Roque CPA Reviewer Auditing ch1 Final PDF

1
CHAPTER 1
An Introduction to
Assurance, Auditing,
and Related Services
A. ASSURANCE SERVICES
1. Which of the following statements best describes assurance

services?
A. Irrdependent 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 in-
formation.
D. Services designed for the improvement of operations, re-
sulting in better outcomes.
2 CPA EXAMINATION REVIEWER: AUDITING THEORY
Assurance engagements performed by professional ac-

countants are intended to enhance the credibility of infor-
mation about a subject matter by evaluating whether the
subject matter conforms in all material respects with suita-
ble criteria, thereby improving the likelihood that the in-
formation will meet the needs of an intended user.
The level of assurance provided by the professional ac-

countant's conclusion conveys the degree of confidence that
the intended user may place in the credibility of the subject
matter.
2. Which of the following is not an assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information
Services performed by professional accountants that are not

assurance engagements include the following:
1. Agreed-upon procedures
2. Compilation of financial or other information
3. Preparation of tax returns where no conclusion is
expressed, and tax consulting
4. Management consulting
5. Other advisory services
3. Which of the following professional services would be con-

sidered an assurance engagement?
A. A management consulting engagement to provide IT ad-
vice to a client.
B. An engagement to report on compliance with statutory
requirements.
C. An income tax engagement to prepare tax returns.
CHAPTER 1 An Introduction to Assuraoce, Auditing, and Related Services 3
D. A compilation of financial statements from a client's ac-

counting records.
4. Which of the following best describes the objective of an as-

surance engagement?
A. Improve the company's outcomes.
B. Compare the company's information and policies with
those of other entities.
C. Enhance the credibility of information in order to improve
the likelihood that the information will meet the needs of
an intended user.
D. Assist in preparing the company's financial statements.
The objective of an assurance engagement is for a profes-

sional accountant to evaluate or measure a subject matter
that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides
the intended user with a level of assurance about the subject
matter.
An assurance engagement is intended to enhance the cred-

ibility 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.
5. 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
Assurance services differ from consulting services in that

they:
1. Focus on enhancing the credibility of information ra-
ther than providing advice.
2. Typically involve situations in which one party wants
to monitor another.
Consulting services are usually two-party arrangements

that focus on providing advice on how to use the infor-
mation for better outcomes.
6. How many separate parties are involved in an assurance en-

gagement?
A. 2 c.
4
B. 3 D. 5
An assurance engagement involves three (3) separate par-

ties:
1. A practitioner,
2. A responsible party, and
3. Intended users.
7. An assuranc~ engagement should have which of the follow-

ing elements?
Subject matter Criteria
A. Yes No
B. No Yes
c. Yes Yes
D. No No
An assurance engagement should have the following ele-

ments:
1. A three-party relationship involving:
a. a professional accountant;
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 5
b. a responsible party; and

c. intended users
2. A subject matter
3. Suitable criteria
4. Sufficient appropriate evidence
5. An assurance report
8. The Philippine Framework for Assurance Engagements

A. Contains basic principles, essential procedures, and re.,.
lated guidance for the performance of assurance en-
gagements. .
B. Defines and describes 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 require-
ments for the performance of assurance engagements.
The Framework defines and describes the elements and ob-

jectives of an assurance engagement and identifies engage-
ments to which PhilipJJine Standards on Auditing (PSAs),
Philippine Standards on Review Engagements (PSREs), and
Philippine Standards on Assurance Engagements (PSAEs)
apply.
The Framework does net itself establish standards or pro-

vide procedural requirements for the performance of assur-
ance engagements. PSAs, PSREs, and PSAEs contain basic
principles, essential procedures and related guidance, con-
sistent with the concepts in the Framework, for the perfor-
mance of assurance engagements.
9. CPAs in public practice who perform assurance engagements

are governed by the following, except
A. Philippine Framework for Assurance Engagements
B. Code of Ethics for Professional Accountants in the PhiliP.-
pines
C. Philippine Standards on Related Services
D. Philippine Standards on Quality Control
The Philippine Standards on Related Services (PSRSs) are to

be applied to non-assurance engagements such as compila-
tion and agreed-upon procedures engagements.
10. In an assurance engagement, the responsible party and the

intended users
A. Should be from different entities.
B. Should be from the same entity.
C. May be from the same entity or different entities.
D. Are both responsible for determining the nature, timing
and extent of the procedures to be performed.
According to the Philippine Framework for Assurance En-

gagements, the responsible party and the intended users
may be from different entities or the same e'ntity.
Answer Dis incorrect because the practitioner is responsi·

ble for the determining the nature, timing and extent of pro-
cedures to be performed.
11. The subject matter of an assurance engagement may in-

clude
Financial Internal Compliance
Information Controls with Regulation
A. Yes Yes Yes
B. No No No
c. Yes No Yes
CHAPTER 1 An lntrod1:1ction to Assurance, Auditing, and Related.Services 7
D. No Yes No
According to the Philippine Framework for Assurance En~

gagements, an assurance engagement's subject matter may
include the following:
• Financial performance or conditions, such as historical
or prospective financial position, financial performance,
and cash flows.
• Non-financial performance or conditions, for example,
performance of an entity.
• Physical characteristics, for example, capacity of a facili-
ty.
• Systems and processes, for example, an entity's internal
control or IT system.
• Behavior, such as corporate governance, compliance
with regulation, and human resource practices.
1Z. For assurance engagements regarding historical financial

information, reasonable assurance engagements are called
A. Audits C. Compilations
B. Reviews D. Examinations
For assurance engagements regarding historical financial in-

formation, reasonable assurance engagements are called
.
audits, while limited assurance engagements are called re-
views.
13. When performing an assurance service, professional ac-

countants use standards or benchmarks to evaluate or
measure the subject matter of an assurance engagement.
These are referred to in the Framework as
A. Criteria C. Conditions
B. Norms D. Gauges
8 CPA EXAMINATION REVIEWER: AUDITING THEO.av
Criteria are the standards or benchmarks used to evaluate

or measure the subject matter of an assurance engagement
These are important because they establish and inform the
intended user of the basis against which the subject matter
has been evaluated or measured in forming the conclusion.
14. The criteria against which the subject matter of the assur-
ance engagement is to be evaluated or measured should
possess which of the following characteristics?
Relevant Concise Neutral
A. Yes No Yes
B. No Yes No
C. Yes No No
D. No Yes Yes
According to the Philippine Framework for Assurance En-

gagements, suitable criteria should have the following char-
acteristics:
1. Relevance
• Relevant criteria contribute to conclusions that as-
sist decision-making by the intended users.
2. Completeness
• Criteria are sufficiently complete when relevant fac-
tors that could affect the conclusions in the context
of the engagement are not omitted.
• Complete criteria include, where relevant, bench-
marks for presentation and disclosure.
3. Reliability
• Reliable criteria allow reasonably consistent evalua-
tion or measurement of the subject matter including,
where relevant, presentation and disclosure, when
used in similar circumstances by similarly qualified

practitioners.
4. Neutrality
• Neutral criteria contribute to conclusions that are
free from bias.
5. Understandability
• Understandable criteria contribute to conclusions
that are clear, comprehensive, and not subject to sig-
nificantly different interpretations.
15. Relevant criteria contribute to conclusions that are

A. Free from bias.
B. Clear and comprehensive.
C. Subject to different interpretations.
iD. Useful for decision making.
16. Criteria that are embodied in laws or regulations, or issued

by authorized or recognized bodies-of experts that follow a
transparent due process are called
A. Suitable criteria
B. Established criteria
C. Specifically developed criteria
D. General criteria
The Framework states that criteria can either be established

or specifically developed. Established criteria are those
that are embodied in laws or regulations, or issued by au-
thorized or recognized bodies. Specifically developed cri-
teria are those designed for the purpose of the engagement.
17. In an assurance engagement, the perso·n or persons, either

as individuals or representatives of an entity, responsible for
the subject matter is the
A. Intended user -
B. Responsible party
C. Professional accountant
D. Client
The responsible party is the one responsible for the sub-

ject matter of an assurance engagement. For example, an
entity's management is responsible for the preparation and
presentation of financial statements or the establishment
and implementation of internal control.
The responsible party may or may not be the party who en-
gages the professional accountant.
18. In an assurance engagement, the person or class of persons

for whom the professional accountant prepares the report
for a specific use or purpose is the
A. Intended user
B. Responsible party
C. Management
D. Client
The intended user is the person or class of persons for

whom the professional accountant prepares the report for a
specific use or purpose.
19. In an assurance engagement, the outcome of the evaluation

or measurement of a subject matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
The term "subject matter information" is used in the

