CH1 [Roque] An Introduction to Assurance, Auditing, and Related Services

Question 1

Which of the following statements best describes assurance services?

a. Independent 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 information
d. Services designed for the improvement of operations, resulting in better outcomes

Answer 1

a

Assurance engagements performed by professional accountants are intended to enhance the credibility 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 interested user

The level of assurance provided by the professional accountant’s conclusion conveys the degree of confidence that the intended user may place in the credibility of the subject matter.

Question 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

Answer 2

d

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

Question 3

Which of the following professional services would be considered an assurance engagement?

a. A management consulting engagement to provide IT advice to a client
b. An engagement to report on compliance with statutory requirements
c. An income tax engagement to prepare tax returns
d. A compilation of financial statements from a client’s accounting records

Answer 3

b

Question 4

Which of the following best describes the objective of an assurance engagement?

a. Improve the company’s outcomes
b. Compare the company’s information 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

Answer 4

c

The objective of an assurance engagement is for a professional 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 credibility 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

Question 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
b. II only
c. Both I and II
c. Neither I nor II

Answer 5

b

Assurance services differ from consulting services in that they:

1. Focus on enhancing the credibility of information rather 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 information for better outcomes

Question 6

How many separate parties are involved in an assurance engagement?

a. 2
b. 3
c. 4
d. 5

Answer 6

b

An assurance engagement involves three separate parties:

1. A practitioner
2. A responsible party
3. Intended users

Question 7

An assurance engagement should have which of the following elements?

a. Subject matter? Yes.
Criteria? No.
b. Subject matter? No.
Criteria? Yes.
c. Subject matter? Yes.
Criteria? Yes.
d. Subject matter? No.
Criteria? No.

Answer 7

c

An assurance engagement should have the following elements:

1. A three-party relationship involving:
   a. a professional accountant
   b. a responsible party
   c. intended users
2. A subject matter
3. Suitable criteria
4. Sufficient appropriate evidence
5. An assurance report

Question 8

The Philippine Framework for Assurance Engagements

a. Contain basic principles, essential procedures, and related guidance for the performance of assurance engagements
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 requirements for the performance of assurance engagements

Answer 8

b

The Framework defines and describes the elements and objectives of an assurance engagement and identifies engagements to which Philippine Standards on Auditing (PSAs), Philippine Standards on Review Engagements (PSREs), and Philippine Standards on Assurance Engagements (PSAEs) apply

The Framework does not itself establish standards or provide procedural requirements for the performance of assurance engagements. PSAs, PSREs, and PSAEs contain basic principles, essential procedures, and related guidance, consistent with the concepts in the Framework, for the performance of assurance engagements

Question 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 Philippines
c. Philippine Standards on Related Services
d. Philippine Standards on Quality Control

Answer 9

c

The Philippine Standards on Related Services (PSRSs) are to be applied to non-assurance engagements such as compilation and agreed-upon procedures engagements

Question 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

Answer 10

c

According to the Philippine Framework for Assurance Engagements, the responsible party and the intended users may be from different entities or the same entities

Answer D is incorrect because the PRACTITIONER is responsible for determining the nature, timing, and extent of procedures to be performed

Question 11

The subject matter of an assurance engagement may include

a. Financial information, Internal controls, and Compliance with Regulation
b. None of the above
c. Financial information and Compliance with Regulation
d. Internal controls

Answer 11

a

According to the Philippine Framework for Assurance Engagements, 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 facility
• 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

Question 12

For assurance engagements regarding historical financial information, reasonable assurance engagements are called:

a. Audits
b. Reviews
c. Compilations
d. Examinations

Answer 12

a

For assurance engagements regarding historical financial information, reasonable assurance engagements are called audits, while limited assurance engagements are called reviews

Question 13

When performing an assurance service, professional accountants 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
b. Norms
c. Conditions
d. Gauges

Answer 13

a

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

Question 14

The criteria against which the subject matter of the assurance engagement is to be evaluated or measured should possess which of the following characteristics?

a. Relevant, Neutral
b. Concise
c. Relevant
d. Concise, Neutral

Answer 14

a

According to the Philippine Framework for Assurance Engagements, suitable criteria should have the following characteristics:

1. Relevance
   - Relevant criteria contribute to conclusions that assist decision-making by the intended users
2. Completeness
   - Criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the engagement are not omitted
   - Complete criteria include, where relevant, benchmarks for presentation and disclosure

3.Reliability
- Reliable criteria allow reasonably consistent evaluation 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 significantly different interpretations

Question 15

Relevant criteria contribute to conclusions that are

a. Free from bias
b. Clear and comprehensive
c. Subject to different interpretations
d. Useful for decision making

Answer 15

d

Question 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

Answer 16

b

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 authorized or recognized bodies

Specifically developed criteria are those designed for the purpose of the engagement

Question 17

In an assurance engagement, the person 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

Answer 17

b

The responsible party is the one responsible for the subject 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 engages the professional accountant

Question 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

Answer 18

a

The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose

Question 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

Answer 19

a

The term “subject matter information” is used in the Framework for Assurance Engagements to mean the outcome of the evaluation or measurement of a subject matter

According to the Framework, it is the subject matter information about which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report

Question 20

In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to intended users. These engagements are called

a. Direct reporting engagements
b. Assertion-based engagements
c. Non-assurance engagements
d. Recurring engagements

Answer 20

b

Question 21

The following are characteristics of “direct reporting” assurance engagements, except

a. The subject matter information is in the form of an assertion by the responsible party that is made available to the intended users
b. The subject matter information is provided to the intended users in the assurance report
c. The practitioner either directly performs the evaluation or measurement of the subject matter or obtains a representation from the responsible party that has performed the evaluation or measurement
d. The representation of the responsible party that has performed the evaluation or measurement of the subject matter is not available to the intended users

Answer 21

a

Question 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 assurance engagement
d. Absolute assurance engagement

Answer 22

c

According to the Framework, the objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a basis for a positive form of expression of the practitioner’s conclusion

Question 23

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 assurance engagement
d. Absolute assurance engagement

Answer 23

c

According to the Framework, the objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion

Question 24

A practitioner’s assurance report contains the following conclusion:

“Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on 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

Answer 24

a

Question 25

In assertion-based assurance engagements, the evaluation or measurement of the subject matter against criteria is performed by the

a. Intended users
b. Responsible party
c. Practitioner
d. AASC

Answer 25

b

In assertion-based assurance engagements, the evaluation or measurement of the subject matter against criteria is performed by the responsible party and the subject matter information (outcome) is in the form of an assertion by the responsible party that is made available to the intended users

Question 26

The following statements relate to the three parties involved in an assurance engagement. Which is correct?

a. The responsible party and the intended users should be from different entities
b. A practitioner should decline a proposed assurance engagement when the subject matter requires specialized skills and knowledge beyond those ordinarily possessed by the practitioner
c. A responsible party is the person who is responsible for the subject matter or the subject matter information
d. The responsible party, not the intended users, determines the nature of the procedures to be performed

Answer 26

c

According to the Framework, the responsible party is the person (or persons) who:

• In a direct reporting engagement, is responsible for the subject matter; or
• In an assertion-based engagement, is responsible for the subject matter information (the assertion), and may be responsible for the subject matter

Question 27

A proposed assurance engagement can be accepted when the practitioner’s preliminary knowledge about the engagement circumstances indicates that relevant ethical requirements 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 evidence 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

Answer 27

d

A proposed assurance engagement can be accepted when the practitioner’s preliminary knowledge of the engagement circumstances indicates 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 IV

Question 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 written report
d. The subject matter is the responsibility of either the intended users or the practitioner

Answer 28

c

Question 29

Which of the following statements is true concerning evidence in an assurance engagement?

a. Sufficiency is the measure of the quantity of evidence
b. Appropriateness is the measure of the quality of evidence, 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

Answer 29

a

Sufficiency is the measure of the quantity of evidence. The quantity of evidence needed is affected by the quality of such evidence (the higher the quality, the less may be required). 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 its nature

Question 30

Assurance engagement risk is the risk

a. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated
b. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated
c. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on
d. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or not materially misstated

Answer 30

a

Question 31

The following are components of assurance engagement risk, except

a. Inherent risk
b. Control risk
c. Detection risk
d. Business risk

Answer 31

d

Assurance engagement risk as the following components:

1. The risk that the subject matter information is materially misstated. This consists of:

a. Inherent risk–the susceptibility of the subject matter information to a material misstatement, assuming that there are no related controls
b. Control risk–the risk that a misstatement that could occur will not be prevented, or detected and corrected on a timely basis by related internal controls

2. Detection risk–the risk that the practitioner will not detect a material misstatement that exists

Question 32

An unqualified conclusion is not appropriate for either reasonable or limited assurance engagement when

a. Circumstances prevent the practitioner from obtaining evidence 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 B
d. Neither A nor B

Answer 32

c

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 practitioner’s work, whether imposed by the engagement circumstances or the engaging party or the responsibly party

Question 33

The following statements relate to the performance of an assurance engagement other than an engagement other than an audit or review of historical financial information covered by PSAs and PSREs. Which is incorrect?

a. Those persons who are to perform the engagement should collectively possess the necessary professional competence
b. The practitioner is precluded from using the work of persons from other professional disciplines
c. The practitioner should consider materiality and assurance 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

Answer 33

b

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 engage persons from other professional disciplines, referred to as experts

Question 34

Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result of the following factors, except

a. The use of selective testing
b. The fact that much of the evidence available to the practitioner 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 judgement in gathering and evaluating evidence and forming conclusions based on that evidence

Answer 34

c

Question 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 a reasonable justification for the change. Which of the following ordinarily will justify a request for change in the engagement?

I. A change in circumstances that affects the intended user’s requirements
II. A misunderstanding concerning the nature of the engagement

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer 35

c

Question 36

Which of the following standards are to be applied, as appropriate, in the audit of historical financial information?

a. PSREs
b. PSAEs
c. PSRSs
d. PSAs

Answer 36

d

The Philippine Standards on Auditing (PSAs) are to be applied, as appropriate, in the audit of historical financial information

Question 37

Which of the following standards are to be applied to compilation engagements, engagements to apply agreed-upon procedures to information, and other related services engagements as specified by the AASC?

a. PSRSs
b. PSAs
c. PSAEs
d. PSREs

Answer 37

a

The Philippine Standards on Related Services (PSRSs) are to be applied to compilation engagements, engagements to apply agreed-upon procedures to information, and other related service engagements as specified by the AASC

Question 38

The Philippine Standards on Review Engagements 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 information

Answer 38

c

Question 39

PSRE 2400 (Engagements to Review Financial Statements), 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 practitioner other than the entity’s auditor
c. Reviews of historical, financial, or other information by a practitioner other than the entity’s auditor
d. Reviews of historical, financial, or other information of an audit client

Answer 39

a

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 summarized as follows:
- PSRE 2400 applies to reviews of historical financial information by a practitioner other than the entity’s auditor
- 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 Historical Financial Information

Question 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 financial information

Answer 40

a

Question 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

Answer 41

d

PSAs, PSREs, PSAEs, and PSRs are collectively referred to as the AASC’s Engagement Standards. PSQCs are to be applied for all services under these Engagement Standards

Question 42

These statements are issued by the AASC to provide interpretative guidance and practical assistance to auditors in the implementation of PSAs and to promote good practice

a. PREPSs
b. PAPSs
c. PAEPs
d. PRSPSs

Answer 42

b

The AASC issues practice statements to provide interpretative guidance and practical assistance to practitioners in implementing the Engagement Standards and to promote good practice. The following are AASC engagement standards and the related Practice Statements

Engagement Standards—Practice Statements

1. Philippine Standards on Auditing (PSAs)—Philippine Auditing Practice Statements (PAPSs)
2. Philippine Standards on Review Engagements (PSREs)—Philippine Review Engagement Practice Statements (PREPSs)
3. Philippine Standards on Audit Engagements (PAEPSs)—Philippine Assurance Engagement Practice Statements (PAEPSs)
4. Philippine Standards on Related Services (PSRSs)—Philippine Related Services Practice Statements (PRSPSs)

Question 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
b. Assurance
c. Examination
d. Verification

Answer 43

b

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 be provided depends on the procedures performed and the evidence collected by the practitioner

Question 44

What level of assurance is provided by the auditor in an audit engagement?

a. Absolute
b. High, but not moderate
c. Moderate
d. No assurance

Answer 44

b

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

Question 45

What level of assurance is provided by the practitioner in a review engagement

a. No assurance
b. High, but not absolute
c. Reasonable
d. Moderate

Answer 45

d

In a review engagement, the practitioner provides a moderate 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

