University of Perpetual Help System Laguna – Isabela Campus

Minante 1, Cauayan City, Isabela

College of Business and Accountancy

Auditing and Assurance: Principles

I. True or False. Write “True” if the statement is correct. Otherwise, write “False”. 2
points each
1. The criteria by which an auditor evaluates the information under audit may vary
with the information being audited.
2. The criteria used by an external auditor to evaluate published financial statements
are known as generally accepted auditing standards.
3. Only companies that file annual statements with the Securities and Exchange
Commission are required to have an annual external audit.
4. The financial statements most commonly audited by external auditors are the
balance sheet, the income statement, and the statement of changes in retained
earnings.
5. The primary purpose of a compliance audit is to determine whether the financial
statements are prepared in compliance with generally accepted accounting
principles.
6. CPA firms are never allowed to provide bookkeeping services for audit clients.
7. Fraud can be difficult to detect because it often involves concealment through
falsification of documents or collusion.
8. Examination of prospective financial information is an example of a special
purpose engagement.
9. A review engagement expresses an opinion with negative assurance.
10. Consulting (or advisory) engagements, such as management and tax consulting,
are not covered by the assurance framework.

II. Multiple Choice. Write the letter of the answer being asked in each question.

1. The IIA’s definition of internal auditing emphasizes the effectiveness of which of the
following?
a. Value, cost, and benefit propositions.
b. Inherent risk, residual risk, and total risk
c. Risk management, control, and governance processes.
d. Purpose, nature, and scope of work.

2. Which one of the following is more difficult to evaluate objectively?

a. Presentation of financial statements in accordance with generally accepted
accounting principles.
b. Compliance with government regulations.
c. Efficiency and effectiveness of operations.
d. All three of the above are equally difficult.
 University of Perpetual Help System Laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy

3. Which of the following audits can be regarded as generally being a compliance audit?
a. IRS agents’ examinations of taxpayer returns.
b. GAO auditor’s evaluation of the computer operations of governmental units.
c. An internal auditor’s review of a company’s payroll authorization procedures.
d. A CPA firm’s audit of the local school district.

4. Which of the following can be significantly affected by an audit?

a. Business risk.
b. Information risk.
c. The risk-free interest rate.
d. Inherent risk.

5. The trait that distinguishes auditors from accountants is the:

a. auditor’s ability to interpret accounting principles generally accepted in the United States.
b. auditor’s education beyond the Bachelor’s degree.
c. auditor’s ability to interpret FASB Statements.
d. auditor’s accumulation and interpretation of evidence related to a company’s financial
statements.

6. Which of the following is not a close relative of the covered member of an assurance
engagement?
A. Sibling
B. Nondependent child
C. Parent
D. Dependent child.

7. According to AICPA standards, which of the following situations will compromise the
independence of the CPA performing an audit?
A. Acting as an executor of an estate that had an immaterial indirect financial interest in the
client.
B. Receiving a private loan from a hedge fund manager who owns 9% of the outstanding shares
of the client company.
C. Owning 9% of a client’s outstanding shares.
D. Refinancing an automobile loan from a bank client.
 University of Perpetual Help System Laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy
8. According to AICPA standards, which of the following situations will not compromise the
independence of the CPA performing an audit?
A. CPA’s wife works as an executive assistant for the client.
B. CPA’s nondependent son has a material financial interest in the client that the CPA is not
aware of.
C. CPA’s brother works as a stock promoter for the client.
D. CPA’s father works as the CFO for the client.

9.  In performance of any professional service, a member shall

A. Maintain objectivity and integrity
B. Avoid conflicts of interest
C. Not knowingly misrepresent facts or subordinate judgment
D. All of the above

 10. Which of the following is an example of an advocacy threat to member independence?

A. An engagement team member sells securities of the attest client’s company.
B. An engagement team member is the CFO of the attest client’s company.
C. An engagement team member is litigating a bill for unpaid invoices by the attest client.
D. An engagement team member’s spouse has a direct financial interest in the attest client.

11. The process of cleaning data for it to be used in an audit data analytic is called:
A. Data extraction.
B. Data transformation.
C. Data loading.
D.  Data smoothing.

12. Which of the following categories of principles is most closely related to gathering audit
evidence?
a. Performance.
 University of Perpetual Help System Laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy
b. Reasonable assurance.
c. Reporting.
d. Responsibilities.

13. One of an accounting firm's basic objectives is to provide professional services that conform
to professional standards. Reasonable assurance of achieving this objective can be obtained by
following
a. Generally accepted auditing standards.
b. Standards within a system of quality control.
c. Generally accepted accounting principles.