Framework for Assurance Engagements to mean the out-
come of the evaluation or measurement of a subject matter.
CHAPTER 1 An Introduction to Assurance, Auditi'ng, and Relatetl Services 11
According to the Framework, it is the subject matter infor-

mation about which the practitioner gathers sufficient ap-
propriate evidence to provide a reasonable basis for ex-
pressing a conclusion in an assurance report.
20. In some assurance engagements, the evaluation or meas-

urement of the subject matter is performed by the responsi-
ble party, and the subject matter information is in the form
of an assertion by the responsible party that is ma~e availa-
ble to intended users. These engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements
21. The following are characteristics of "direct reporting" assur-

ance engagements, except
A. The subject matter information is in the form of an as-
sertion by the responsible party that is made available to
the intended users.
B. The subject matter information is provided to the intend-
ed users in the assurance report.
C. The practitioner either directly performs the evaluatiof!
or measurement of the subject .matter or obtains a rep-
resentation from the responsible party that has per-
formed the evaluation or measurement.
D. The representation of the responsible party that has per-
formed the evaluation or measurement of the subject
matter is not available to the intended users.
22. What type of assurance engagement is involved when the

practitioner expresses a positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assprance engagement
D. Absolute assurance engagement
According to the Framework, the objective of a reasonable

assurance engagement is a reduction in assurance en-
gagemen t risk to a n acceptably low level in the c ircum-
sta nces of th e e ngagement as th e basis for a positive forn1
of e xpressi o n of the practiti o ne r's conclus ion.
23. What type of assurance engagement is involved when the

practitioner expresses a negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
According to the Fra mew o r k, the objecti ve of a limited as-

surance engagement is ;:i re d uction in assura nce engage-
me nt ri s k lo a level that is acceptable in th e circumstances

of t he engage ment, but w he re the r is k is greate r tha n fo r a
re <lsona ble assura nce e ngagem e nt, as t he b asis fo r a nega-
tive fo rm of expression of the pra ctitioner's conclusion.
24. A practitioner's assurance report contains the following con-

clusion :
'·Based on our work described in thi s report, 11othing has come to
our attention that caust!s us to believe that internal contro l is not ef-
fecti ve, in all material respects, based on ABC criteria.'·
What type of assurance engagement was performed?
A. Limited assurance engagement
B. Reasonable assurance engagement
C. Negative assurance engagement
D. Positive assurance engagement
CHAPTER 1 An Introduction to Assurance, Auditing, a11d Related Services 13
25. In assertion-based assurance engagements, the evaluation

or measurement of the subject matter against criteria is per-
formed by the
A. Intended users C. Practitioner
B. Responsible party D. AASC
In assertion-based assurance engagements, th~ evaluation

or meas urem ent of the subject matter against criteria is per-
formed by the responsible party a nd the subj e ct matter in-
formation (outcome) is in the form of an assertion by the re-
sponsible party that is made available to the intended users.
26. The following statements relate to the three parties involved

in an assurance engagement. Whic;h is correct?
A. The responsible party and the intended users should be
from different entities.
B. A practitioner should decline a
proposed assurance en-
gagement when the subject matter requires· specialized
skills and knowledge beyond those ordinarily possessed
by the practitioner.
C. A responsible ptirty is the person who is responsible for
t~e subject matter or the subject matter information.
D. The responsible party, not the intended users, deter-
mines the nature of the procedures to he performed.
According ~o the Framework, the res ponsible party is the

p'erson (or persons) wlto:
• rn a direct reporting engagement, is responsible for
the subject matter; or
• In an assertion-based engagement, is resl'Jonsible for
the subject matter information (the assertion), and
may be responsible for the subject matter.
27. A proposed assurance engagement can be accepted when

the practitioner's preliminary knowledge about the engage-
ment circumstances indicates that relevant ethical require-
ments 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 ev-
idence 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
A proposed assurance engagement can be accepted whei:t

the practitioner's preliminary knowledge of the engagement
circumstances indica tes that relevant ethical requirements
such as independence and professional competence will be
met and the engagement exhibits all of the characteristics
described in statements I to V.
28. A practitioner should accept an assurance engagement only

if
A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended.
users.
C. The practitioner's conclusion is to be contained in a writ-
ten report.
D. The subject matter is the responsibility of either the in-
tended users or the practitioner.
29. Which of the following statements is true concerning evi-

dence in an assurance engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evi-
dence, 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.
Sufficiency is the measure of the quantity of evid'ence. The

quantity of evidence needed is affected by the quality of
such evidence (the higher the quality, the less may be re-
quired). However, merely obtaining more evidence may not
compensate for its poor quality.
Appropriateness is the measure of the quality of evidence,

that is, its relevance and its reliability. The reliability of
evidence is influenced by its source and by its nature.
30. Assurance engagement risk is the risk

A. That the practitioner expresses an inappropriate conclu-
sion when the subject matter information is materidlly
misstated.
B. Of expressing an inappropriate conclusion when the sub-
ject matter information iG not materially misstated.
C. Through loss from litigation, adverse publicity, or other
events arising in connection with a subject matter re-
ported on.
D. Of expressing an inappropriate conclusion when the sub-
ject matter information is either materially misstated or
not materially misstated.
31. The following are components of assurance engagement

risk, except
A. Inherent risk C. Detection risk

B. Control risk D. Business risk
Assurance engagement c;;/< has the following components:

1. The risk that the subject matter information is material-
ly misstated. This consists of:
a. Inherent risk - the susceptibility of the subject mat-
ter information to a material misstatement, assum-
ing that there are no related controls; a nd
b. Control risk - the risk tha t a r!lisstatement. that
could occur will not be prevented, or detected and
corrected, on a timely basis by related internal con-
trols.
2. Detection risk - the risk th at the practitioner will not

detect a material misstatement that exists.
32. An unqualified conclusion is not appropriate for either rea-

sonable or limited assurance engagement when
A. Circumstances prevent the practitioner from obtaining
evid2nce required to reduce assurance engagement risk
to the appropriate level. ·
B. 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.
C. Both A and H.
D. Neither A nor B.
According to the Framework, an unqualified conclusion is

not appropriate for either type of assurance engagement in
the case of a material limitation on the scope of the practi-
tioner's work, whether imposed by the engagement circum-
stances or the engaging party or the responsible party.
· 33. The following statements relate to the performance of a.n

assurance engagement other than an audit or review of his-
torical financial information covered by PSAs and PSREs.
Which is incorrect?
A. Those persons who are to p.erform the engagement
should collectively possess the necessary professional
competence.
8. The practitioner is precluded from using the work of per-
sons from other professional disciplines.
C. The practitioner should consider materi.ality and assur-
ance 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 practitioner's conclusion
about the subject matter information.
The subject matter and related criteria of some assurance

engagements may include aspects requiring specialized
knowledge and skills in the accumulation and evaluation of
evidence. The standards allow a practitioner to eng~ge per-
sons from other professional disciplines, referred to as ex-
perts.
34. Reducing assurance engagement risk to zero is very rarely

attainable or cost beneficial ·as a result of the following fac-
tors, except
A. The use of selective testing.
8. The fact that much of the evidence available to the prac-
titioner 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 evaluating evi-
dence and forming conclusions based on that evidence.
35. 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 follow-
ing ordinarily will justify a request for a change in the en-
gagement?
I. A change in circumstances that affects the intended us-
ers' requirements.
II. A misunderstanding concerning the nature of the en-
gagement.
A. I only C. Both I and II
B. AUDITING AND RELATED SERVICES
36. Which of the following standards are to be applied, as ap-

propriate, in the audit of historical financial information?
A. PSREs C. PSRSs
B. PSAEs D. PSAs
The Philippine Standar~s on Auditing (PSAs) are to be ap-

plied, as appropriate, in the audit of historical financial in-
formation.
37. Which of the following standards are to be applied to compi-

lation engagements, engagements to apply agreed-upon
procedures to information, and other related services en-
gagements as specified by the AASC?
A. PSRSs C. PSAEs
B. PSAs D. PSREs
The Philippine Standards on Related Services (PSRSs) are to

be applied to compilation engagements, engagements to ap-
ply agreed-upon procedures to information, and other relat-

ed services engagements as specif~ed by the AASC.
38. The Philippine Standards on Review Engagements (PSREs)

are to be applied in
A. The audit of historical financial information.
B. Assurance engagements dealing with subject matters
other than historical financial information.
C. The review of historical financial information.
D. The review of both historical and prospective financial in-
formation.
39. PSRE 2400 (Engagements to Review Financial St~tements),

as amended by the AASC in February 2008, applies to
A. Reviews of any historical financial information .of an audit
client.
B. Reviews of any historical financial information by a prac-
titioner other than the entity's auditor.
C. Reviews of historical financial or other information by a
practitioner other than the entity's auditor.
D. Rev~ews of historical financial or other information of an
audit client.
PSRE 2400 (Engagements to Review Financial Statements)

and PSRE 2410 (Review of Interim Financial Information
Performed by the Independent Auditor of the Entity) were
amended by the AASC in February 2008. The objective of
the amendments made is to clarify to which engagements
each of the standards is to be applied.
The effect of the amendments is sumfllarized as follows:

• PSRE 2400 applies to reviews of historical financial
information by a practitioner other than the entity's .
auditor.
20 CPA t;XAMINATION REVIEWER: AUDITING THEORY
• PSRE 2410 applies to reviews of historical financial

information by the entity's auditor.
• Reviews of other historical information fall under
PSAE 3000 (Revised), Assurance Engagements other
than Audits or Reviews of Hb torical Financial Infor-
mation.
40. The Philippine Standards on Assurance Engagements

(PSAEs) 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 fir.ancial
information.
41. The Philippine Standards on Quality Control (PSQCs) are to

be applied to
A. Assurance engagements only.
B. Review engagements only.
C. Compilation and review engagements only.
D. All services that fall under the AASC's engagement
standards.
PSAs, PSREs, PSAEs, and PSRSs are collectively referred to

as the AASC's Engagement Standards. PSQCs are to be ap-
plied for all services under these Engagement Standards.
42. These statements are issued by the MSC to provide inter-

pretive guidance and practical assistance to auditors in the
implementation of PSAs and to promote good practice.
A. PREPSs C. PAEPs
B. PAPSs D. PRSPSs
The AASC issues Prartice Statements to provide fo terpretive

guidance and practical assistance to practitioners in imple-
menting the Engagement Standards and to promote good
practice. The following are the AASC engagement standards
and the related Practice.Statements.
Engagement Standards Practice Statements

1. Philippine Standards on Auditing (PSAs) Philipine Auditing Practice
Sfatements (PAPSs}
2. Philippine Standards on Review Philippine Review Engagement
Engagements (PSREs) Practice Statements (PREPSs)
3. Philippine Standards on Assurance Philippine Assurance::
Engagements (PAEPSs) EngagemP.nt Practice
Statements (PAEPSs)
4. Philippine Standards on Related Philippine Related Services
Services (PSRSs) Practice Stal'. nents (PRSPSs)
43. The auditor's satisfaction as to the reliability of an assertion

being made by one party for use ,by another party is called
A. Opinion C. Examination
B. Assurance D. Verification
The term "assurance" means the practitioner's satisfaction

as to the reliability of an assertion being made by one party
for use by another party. The level of assurance that may b.e
provided depends on the procedures performed and the ev-
idence collected by the practitioner.
44. What level of assurance is provided by the auditor in an au-

dit engagement?
A. Absolute
B. High, but not absolute
C. Moderate
D. No assurance
In an audit engagement, the auditor provides a high, but not

absolute level of assurance that the financial statements are
free of material misstatement. This is expressed positively
in the audit report as reasonable assurance.
45. What level of assurance is provided by the practitioner in a

review engagement?
A. No assurance C. Reasonable
B. High, but not absolute D. Moderate
In a review engagement, the practitioner provides a moder-

ate level of assurance that the information subject to review
is free of material misstatement. This is expressed in the
form of a negative (also called limited) assurance.
46. For the purpose of expressing negative assurance in the re-

view report, the practitioner should obtain sufficient appro-
priate evidence primarily through
A. Inquiry and confirmation
B. Analytical procedures and substantive tests of details of
transactions and account balances
C. Confirmation and tests of controls
D. Inquiry and analytical procedures
47. In reviewing a company's financial statements, a practitioner

is required to
A. Send bank confirmations.
B. Obtain knowledge of the client's industry.
C. Obtain a signed engagement letter from the client.
D. Observe client's physical inventory.
48. In a review engagement, the practiti0ner performs which of

the following?
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Se:vices 23
Obtain an understanding Tests of Tests of

of internal control controls transactions
A. Yes Yes No
B. Yes No Yes
c. No Yes Yes
D. No No No
49. A practitioner's review of an entity's financial statements

does not provide assurance that he/she will become aware
of all significant matters that would be disclosed in an audit.
However, if the practitioner has become aware that infor-
mation coming to his/her attention may be materially mis-
stated, the practitioner should .
A. Carry out additional or more extensive procedures as are
necessary to achieve limited assurance.
B. Withdraw immediately from the engagement.
C. Perform a complete audit and issue a modified auditor's
report.
D. Downgrade the engagement to a compilation and issue
the appropriate report.
According to PSRE 2400, if the practitioner has reason to be-

lieve that the information subject to review may be materi-
ally misstated, he/she should carry ou.t additional or more
exLensive procedures as are necessary to be able to express
negative assurance or to confirm that a modified report is
required.
50. The following statements relate to a review of financial

statements. Which is incorrect?
A. The objective of a review of financial statements is to
enable a practitioner to state whether anything has come
to the practitioner's attention that causes the practitioner
to believe that the financial statements are not prepared
in accordance with an identified financial reporting

framework.
B. A review comprise~ inquiry and analytical procedures
which are designed to review the reliability of an asser-
tion that is the responsibility of one party for use by an-
other party.
C. A review ordinarily involves an assessment of accounting
and internal control systems.
D. The level of assurance provided in a review report· is less
than that given in an audit report.
Whil e a review invo lves the application of audit skills and

techniq ues and the gathe ring of evidence, it does not ordi-
naril y invo lve rin assessment of acco unting and internal con-
trol systems, tests of records and of responses to inquiries
by obtai ning co 1-robo rating evid ence through inspection,
observation, confirmation, and computation which are pro-
·cedure·- ordina rily performed during an audit.
51. The following statements relate to a review of interim finan-

cial information performed by the entity's independent audi-
tor. Which is incorrect?
A. Similar to a financial statement audit, a review of interim
financial information is designed 'to obtain reasonable as-
surance that the interim financial information is free from
q1aterial 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 wilh an applicable financial reporting frame-
wo~. ·
C. In a review of inlerim financial information, the auditor
should have an understanding of the entity and its envi-
ronment, including its internal control.
CHAPTER 1 An Introduction to Assurance, Auditing , and Related Services 25
D. A review of interim financial information may bring sig-

nificant matters affecting the interim financial infor-
mation to the· auditor's attention, but it does not provide
all of the evidence that would be required in an audit.
In contrast to an audit, a review of interim financial infor-

mation is not designed to obtain reasonable assurance that
the interim financial information is free from materia.l mis-
statement.
The objective of an engagement to review an entity's inter··

im financial inform ation is to en able the auditor to express a
conclusion whether, on the basis of the review, anythjng has
come to the auditor's attention that causes the auditor to be-
lieve that the interim financial information is not prepared,
in all material respects, in accordance with an applicable fi-
nancial reporting framework.
52. In a compilation engagement, the accountant is engaged to

use accounting expertise as opposed to auditing expertise to
collect, classify, and summari;ze financial information. What
type of assurance is provided by the accountant when
he/she performs this engagement?
A. Positive assurance
B. Negative assurance
C. No assurance
D. Limited assurance
A compilation engagement ordinarily entails reducing de-

tailed data to a manageable and understandable form with-
out a requirement to test the assertions underlying that in-
formation.
The procedures employed are not designed and do not ena-

ble the accountant to express any assurance on the financial
information.
However, the accountant's involveme nt provides some ben-

efit to users of compiled financial information ·because the
work has been performed with due professional skill and
care.
53. Which of the following statements concerning compilation

engagement is incorrect?
A. In a compilation engagement, the accountant is engaged
to use accounting expertise as opposed to auditing ex-
pertise to collect, classify, and summarize financial in-
formation.
B. The procedures employed in a compilation engagement
enable the accountant to express a moderate level of as-
surance on the compiled financial information.
C. Users of the compiled financial information derive some
benefit as a result .of the accountant's involvement be-
cause the service has been performed with due profes-
sional skill and care.
D. A compilation engagement ordinarily entails reducing de-
tailed data to a manageable and understandable form
without a requirement to test the assertions underlying
that information.
The procedures employed in a compilation engagement are

not designed and do not enable the accountant to express
any assurance on the financial information.
54. When performing a compilation engagement, the accountant

is required to
A. Assess· internal controls.
B. Make inquiries of management to assess the reliability

and completeness of the information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and opera-
tions of the entity.
According to PSRS 4410 (Engagements to Compile Financial