Question 46

For the purpose of expressing negative assurance in a review report, the practitioner should obtain sufficient appropriate 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 control
d. Inquiry and analytical procedures

Answer 46

d

Question 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

Answer 47

b

Question 48

In a review engagement, the practitioner performs which of the following?

a. Obtain an understanding of internal control, tests of control, tests of transactions
b. Obtain an understanding of internal control, tests of transactions
c. Tests of control, tests of transactions
d. None of the above

Answer 48

d

Question 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 a practitioner has become aware that information coming to his/her attention may me materially misstated, 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

Answer 49

a

According to PSRE 2400, if the practitioner has reason to believe that the information subject to review may be materially misstate, he/she should carry out additional or more extensive procedures as are necessary to be able to express negative assurance or to confirm that a modified report is required

Question 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 comprises inquiry and analytical procedures which are designed to review the reliability of an assertion that is the responsibility of one party for use by another 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

Answer 50

c

Question 51

The following statements relate to a review of interim financial information performed by the entity’s independent auditor. Which is incorrect?

a. Similar to a financial statement audit, a review of interim financial information is designed to obtain reasonable assurance that the interim financial information is free from material 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 with an applicable financial reporting framework
c. In a review of interim financial information, the auditor should have an understanding of the entity and its environment, including its internal control
d. A review of interim financial information may bring significant matters affecting the interim financial information to the auditor’s attention, but it does not provide all of the evidence that would be required in an audit

Answer 51

a

In contrast to an audit, a review of interim financial information is not designed to obtain reasonable assurance that the interim financial information is free from material misstatement

The objective of an engagement to review an entity’s interim financial information is to enable the auditor to express a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with an applicable financial reporting framework

Question 52

In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and summarize 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

Answer 52

c

A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information

The procedures employed are not designed and do not enable the accountant to express any assurance on the financial information

However, the accountant’s involvement provides some benefit to the users because the work has been performed with due professional skill and care

Question 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 expertise to collect, classify, and summarize financial information
b. The procedures employed in a compilation engagement enable the accountant to express a moderate level of assurance on the compiled financial information
c. Users of the compiled financial information derive some benefit as a result of the accountant’s involvement because the service has been performed with due professional skill and care
d. A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information

Answer 53

b

The procedures employed in a compilation engagement are not designed and do not enable the accountant to express any assurance on the financial information

Question 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 operations of the entity

Answer 54

d.

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 practices of the industry in which the entity operates and with the form and content of the financial information that is appropriate in the circumstances

The standard further provides that, “The accountant ordinarily obtains knowledge of these matters through experience with the entity or inquiry of the entity’s personnel.”

PSRS 4410, par. 13, provides that the accountant is not ordinarily required to:

a. make any inquiries of management to assess the reliability and completeness of the information provided
b. assess internal controls
c. verify any matters
d. very any explanations

Question 55

Each page of the financial information compiled by the accountant should include the following reference, except

a. “Unaudited”
b. “Compiled without Audit or Review”
c. “Refer to Compilation Report”
d. “Compiled, Negative Assurance Expressed”

Answer 55

d

According to PSRS 4410 (Engagements to Compile Financial Information), the financial information compiled by the accountant should contain a reference such as:

• Unaudited
• Compiled without Audit or Review
• Refer to Compilation Report

On each page of the financial information or on the front of the complete set of financial statements

Question 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 the assertions underlying the compiled financial information
c. Include in his/her report a listing of the specific procedures performed
d. Need not obtain an acknowledgement from management of its responsibility for the appropriate presentation of the financial information

Answer 56

a

Question 57

What assurance is provided by the auditor in an agreed-upon procedures engagement?

a. Reasonable
b. Absolute
c. Moderate
d. No assurance

Answer 57

d

In an agreed-upon procedures engagement, the auditor simply provides a report of the factual findings and expresses no assurance in his/her report. Users of the report make an assessment of the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work

Question 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 parties have agreed and to report on factual findings
b. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information
c. Provide a moderate level of assurance that the information is free of material misstatement
d. Provide a high, but not absolute, level of assurance that the information is free of material misstatement

Answer 58

a

In ang 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 appropriate third parties have agreed and to report on factual findings