14. Which of the following best demonstrates the concept of professional skepticism?
a. Relying more extensively on external evidence rather than internal evidence.
b. Focusing on items that have a more significant quantitative effect on the entity's financial
statements.
c. Critically assessing verbal evidence received from the entity's management.
d. Evaluating potential financial interests held by auditors in the client.

15. The primary purpose for obtaining an understanding of the entity's environment (including its
internal control) in a financial statement audit is
a. To determine the nature, timing, and extent of substantive procedures to be performed.
b. To make consulting suggestions to the entity's management.
c. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an
opinion on the financial statements.
d. To determine whether the entity has changed any accounting principles.

For a particular assertion, control risk is the risk that:

a. a material misstatement will occur in the accounting process.
b. audit procedures will fail to detect a weak control system.
c. control procedures will not detect a material misstatement that occurs.
d. the prescribed control procedures will not be applied uniformly.
 University of Perpetual Help System Laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy
16. For a particular assertion, control risk is the risk that:
a. a material misstatement will occur in the accounting process.
b. audit procedures will fail to detect a weak control system.
c. control procedures will not detect a material misstatement that occurs.
d. the prescribed control procedures will not be applied uniformly.

17. Auditing standards primarily encourage which of the following conversations about financial
reporting?
a. A conversation with those charged with governance to discuss matters pertaining to financial
reporting.
b. A conversation with only management to discuss matters pertaining to financial reporting.
c. A conversation with the head of the entity’s internal audit department and those charged with
governance to discuss matters pertaining to financial reporting.
d. A conversation in which those charged with governance report on management’s views on
matters pertaining to financial reporting.

18. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then that information is, by definition
of FASB Statement No. 2,
a. material.
b. insignificant.
c. significant.
d. relevant.

19. When the auditor decides to select less than 100 percent of the population for testing, the
auditor is said to be using
a. audit sampling.
b. representative sampling.
c. poor judgment.
d. none of the above.

20. An example of an assurance engagement is

a. labor data for union contract negotiation
b. audit of financial statements of a medium size company
c. regulator's questionnaire on business ethics and conduct
d. insurance claims data

21. During the audit of XYZ Co. client management informs the auditor that they have two bank
accounts both with a minimal balance in them. As the auditor you should
a. believe the client as a minimal balance is too small to worry about
b. tell management they are being dishonest, last year there were three accounts
c. ask the client staff that reconciles the bank accounts if they agree with management
 University of Perpetual Help System Laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy
d. prepare a bank confirmation and have the bank confirm the number of accounts

22. Subject matter and subject matter information of an assurance engagement can take all the
following forms EXCEPT:
a. Financial performance or conditions.
b. Litigation planning.
c. Physical characteristics.
d. Non-financial performance or conditions.

23. A responsible party does which of the following?

a. Engages the practitioner
b. Selects criteria
c. Determines the subject matter
d. Selects the audit procedures

24. The characteristics of assessing whether criteria is suitable or not are all of the following,
except:
a. Neutrality
b. International Acceptance
c. Understandability
d. Reliability

25. Sufficiency of evidence is:

a. The measure of the quality of evidence
b. Evidence which is adequate
c. Evidence which is material.
d. The measure of quantity of evidence

26. In a limited assurance engagement, the practitioner:

a. Expresses the conclusion in a negative form
b. Conveys reasonable assurance
c. Expresses the conclusion in a negative form
d. Has obtained sufficient appropriate audit evidence to reduce assurance engagement risk to an
acceptably low level

27. An assurance report:

a. Provides a written report containing a conclusion that conveys the assurance obtained about
the subject matter information.
b. Has a format that is uniquely different from ISA audit opinions.
c. Provides reasonable assurance to the responsible party.
d. Is prepared by the responsible party.

28. Which of the following is not true about the subject matter of an assurance engagement?
a. It could be systems and processes or behavior.
b. It is the topic about which the assurance is conducted.
c. It could be International Financial Reporting Standards.
 University of Perpetual Help System Laguna – Isabela Campus
Minante 1, Cauayan City, Isabela
College of Business and Accountancy
d. It could be information such as financial statements, statistical information and non-financial
performance indicators.

29. Which of the following is not one of five elements exhibited by all assurance engagements?
a. A multi-party relationship involving a practitioner, a responsible party, those in charge of
governance, and the intended users.
b. Suitable criteria.
c. The subject matter.
d. Evidence.

30. The auditor is required to prepare audit documentation sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand the _______________ in
reaching conclusions on significant matters arising during the audit.
a. The interviews conducted with employees and management.
b. Confirmation letters.
c. The total evidence gathered.
d. Significant professional judgments made.

III. Essay. Answer the following question in an essay form. 10 points each.

1. What is professional skepticism and whom does it refer to?

2. Differentiate assurance services from non-assurance services. Provide examples.