Information), "The accountant should obtain a general
knowledge of the business and operations of the entity and
should be familiar with the accounting principles and prac-
tices of the industry in which the entity operates and with
the form and content of the financial information that is ap-
propriate in the circumstances."
The standard 'further provides that, "The accountant ordi-

narily obtains knowledge of these matters through experi-
ence with the entity or inquiry of the entity's personnel."
PSRS 4410, par. 13, provides that the accountant is not or-
dinarily required to:
a) make any inquiries of management to assess the reli-
ability and.completeness of the information provided;
b) assess internal controls;
c) verify any matters; or
d) verify any explanations.
55. Each page of the financial information compiled by the ac ..

countant should include the following reference, except
A. "Unaudited"
B. "Compiled without Audit or Review"
C. "Refer to Compilation Report"
D. "Compiled, Negative Assurance Expressed"
According to PSRS 4410 (Engagements to Compile Financial

Information), the financial information compiled by the ac-
countant should contain a reference such as:
• Unaudited;
• Compiled without Audit or Review; or
• Refer to Compilation Report
on each page of the financial information or on the front of
the complete set of financial statements.
56. An accountant who performs a compilation engagement

A. Should read the compiled information and consider
whether it appears to be appropriate in form and free
from obvious material misstatements.
B. Should use his/her auditing expertise in testing th~ as-
sertions underlying the compiled financial information.
C. Include in his/her report a listing of the specific proce-
dures performed.
D. Need not obtain an ackr:iowledgment from management
of its responsibility for the appropriate presentation of
the financial information.
57. What assurance is provided by the auditor in an agreed-

upon procedures engagement?
A. Reasonable C. Moder.ate
B; Absolute D. No assurance
In an agreed-upon procedures engagement, the auditor

simply provides a report of the factual findings and ex-
presses no assurance in his/her report. U$ers of the report
make an assessment of the procedures (lnd findings report-
ed by the auditor and draw their own/Conclusions from the
auditor's work.
58. 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 par-
ties have agreed and to report on factual findings.
B. Use accounting expertise as opposed to auditing ~xper
tise to collect, classify, and summarize financial infor-
mation.
C. Provide a moderate level of assurance that the infor-
mation is free of material misstatement.
D. ·Provide a high, but not absolute, level of assurance that
the information is free of material misstatement.
In an engagement to perform agreed-upon procedures, an

auditor is engaged to carry out those procedures of an audit
nature to which the auditor and the entity and .any appro-
priate third parties have agreed and to report on factual
find.ings.
The report contains no assurance and is restricted to those

parties that have agreed to the procedures to be performed,
since others, unaware of the reasons for the procedures,
may misinterpret the results. Users of the report must form
their own conclusions from the auditor's work.
59. A report may be based upon applying agreed-upon proce-

dures to sp~cified elements, accounts, or items of a financial
statemerit~ The users of the report should participate in es-
tablishi'ng the procedures to be performed. If the auditor
cannot discuss the procedures with all the parties who will
r£:ceive 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 in-

volved. ·
III. Distribute a draft of the type of report that will be is-
sued to the parties involved.
A. I and II only C. II and III only
B. I and III only D. I, II, and III
PSRS 4400 (Engagements on Agreed-upon Procedures)

states, "In certain circumstances, for example, when the
procedures have been agreed to betvveen the regulator, in-
dustry representatives and representatives of the account-
ing profession, the auditor may not be able to discuss the
procedures with all the parties who wilt receive the report.
In such cases, the auditor may consider, for example, dis-
cussing the procedures to be applied with appropriate rep:
resentatives of the parties involved, reviewing relevant cor-
respondence from such parties or sending them a draft of
the type of report that will be issued."
60. An auditor may accept an engagement to perform specified

procedures on the specific subject matter of specified ele-
ments, accounts, or items of a financial sta~ement if
A: The report does not list the procedures performed.
B. The financial statements are prepared in accordance with
a special purpose framework.
C. Use of the report is restricted.
D. The auditor is also the entity's continuing auditor.
PSRS 4400 states that the report is restricted to those par-

tiP.s .that have agreed to the procedures to be performed ·
since others, unaware of the r~asons for the procedures,
may misinterpret the results.
CH,C.,PTER 1 An Introduction to Assurance, Auditing, and Related Services 31
Answer A is incorrect because the report should include a

listing of the specific procedur~s performed.
Answer B is incorrect because the financial statements need

not be prepared in accordance with a special purpose
framework.
Answer D is incorrect because the auditor need not. be the

entity's continuing auditor.
61. Reports on agreed-upon procedures are intended to be dis-

tributed
A. To only the involved parties, who are aware of the rea-
sons for the procedures.
B. Only to the stockholders of the entity.
C. To any party to whom the client wishes.
D. Only to the entity's management.
62. An engagement to perform agreed-upon procedures may ·

involve the auditor in performing certain procedures con-
cerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.
A. I and II only C. I and III only
B. II and III only D. !, II, and III
63. The report on an agreed-upon procedures engagement

should contain
A. Identification of the purpose for which the agreed-upon
procedures were performed.
B. An expression of positive assurance based on the specific
procedures performed.
c. A statement that the auditor is independent of. the entity.
32 CPA EXAM/Nkf/ON REVIEWER: AUDITING.THEORY
D. A general description of the procedures performed.
According to PSRS 4400, the report on an agreed-upon pro-

cedures engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient de-
tail to enable the users of the report to understand the na-
ture and extent of the work performed.
Answer B is incorrect because the report should include a

statement that the procedures performed do not constitute
either an audit or a review and, as such, no assurance is
expressed.
Answer C is incorrect because the report should contain a

statement that the auditor is not independent of the entity if
such is the case.
Answer D is incorrect because the report should include a

listing of the specific procedures performed.
64. Which of the following engagements does not require com-

pliance with independence requirements?
A. Compilation of financial information.
B. Review of financial statements.
C. Examination of prospective financial information.
D. Audit of financial statements.
Independence is not a requirement for compilation and

agreed-upon· procedures engagements. However, where the
accountant or auditor is not independent, a statement to
that effect would be made in the report.
65. Which of the following services, if any, may a practitioner

who is not independent provide?
A. Compilations but not reviews.

B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures b1;1t not compilations.
66. A practitioner is associated with financial information when

I. The practitioner attaches a report to that financial infor-
mation.
II. The practitioner consents to the use of his/her name in a
professio~al connection.
A. I only C. Either I or II
A practitioner is associated with financial information when

the practitioner attaches a report to that information or
consents to the use of his/her name in a professional con-
nection. If the practitioner is not associated in this manner,
third parties can assume no responsibility of the practition-
er.
C. DIFFERENT TYPES OF AUDITS
FINANCIAL STATEMENT/INDEPENDENT AUDITING
67. The .purpose of ari audit of financial statements is to

A. Relieve management or those charged with governance
of the responsibility for the preparation and presentatie>n
of the financial statem·ents.
B. Obtain an absolute level of assurance that the financial
statements as a whole are free from material misstate-
ment.
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 entity's financial statements.
An audit is conducted primarily to enhance the degree of

confidence of intended users in the financial statements.
·This purpose is achieved by the auditor's expression of an
opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable fi-
nancial reporting framework.
Answer A is incorrect because the financial statements sub-

ject to the audit are those of the entity, prepared and pre-
sented by its management, with oversight from those
charged with governance.
Answer B is incorrect because the PSAs require the auditor

to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
whether caused by fraud or error. Reasonable assurance is
a high level of assurance, but not an absolute level of assur-
ance.
Answer D is incorrect because the. auditor's opinion on the

finan cial statements does not assure the future viability of
the entity.
68. The auditor is required to comply with all PSAs rel~vant to

the audit of ah entity's financial statements. A PSA is rele-
vant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only C. Either I or II
B. II only D. Both I and II
A PSA is relevant when it is in effect and the circumstances

addressed by the· PSA exist.
69. The overall objectives of the auditor in conducting an audit

of financial statements are
I. To obtain reasonable assurance about whether the fi-
nancial 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. I and II only C. I, II, and III only
B. II and IV only D. I, II, III, and IV
The overall objectives of the auditor in conducting an audit

of financial statements are:
1. To obtain reasonable assurance about whether the finan- ·

cial statements as a whole are free from material mis-
statement, whether cause9 by fraud or error, to enable
the auditor to express an opinion on whether the finan-
cial statements are prepared, in all material respects, in
accordance with an applicable financial reporting frame-
work; and
2. To report on the financial statements, and cbmmunicate