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

Question 59

A report may be based upon applying agreed-upon procedures to specified elements, accounts, or items of a financial statement. The users of the report should participate in establishing the procedures to be performed. If the auditor cannot discuss the procedures with all parties who will receive 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 involved
III. Distribute a draft of the type of report that will be issued to the parties involved

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

Answer 59

d

PSRS 4400 (Engagements on Agreed-upon Procedures) states, “In certain circumstances, for example, when the procedures have been agreed to between the regulator, industry representatives, and representatives of the accounting profession, the auditor may not be able to discuss the procedures with all the parties who will receive the report. In such cases, the auditor may consider, for example, discussing the procedures to be applied with appropriate representatives of the parties involved, reviewing relevant correspondence from such parties or sending them a draft of the type of report to be issued

Question 60

An auditor may accept an engagement to perform specified procedures on the specific subject matter of specified elements, accounts, or items of a financial statement 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

Answer 60

c

PSRS 4400 states that the report 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

Answer A is incorrect because the report should include a listing of the specific procedures 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

Question 61

Reports on agreed-upon procedures are intended to be distributed

a. To only the involved parties, who are aware of the reasons for the procedures
b. Only to the stockholders of the entity
c. To any party to whom the client wishes
d. Only to the client’s management

Answer 61

a

Question 62

An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures concerning

I. Individual items of financial data
II. A single financial statement
III. A complete set of financial statements

a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

Answer 62

d

Question 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
d. A general description of the procedures performed

Answer 63

a

According to PSRS 4400, the report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon procedures of the engagement in sufficient detail to enable the users of the report to understand the nature 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

Question 64

Which of the following engagements does not require compliance with independence requirements?

a. Compilation of financial information
b. Review of financial statements
c. Examination of prospective financial information
d. Audit of financial statements

Answer 64

a

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

Question 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 but not compilations

Answer 65

a

Question 66

A practitioner is associated with financial information when
I. The practitioner attaches a report to that financial information
II. The practitioner consents to the use of his/her name in a professional connection

a. I only
b. II only
c. Either I or II
d. Neither I nor II

Answer 66

c

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 connection. If the practitioner is not associated in this manner, third parties can assume no responsibility of the practitioner

Question 67

The purpose of an audit of financial statements is to

a. Relieve management or those charged with governance of the responsibility for the preparation and presentation of the financial statements
b. Obtain an absolute level of assurance that the financial statements as a whole are free from material misstatement
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

Answer 67

c

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 financial reporting framework

Answer A is incorrect because the financial statements subject to the audit are those of the entity, prepared and presented 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 assurance

Answer D is incorrect because the auditor’s opinion on the financial statements does not assure the future viability of the entity

Question 68

The auditor is required to comply with all PSAs relevant to the audit of an entity’s financial statements. A PSA is relevant to the audit when
I. The PSA is in effect
II. The circumstances addressed by the PSA exist

a. I only
b. II only
c. Either I or II
d. Both I or II

Answer 68

d

A PSA is relevant when it is in effect and the circumstances addressed by the PSA exist

Question 69

The overall objectives of the auditor in conducting an audit of financial statements are

I. To obtain reasonable assurance about whether the financial 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
b. II and IV only
c. I, II, and III only
d. I, II, III, and IV

Answer 69

a

The overall objectives of the auditor in conducting an audit of financial statements are:

1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether caused by fraud or error, to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
2. To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor’s findings

Question 70

The auditor is required to obtain reasonable assurance about whether the financials statements are free of material misstatement, whether due to fraud or error. In all cases when reasonable assurance cannot be obtained, the auditor’s report should contain a/an

a. Unmodified opinion
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Disclaimer of opinion

Answer 70

c

The standard provides that in all cases when reasonable assurance cannot be obtained and a qualified opinion is insufficient 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 engagement, where withdrawal is legally permitted

Question 71

An audit in accordance with PSAs is performed on the premise 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 records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements
c. To provide unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence
d. To design, implement, and maintain internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether caused by fraud or error

Answer 71

a

Management, and where appropriate, those charged with governance, have responsibility for the preparation and presentation of financial statements in accordance with the applicable financial reporting framework. The auditor has the responsibility to conduct the audit of financial statements in accordance with relevant PSAs

