yes Yes Yes
B. No No Yes Yes D. Yes Yes Yes No

- END OF EXAMINATION -