as required by the PSAs, in accordance with the auditor's
findings.
70. The auditor is required to obtain reasonable assurance about

whether the fioancial statements are free of material mis-
statement, whether due to fraud or error. In all cases when
reasoi:iable assurance cannot be obtained, the auditor's re-

port should contain a/an
A. Unmodified opinion
B. Qualified or adverse opinion
C. Qualified or disclaimer of opinion
D. Disclaimer of opinion
The standard provides that in all cases when reasonable as-

surance cannot be obtained and a qualified opinion is insuf-
ficient in the circumstances for purposes of reporting to the
intended users of the financial statements, the auditor
should disclaim an opinion or withdraw from the engage-
ment, where withdrawal is legally permitted.
71. An audit in accordance with PSAs is performed on the prem-

ise 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 entity's financial statements.
B. To provide the auditor with all information, such as rec-
ords and documentation, and other matters that are rel-
evant to the preparation and presentation of the finan-
cial statements.
C. To provide unrestricted access to those within ~he entity
from whom the auditor determines it necessary to obtain
audit evidence.
D. To design, implement, and maintain internal control rele-
vant to the preparation and presentation of financial
statements that are free from material misstatement,
whether caused by fraud or error.
Management, and where appropriate, those charged with

governance, have responsibility for the preparation and
presentation of the financial statements in accordance with

the applicable financial reporting framework. The auditor
has the responsibility to conduct the audit . of financial
s.tatements in accordance with relevant PSAs.
72. 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 gov-
ernance are honest and have integrity' relieves the audi-
tor 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 the audit
procedures and evaluating the results thereof.
C. Professional skepticism . is necessary to the critical as-
sessment of audit evidence.
D. Professional skepticism is an attitude that includes ques-
tioning contradictory audit evidence obtained.
The auditor is required to plan and perform the audit with

professional skepticism. As defined in the standard, profes-
sional skepticism is an attitude that includes a questioning
mind, being alert to co"nditions ·.vhich may indicate possible
misstatement due to error or fraud, and a critical assess-
ment of audit evidence.
According to the standard, maintaining professional skepti-

cism red.uces the risks of:
• Overlooking unusual circumstances.
• Over generalizing when drawing conclusions from audit
obsP.rvations.
• Using inappropriate assumptions in determining the na-

ture, timing, and extent of the audit procedures and eval-
uating the results thereof.
Although the a uditor cannot be expected to disregard past

experience of the honesty and integrity of the entity's man-
agem ent a nd those charged with governance, a belief that
they are hon es t and have integrity does not relieve the audi-
tor to maintain professional skepticism in conducting the
audit.
73. Professional judgment

A. Should be exercised in planning and performing an audit
of financial statements but need not be documented.
B. Can be used as the justification for the decisions made
by t he auditor that are not supported by the facts and
circumstances of the engagement.
C. Is necessary in the evaluation of management's judg-
ments in applying the entity's applicable financial report..
ing· framework.
D. Is not used in making decisions about materiality and
a_u dit risk.
Accord ing to the sta ndard, professional judgment is nec-

essary to the proper conduct of an audit. The auditor exer-
cise professional judgment in making decisions about:
• Materiality and audit risk.
• The nature, timing, and extent of audit procedures to be
performed in gathering audit evidence.
• Evaluating whether sufficient appropriate audit evidence
has been obtained.
• Evaluating ma1tagement's judgments in applying the enti-
ty's applicable fin ancial reporting framework.
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services · 39
• Conclusions to be drawn based on the audit evidence

gathered.
The auditor is required to document the exercise of profes-

sional judgment. The documentation should enable an ex-
perienced auditor, having no previous connection with the
audit, to understand the significant' professional judgments
made in reaching conclusions on significant matters that
arise during the audit.
Professional judgment is not to he used as the justification

for decisions that are not otherwise supported by the facts
and circumstances of the engagem·e nt or sufficient appro-
priate audit evidence.
74. The primary reason for a financial statement audit by an in-

dependent CPA is to
A. Provide increased assurance to users as to the fairness
of the financial statements. ·
B. Guarantee that there are no misstatements in the finan-
cial statements and ensure that any fraud will be discov-
ered.
C. Satisfy governmental regulatory requirements.
D. Relieve management of responsibility for the financial
statements.
The objective of a financial statement audit is to express an

opinion as to whether an entity's financial statements pre-
sent fairly, in all material respects, its financial position, per-
formance, and cash flows in accordance with an applicable
fi~ancial reporting framework.
75. Independent auditing can best be describea as

A. A branch of accounting.
B. A professional activity that measures and communicates

financial and business data.
C. A discipline which attests to the · results of accounting
and other functional operations and data.
D. A regulatory function that prevents the issuance of im-
proper financial information.
The objective of an independent audit is to attest to (express

an opinion on) accounting information.
76. Which of the following statements is correct concerning an

auditor's responsibilities regarding financial statements?
A. An auditor's responsibilities for audited financial state-
ments are confined to the expression of the auditor's.
opinion.
B. The fair presentation of audited financial statements in
accordance with an applicable financial reporting frame-
work is an implicit part of the auditor's responsibilities.
C. Making suggestions that are adopted about the form and
content of an entity's financial statements impairs an au-
ditor's independence.
D. The auditor's report should provide an assurance as to
the future viability of the entity.
The auditor's responsibility for the financial statements is

confined to the expression of his/her opinion on them.
77. A financial statement audit aids in the communication of

economic data because the audit
A. Assures the readers of final")cial statements that any
fraudulent activity has been corrected.
B. Guarantees that financial data are fairly presented.
C. Lends credibility to the financial statements.
D. Confirms the accuracy of management's financial repre-
sentations.
CHAPTE_R 1 An Introduction to Assurance, Auditing, and Related Services 4\
In a financial st_a tement audit, the auditor expresses an opin-

ion on the fairness of the audited financial statements. The
auditor's opinion helps establish the credibility of the finan-
cial statements.
78: Which of the following best describes the reason why an in-
dependent auditor reports on financial statements?
A. A poorly designed internal control system may be in ex-
istence. _
B. Different interests may exist between the company pre-
paring· the statements and the persons using the state-
ments.
C. A misstatement of account balances may exist and is
generally corrected as the result of the independent au-
ditor's work.
D. A management fraud may exist and it is more likely to be
detected by independent auditors.
In making decisions, external financial statement users are

interested in financial statements that present as closely as
possible the true financial position, performance, and cash
flows of the company.
Management, knowing that its stewardship function is to be

·evaluated on the basis 1of the financial statements, may have
incentives to resort tq fraudulent financial reporting. Thus,
. a possible conflict of interest may be assumed between
management and users of financial statements.
I
The a~ditor's role is.Jto lend credibility to the audited finan-

cial statements by expressing an opinion on the fairness of
presentation of the financic1l position, performance, and
cash flows ofthe company.
79. Which of the following can be significantly affected by a fi-

nancial statement audit?
A. Business risk
B. Information risk
C. Inherent risk
D. The risk-free interest rate
80. The primary responsibility for the adequacy of disclosure in

the financial statements rests with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Securities and Exchange Commission.
D. Auditor in charge of the field work.
Management is responsible for the fairness of the represen-

tations made through financial statements. The auditor's
responsibility is confined to the expression of opinion on the
fairness of management representations.
81. Which of the following elements does not relate to audit

quality?
A. Audit competence
B. Audit fees
C. Independence
D. Due diligence
Audit quality is an overall concept that encompasses adher-

ence to independence, auditor competence, due diligence,
and quality control processes.
INTERNAL/OPERATIONAL AUDITING
82. The following statements relate to internal auditing? Which

is incorrect?
CHAPTER 1 An Introduction to AssuraAce, Auditing, and Related Services 43
A. Internal auditing is carried out within an entity by em-

ployees of the entity or by personnel contracted for the
purpose.
B. Internal auditing has become a function that evaluates
and improves an organization's risk management, control
.and governance processes to add value to the organiza-
tion.
C. The internal auditor's judgments are subordinated to
those of management.
D. Internal au~iting has evolved into a highly professional
activity that extends beyond the appraisal of the efficien-
cy and effectiveness of an entity's oper~tions.
83. Which of the following statements is an incorrect descrip-

tion of the role of internal auditors?
A. Internal auditors should review the means of minimizing .
risks and assist management processes.
_B. Internal auditors should assess risks within the business
operations and those from outside the business.
C. Internal auditors should appraise the economy and effi-
ciency with which resources are employed.
D. Internal auditors should have authority and responsibility
for the activities they audit.
84. Which of the following statements is not true in respect of

the internal auditor? ·
A. The scope of audits performed by the internal auditor is
primarily in respect of financial report audits.
B. An internal auditor does not require a license to. practice.
C. Internal auditors are usually employed by companies and
government units.
D. Primary responsibility of the internal auditor is to the
-board of directors.
85. . Which of the following groups could be involved in an opera-

tional audit?
Internal Government
CPA Firms Auditors Auditors
A. Yes Yes Yes
B. Yes No No
c. No No Yes
D. Yes Yes No
' an operational au-

86. Which is not one of the three phases in
dit?
A. Evidence accumulation and evaluation
B. Planning
c. Reporting and follow-up
D. Training and supervising employees
87. In performing an operational audit, the auditor primarily re-

lies on which of the following procedures?
A. Physical inspection
B. Analytical procedures
C. Inquiry and observation
D. Tracing and vouching
88. 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 intended results of operations, pro-
grams or activities.
C. The achievement of objectives within a specified time
frame.
D. The acquisition of resources at appropriate times and
within a specified time frame.
89. Before an effectiveness audit can be performed, there must

be
A. Specific criteria developed to define effectiveness.
B. A compliance audit performed by a government auditor.
C. A review performed by either an independent or internal
auditor.
D. A financial statement audit by an independent auditor.
90. Which of the following activities would generally account for

a significant proportion of an internal auditor's time?
A. Checking the company is complying ·with all of its rules
and regulations of operation.
B. Verifying all invoices before payment is made.
C. Ensuring-the company is operating within budget.
D. Evaluating the effectiveness and efficiency of .all phases
of an entity's operations.
91. Which of the following is a typical objective of an operational

audit?
A. To determine whether an entity's internal control system
is adequately operating as designed.
B. To determine whether an entity's operational information
is in accordance with PFRS.
C. To determine whether an entity's financial statements
present fairly the results of operations.
D. To determine whether an entity's specific operating units
are functioning efficiently and effectively.
92. The primary orientation of operational auditing is towards

A. Futur~ improvements to accomplish the goals of man-
agement.
B. The accuracy of the data reflected in management's fi-
nanci~I records.
C. The verification that a company's financial report is fairly
presented.
D. Past protection provided by existing internal control.
93. The purpose of an internal audit is

. .
I. To evaluate the adequacy and effectiveness of compa-
ny's internal controls.
II. To determine the extent to which assigned responsibili-
ties are actually carried out.
III. To collect evidence on whether the company is continu-
ing as a going concern .
A. I and II only C. II and III only
B. I and III only D. I, II, and III
94. What is the proper organizational role of internal auditing?

A. To ~erve as an independent, objective assurance and
consulting activity that adds value to operations.
B. To assist the external auditor in order to reduce external
audit fees.
C. To perform studies to assist in the attainment of more
efficient operations.
D. To serve as the investigative arm of the audit committee
of the board of directors.
Intern a l auditing is defined as "an independent, objective

assurance and consulting activity designed to add value and
improve an orga nization's operations. It helps an organiza-
tion accomplish its objectives by bringing a systematic,· dis-
ciplined approach to evaluate a nd improve the effectiveness
of risk management, control, and governance processes."
Answer B is incorrect because while it is true that internal

audit work reduces external audit fees, it is not a reason for
having an internal audit department.
Answer C is incorrect because the primary role of internal

auditing is not limited to assessing the efficiency of opera-
tions.
Answer D is incorrect because internal auditors serve not

only the audit committee of the board of directors but also
the entity's management.
95. Which of the following best describes the scope of internal

ting as it has developed to date?
audi_
A. Internal auditing involves appraising the economy and
efficiency with which resources are employed.
B. Internal auditing has evolved to verifying the existence
of assets and reviewing the means of safeguarding as-
sets.
C. Internal auditing has evolved to more of an operational
orientation from a strictly financial orientation.
D. Internal auditing involves evaluating compliance with
policies, plans, procedures, laws, and regulations.
Internal auditin9 includes the audit of

1. Financial and operating information;
2. Compliance with policies, plans, procedures, laws, re~ula
tions, and contracts;
3. The means of safeguarding assets and verifying their ex-
istence;
4. The economy and efficiency with which resources are
employed; and
5. Operations or programs to ascertain whether results are
consistent with established objectives and goals and
whether the,1 are being carried out as prescribed.
Answers A, B, and D are incomplete descriptions of the

scope· of internal auditing.
96. Which of the following is considered a primary reason for

creating an internal audit department?
A. To evaluate and improve the effectiveness of control
processes.
B. To ensure the accuracy, reliability, and timeliness of fi-
nancial and operating data used in management's deci-
sion making. ·
C. To relieve management of the responsibility for estab-
lishing effective controls.
D. To safeguard resources entrusted to the organization.
Internal auditing is defined as "an independent, objective

assurance and consulting activity designed to add value and
improve an organization's operations. It helps an organiza-
tion accomplish its objectives by bringing a systematic, dis-
ciplined approach to evaluate and improve the effectiveness
of risk management, control, and governance processes."
Answer B is incorrect because internal auditors do not en-

sure the accuracy, reliability,' and timeliness of information
used in decision making. They report on the status of opera-
tions.
Answer C is incorrect because management is responsible

for establishing and maintaining internal controls.
Answer D is incorrect because· prescribed controls-not

management-safeguard the organization's resources.
97. The internal auditing profession has advanced primarily as a

result of .
A. Increased interest by Bachelor of Science in Accountancy
(BSA) graduates and experienced auditors.
B. Job qualification specifications that indude added em-

phasis on background knowledge and skills.
C. The limitation of financial statement audit scope.
D. Increased complexity and sophistication of business op-
erations;
Internal auditing is an appraisal control that measures and

evaluates other controls. The increased complexity and so-
phistication of business operations have required manage-
ment to rely on this appraisal control.
Answer A is incorrect because increased interest by BSA

graduates and experienced auditors contributes to the ad-
vancement of the internal audit profession, but it is not the
primary reason for such advancement.
Answer B is incorrect because improved job qualification

specifications of internal auditors result from increased
complexity and sophistication of business operations.
Answer C is incorrect because the limitation of external 'au-

dit scope does not contribute to the advancement of the in-
ternal audit profession.
98. Which of the following actions would be an appropriate re-

sponse by companies to improve the public's perception of
their financial reporting?
A. Increased adoption of audit committees.
B. Keeping external and ·internal auditing work separated to
maintain independence.
c. Requiring internal auditors to report all significant find-
ings of fraud and illegal activity to the company presi-
dent.
D. None of the above.
The audit committee is composed of outside directors who

are independent of management. The primary purpose is to
assure that the directors are exercising due care and exter-
nal and internal auditors are independent of management.
The following are some of the audit committee's functions:

1. Select the external auditors.
2. Review the external auditor's overall audit plan.
3. Evaluate the results of external and internal audits·.
4. Review the internal auditing work schedule, budget, etc.
5. Meet regularly with the internal auditing director.
The above functions should increase public confidence on

the fair presentation of the company's financial statements.
99. Internal auditors review the adequacy. of the company's in-

ternal control system primarily to
A. Help determine the nature, timing, and extent of tests
necessary to achieve audit objectives.
B. Determine whether the internal control system provides
reasonable assurance that the company's objectives and
goals are met efficiently and economically.
C. Ensure that material weaknesses in the system of inter-
nal control are corrected.
D. Det,ermine whether the internal control system ensures
that financial statements are fairly presented.
Internal auditors review the adequacy of the company's in-

ternal control system primarily to ascertain whether the
system provides reasonable assurance that the company's
objectives and goals will be achieved efficiently and eco-
nomically. Efficient performance implies the use of minimal
resources to meet the company's objectives and goals. Eco-
nomical performance is the accomplishment of objectives

and goals at a cost comm~nsurate with the task.
Answer A is incorrect because external auditors determine

and use the acceptable level of detection risk to determine
the nature, timing, and extent of substantive tests.
Answer C is incorrect because internal auditors do not have

authority to ensure that material weaknesses in the internal
control system are corrected.
Answer D is incorrect because the scope of internal auditing

includes, but is not limited to, determining the fairness of fi-
nancial stat~ments.
100.· The internal auditing department's responsibility for deter-

ring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention act[vi-
ties.
Internal auditors assist in the prevention of fraud by exam-

ining and evaluating the system ·of internal control.
Answers A and B are incorrect because management, not the

internal auditor, has the responsibility to establish and
maintain aH effective internal control system.
Answer D is incorrect because internal auditors are not al-

lowed to assume operating re~ponsibilities.
101. In conducting an appraisal of the economy and efficiency

with which company resources are used, an internal audi-
tor's responsibility is to
A. Verify the accuracy of asset valuation.
B. Review the reliability of operating information.
C. Verify the existence of assets.
D. Determine whether operating standards have been es-
tablished.
The company's management is responsible for setting oper-

ating standards. The internal auditor's responsibilities are
to determine that:
1. Management has established such standards.
2. The standards are being met.
3. Deviations from established standards are being iden-
tified and corrected.
4. Corrective action has been taken.
Answers A and Bare incorrect because they relate to the re-

liability and integrity of information.
Answer C is incorrect because verifying the existence of as-

sets relates to the safeguarding of assets.
102. Internal auditors should review the means of physically

safeguarding assets from losses arising from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.
Internal auditors are required to review the means em-

ployed by the company to safeguard its assets from various
types of losses such as those r~sulting from fire, theft, un-
scrupulous or illegal · activities, and exposure to the ele-

ments.
I
Answers B and D are incorrect because they relate to ·effi-

ciency of operations.
Answer C is incorrect because it relates to the reliability Of

information, not physical safeguards.
103. Operational audits generally have been conducted by inter-

nal and COA auditors, but may be performed by certified
public accountants. A primary purpose of an operational
audit is to provide
A. A measure of management performance in meeting or-
ganizational goals.
B. The results of internal examinations of financial and ac-
counting matters to a company's top-level management.
C. Aid to the independent auditor, who is conducting the
examination of the financial statements.
D. A means of assurance that internal accounting controls
are functioning as planned.
Operational auditing involves a systematic review and eval-

uation of an entity's activities in relation to the efficient use
of its resources and the effectiveness in accomplishing its
objectives. The objective of operational auditing is to assess
performance, identify areas for improvement, and develop
recommendations.
GOVERNMENTAL AUDITING
104. Governmental auditing often extends beyond examinations

leading to the expression of opinion on the fairness of finan-
cia! presentation and includes audits of efficiency, economy,
effectiveness, and also
A. -,Accuracy
B. Compliance
C. Evaluation
D. Internal Control
A governmental audit is typically designed to determine

whether the auditee has complied with applicable laws and
regulations.
105. A governmental audit may extend beyond an audit leading

to the expression of an opinion on the fairness of financial
presentation to include
Program Economy and
Results Compliance Efficiency
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes
The types of audits conducted by the Commission on Audit

(COA) are financial audit .and performance audit. Perfor-
mance audits include economy, efficiency, and program au-
dip;. Included in the scope of financial and performance au-
dits is determining whether the entity has complied with
applicable laws and regulations.
106. An objective of a performance audit is to determine whether

an entity's
A. Operational information is in accordance with govern-
ment auditing standards.
B. Specific operating units are functioning economically and
efficiently.
c. Financial statements present fairly ~e results of opera-
tions.
D. Internal control is adequately operating as designed.
Performance audits include economy, efficiency, and pro-

gram audits. Economy and efficiency audits determine
whether the entity's resources are utilized efficiend'y.
Program or effectiveness audits determine whether the en-

tity has been effective in achieving the desired results or
benefits of the program or activity.
107. Which of the following statements is a standard applicable to

financial statement audits in accordance with Government
Auditing Standards?
A. An auditor should determine the extent to wh ich the en-
tity's programs achieve the desired level of results.
B. An auditor should assess whetl1er the entity has reporta-
ble measures of economy and efficiency that are valid
and reliable.
C. An auditor should report on the scope of the auditor's
testing of internal control.
D. An auditor should briefly describe in the auditor's report
the method of statistical sampling used in performing
tests of controls and substantive tests .
Government auditors are : equired to prepare a written re-

port on th.e entity's internal control and assessment of con-
trol risk made as part. of a financial sta teme nt audit. The
auditor's report should include the followin g:
1. The scope of the auditor's work in obtaining a n under-
standing of the entit_is nt ernal co ntrol and in his/her
assessment of control r isk.
2. The entity's significant con trols including those that
are established to ensure co mpli ance with laws and
regulations that have a material impac·t on the financial
statements.
3. The conditions, including the identification of material

weaknesses, identified as a result of the auditor's
work.
108. Reporting on internal control under Government Auditing

Standards differs from reporting under generally accepted
auditing standards in that Government Auditing Standards
require a
A. Statement of positive assurance that internal control ac-
tivities designed to detect material errors and fraud were
tested.
B. Written report describing the entity's internal control ac-
tivities specifically designed to prevent fraud, abuse, and
illegal acts.
C. Statement of negative assurance that the internal control
activities not tested have an immaterial effect on the en-
tity's financial statements.
D. Written report describing each reportable condition ob-
served, including identification of those considered mate-
rial weaknesses.
The Government Auditing Standards require auditors to

prepare a written report on the entity's internal control.
This report should include the conditions, including the
identification of material weaknesses, discovered as a result
of the auditor's work. However, the report should not give
any form of assurance on the design and effectiveness of the
entity's internal control.
109. yYhat is the responsibility of an auditor who is engaged to

audit the financial statements of a government entity?
A. Assess control risk with respect to each component of in-
ternal control.
B. Assume responsibility for assuring that the entity com-
plies with applicable laws and regulations.
C. Obtain an understanding of the possible financial state-

ment effects of laws and regulations having direct and
mqterial effects on amounts reported.
D. Design the audit to provide reasonable assurance that
the statements are free of material misstatements result-
ing from illegal acts having direct or indirect effects.
Guv~tnment auditors are required to obtain an understand-

ing of the possible financial statement effects of laws and
regulations having direct and material effects on amounts
reported. Also, they are required to make an assessment
whether management has identified such Jaws that might
have such effects.
Answer A is incorrect because auditors assess control risk in

terms of financial statement assertions.
Answer B is incorrect because management is responsible

for assuring that the entity complies with applicable Jaws
and regulations.
Answer D is incorrect because auditors are primarily con-

cerned with those that have direct and material effects on
financial statement amounts.
110. The objective of governmental effectiveness or program au-

diting is to determine if the desired results of a program are
being achieved. What is the first st~p in conducting such an
audit?
A. Identify the legislative intent of the program being audit-
ed.
B. Collect quantifiable data on the program's success or
failure.
C. Determine the time frame to be audited.
D. Evaluate the system used to measure results.
The audit of a government program involves obta ining in-

formation about th e costs, outputs, benefits, and effects of
the program . Auditors attempt to measure the accomplish-
ments and relative success of the program based on the ac-
tual intent of the legislation that established the program.
Answers B, C, and D a re incorrect because the procedures

described are subsequent steps.
D. CONSULTING SERVICES
111. A pervasive characteristic of a CPA's role in a consulting ser-

vices engagement is that of being a( an)
A. Independent practitioner
B. Computer expert
C. Confidential reviewer
D. Objective advisor
While maintaining objectivity a nd integrity, the CPA in a

consulting services e ngagement serves the client's interest
by pursuing the objectives established by the understanding
with the client.
112. 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 auditor's independ-
ence.
B. Consulting services differ fundamentally from the CPA's
function of attesting to the assertions of other parties.
C. Consulting services ordinarily involve external reporting.
CHAPTER' 1 An Introduction to Assurance, Auditing, and Related Services 59
D. Most CPAs, including those who provide audit and tax ·

services, also provide consulting services to their clients.
The performance of consulting services is usually ·for the

sole use and benefit of.the client.
113. Which of the following are considered consulting services?

Advisory Transaction Assurance
Services Services Services
A. No Yes Yes
B. Yes Yes No ·
C. Yes No Yes
D. Yes Yes Yes
Assurance services are "independent professional services

that are intended to enhance the credibility of information
to meet the needs of an intended user." Assurance services
do not encompass consulting services. Advisory services
and transaction services are both consulting services.
114. The form of communication with a client in a cohsulting ser-

vices engagement should be · ·
A. Either written or oral.
B. Written, and a copy should be sent to management
alone.
C. Oral, with appropriate documentation in working papers.
D. Written, .and copies should be sent to both management
and the board of directors.
The form of communication with a client in a consulting

service may be written or oral depending on the:
1. Understanding with the client;
2. Need for a formal record;
3. ·Intended use of results;
4. Significance or sensitivity of material covered; and

5. Degree results are communicated during the engage-
ment.
115. Which of the following is the most appropriate action to be

taken by a CPA who has been QSked to perform a consulting
services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry in- .
valved?
A. Accept the engagement but he/she should conduct re-
search or consult with others to obtain sufficient compe-
tence.
B. Decline the engagement because he/she lacks sufficient
knowledge.
C. Accept the engagement and issue a report that contains
his/her opinion on the achievability of the results of the
merger.
D. Accept the engagement and perform it in accordance
with Philippine Standards on Auditing (PSAs).
A CPA is not precluded from accepting the engagement but

he/she should perform additional research or consult with
others to obtain a sufficient level of knowledge about the
subject of the engagement.
Answer Bis incorrect because the CPA need not decline the
engagement.
Answer C is incorrect because a CPA is required to always

include a caveat in his/her r.eport on prospective financial
information that the prospective results may not be
achieved.
Answer D is incorrect because audits, not ·consulting ser-

vices, are required to be performed in accordance with Phil-
ippine Standards
TRUE OR FALSE
1. As used in the Philippine Framework for. Assurance Engage-

ments, the term "practitioner" refers to a CPA in public prac-
tice.
2. In a limited assurance engagemerit, the practitioner ex-

presses his/her conclusion in positive form.
3. Common examples of assurance engagements are engage-

ments to apply agreed-upon procedures and consulting.
4. When an assurance engagement is a part of a larger en-

gagement (for example, a business acquisition consulting
engagement which includes a requirement to provide assur-
ance on historical financial information), the Philippine
Framework for Assurance Engagements shall be applied only
to the assurance portion of the engagement ..
5. In some cases, the ethical requirement on professional com-

petence can be satisfied by using the work of individuals
from other di.sciplines referred to in the standards as ex-
perts.
6. In a direct reporting engagement the re5Ponsible party is /
responsible for the subject matter of the engagement.
7. Under all situations, the responsible party is the party who

engages the practitioner (i.e., the engaging party).
8. The responsible party can pe one of those for whom the

practitioner prepares the assurance report.
9. In an ehgagement to provide assurance about the effective-

ness of an entity's internal control, the subject matter is the ·
assertion of management about its effectiveness.
10. An appropriate subject matter is one that is capable of con-

sistent evaluation or measurement against the identified cri-
teria.
11. The criteria or benchmarks that are used to measure or

evaluate the subject matter of the assurance engagement
need not be available to the intended users.
12. The quantity of evidence is affected by the risk of the sub-

ject matter information being materially misstated and also
by the quality of such evidence (the greater the risk and the
higher the quality, the more evidence is likely to be re-
quired).
13. Assurance engagement risk is the possibility that the practi-

tioner will express an inappropriate conclusion on a subject
matter information that is materially misstated.
14. The conclusion: "In our opinion, internal control is effective

in all material respects, based on x:YZ criteria." expresses a
reasonable assurance in positive form.
15. The practitioner's conclusion in an assertion-based engage-

ment can be worded in terms of the intended users' asser-
tion.
16. PSA 120 (Framework of Philippine Standards on Auditing)

applies to audits and related services such as taxation and
consultancy.
17. In a review engagement, the auditor provides a high, but

not absolute level of assurance (expressed in the form of
negative assurance) that the information subject to review is
free of material misstatement.
18. For agreed-upon procedures and compilation engagements,

no assurance is expressed.
19. Because most of the evidence available to the auditor is

conclusive, rather than persuasive, in nature, absolute as-
s~rance in auditing is not attainable.
20. A review of financial statements normally involves an as-

sessment of an entity's accounting and internal control sys- .
terns.
21. A practitioner engaged to perform related services such as

agreed-upon procedures, re\(iew, and compilation need not
be the auditor of the entity's financial statements.
22. A practitioner is associated with financial information when

he/she attaches a report to that information or consents to
the use of his/her name in a professional connection.
23. Independence is not a requirement for a compilation en-

gagement.
24. In a financial statement audit, reasonable assurance is ob-

tained when the auditor has gathered sufficient appropriate
audit evidence to reduce audit risk to an acceptably low lev-
el.
25. In general, misstatements are considered to be material if,

individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of the financial statements.
26. Audit risk is the risk that the auditor will provide an unmodi-
fied opinion on financial statements that are, in fact, ma~eri
ally misstated.
27. A practitioner's report expressing an opinion on an entity's

internal controls should state that the study and evaluation
of the internal controls was conducted in accordance with
Philippine Standards on Auditing (PSAs).
28. A summary of findings rather than assurance is most likely

to be included in an examination report.
29. The risk that information is misstated is referred to as infor-

mation risk.
30. The work of internal auditors is primarily for· the benefit of

the entity's management and its board of directors.
KEY ANSWERS
1. A 24. A 47. B 70. c 93. A

2. D 25. B 48. D 71. A 94. A
3. B· 26. c 49. A 72. A 95. c
4. c 27. D 50. c 73. c 96. A
5. B 28. c 51. A 74. A 97. D
6. B 29. A 52. c 75. c 98. A
7. c 30. A 53. B 76. A 99. B
8. B 31. . D 54. D 77. c 100. c
9. c 32. c 55. D 78. B 101. D
10. c 33. B 56. A 79. B 102. A
11. A 34. c 57. D 80. B 103. A
12. A 35. c 58. A 81. B 104. B
13. A 36. D 59. D 82. c 105. A
14. A 37. A 60. c 83. D 106. B
15. D 38. c 61. A 84. A 107. c
16. B 39. B 62. D 85. A 108. D
17. B 40. A 63. A 86. D 109. c
18. A 41. D 64. A 87. c 110. A
19. A 42. B 65. A 88. A 111. D
20. B 43. B 66. c 89. A 112. c
21. A 44. B 67. c 90. D 113. B
22. c 45. D 68. D 91. D 114. A
23. D 46. D 69. A 92. A 115. A
66 CPA EXAM/NATION REVIEWER: AUDITING THEORY
TRUE OR FALSE
1. True 7. False 13. True 19. False 25. True
2. False 8. True 14. True 20. False 26. True
3. False 9. False 15. False 21. True 27. False
4. True 10. True 16. False 22. True · 28. False
5. True 11. False 17. False 23. True 29. True
6. True
. 12. False 18. True 24. True 30. True

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1

1. Which of the following statements best describes assurance

Assurance engagements performed by professional ac-

The level of assurance provided by the professional ac-

2. Which of the following is not an assurance service?

Services performed by professional accountants that are not

3. Which of the following professional services would be con-

D. A compilation of financial statements from a client's ac-

4. Which of the following best describes the objective of an as-

The objective of an assurance engagement is for a profes-

An assurance engagement is intended to enhance the cred-

5. Assurance services differ from consulting services in that

Assurance services differ from consulting services in that

Consulting services are usually two-party arrangements

6. How many separate parties are involved in an assurance en-

An assurance engagement involves three (3) separate par-

7. An assuranc~ engagement should have which of the follow-

An assurance engagement should have the following ele-

b. a responsible party; and

8. The Philippine Framework for Assurance Engagements

The Framework defines and describes the elements and ob-

The Framework does net itself establish standards or pro-

9. CPAs in public practice who perform assurance engagements

The Philippine Standards on Related Services (PSRSs) are to

10. In an assurance engagement, the responsible party and the

According to the Philippine Framework for Assurance En-

Answer Dis incorrect because the practitioner is responsi·

11. The subject matter of an assurance engagement may in-

According to the Philippine Framework for Assurance En~

1Z. For assurance engagements regarding historical financial

For assurance engagements regarding historical financial in-

13. When performing an assurance service, professional ac-

Criteria are the standards or benchmarks used to evaluate

According to the Philippine Framework for Assurance En-

used in similar circumstances by similarly qualified

15. Relevant criteria contribute to conclusions that are

16. Criteria that are embodied in laws or regulations, or issued

The Framework states that criteria can either be established

17. In an assurance engagement, the perso·n or persons, either

The responsible party is the one responsible for the sub-

18. In an assurance engagement, the person or class of persons

The intended user is the person or class of persons for

19. In an assurance engagement, the outcome of the evaluation

The term "subject matter information" is used in the

According to the Framework, it is the subject matter infor-

20. In some assurance engagements, the evaluation or meas-

21. The following are characteristics of "direct reporting" assur-

22. What type of assurance engagement is involved when the

D. Absolute assurance engagement

According to the Framework, the objective of a reasonable

23. What type of assurance engagement is involved when the

According to the Fra mew o r k, the objecti ve of a limited as-

me nt ri s k lo a level that is acceptable in th e circumstances

24. A practitioner's assurance report contains the following con-

25. In assertion-based assurance engagements, the evaluation

In assertion-based assurance engagements, th~ evaluation

26. The following statements relate to the three parties involved

According ~o the Framework, the res ponsible party is the

27. A proposed assurance engagement can be accepted when

A proposed assurance engagement can be accepted whei:t

28. A practitioner should accept an assurance engagement only

29. Which of the following statements is true concerning evi-

Sufficiency is the measure of the quantity of evid'ence. The