Question 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 governance are honest and have integrity relieves the auditor 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 the results thereof
c. Professional skepticism is necessary to the critical assessment of audit evidence
d. Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained

Answer 72

a

The auditor is required to plan and perform the audit with professional skepticism. As defined in the standards, professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence

According to the standards, maintaining professional skepticism reduces the risks of:
- overlooking unusual circumstances
- overgeneralizing when drawing conclusions from audit observations
- using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the results thereof

Although the auditor cannot be expected to disregard past experience of the honesty and integrity of the entity’s management and those charged with governance, a belief that they are honest and have integrity does not relieve the auditor to maintain professional skepticism in conducting the auditor

Question 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 the auditor that are not supported by the facts and circumstances of the engagement
c. Is necessary in the evaluation of management’s judgements in applying the entity’s applicable financial reporting framework
d. Is not used in making decisions about materiality and audit risk

Answer 73

c

According to the standard, professional judgment is necessary to the proper conduct of an audit. The auditor exercises 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 management’s judgments in applying the entity’s applicable financial reporting framework
• Conclusions to be drawn based on the audit evidence gathered

The auditor is required to document the exercise of professional judgment. The documentation should enable an experienced 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 be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or sufficient appropriate audit evidence

Question 74

The primary reason for a financial statement audit by an independent 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 financial statements and ensure that any fraud will be discovered
c. Satisfy governmental regulatory requirements
d. Relieve management of responsibility for the financial statements

Answer 74

a

The objective of a financial statement audit is to express an opinion as to whether an entity’s financial statements present fairly, in all material respects, its financial position, performance, and cash flows in accordance with an applicable financial reporting framework

Question 75

Independent auditing can best be described 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 improper financial information

Answer 75

c

The objective of an independent audit is to attest to (express an opinion on) accounting information

Question 76

Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?

a. An auditor’s responsibilities for audited financial statements 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 framework 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 auditor’s independence
d. The auditor’s report should provide an assurance as to the future viability of the entity

Answer 76

a

The auditor’s responsibility for the financial statements is confined to the expression of his/her opinion on them

Question 77

A financial statement audit in the communication of economic data because the audit:

a. Assures the readers of financial 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 representations

Answer 77

c

In a financial statement audit, the auditor expresses an opinion on the fairness of the audited financial statements. The auditor’s opinion helps establish the credibility of the financial statements

Question 78

Which of the following best describes the reason why an independent auditor reports on financial statements?

a. A poorly designed internal control system may be in existence
b. Different interest may exist between the company preparing the statements and the persons using the statements
c. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work
d. A management fraud may exist and it is more likely to be detected by independent auditors

Answer 78

b

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 of the financial statements may have incentives to resort to fraudulent financial reporting. Thus, a possible conflict of interest may be assumed between the management and users of financial statements

The auditor’s role is to lend credibility to the audited financial statements by expressing an opinion on the fairness of presentation of the financial position, performance, and cash flows of the company

Question 79

Which of the following can be significantly affected by a financial statement audit?

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

Answer 79

b

Question 80

The primary responsibility for the adequacy of disclosure in the financial statements rests with

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

Answer 80

b

Management is responsible for the fairness of the representations made through financial statements. The auditor’s responsibility is confined to the expression of opinion on the fairness of management representation

Question 81

Which of the following elements does not relate to audit quality?

a. Audit competence
b. Audit fees
c. Independence
d. Due diligence

Answer 81

b

Audit quality is an overall concept that encompasses adherence to independence, auditor competence, due diligence, and quality control processes

Question 82

The following statements relate to internal auditing. Which is incorrect?

a. Internal auditing is carried out within an entity by employees 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 organization
c. The internal auditor’s judgments are subordinated to those of management
d. Internal auditing has evolved into a highly professional activity that extends beyond the appraisal of the efficiency and effectiveness of an entity’s operations

Answer 82

c

Question 83

Which of the following is an incorrect description 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 efficiency with which resources are employed
d. Internal auditors should have authority and responsibility for the activities they audit

Answer 83

d

Question 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 the 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

Answer 84

a

Question 85

Which of following groups could be involved in an operational audit?

a. CPA Firms, Internal Auditors, Government Auditors
b. CPA Firms
c. Government Auditors
d. CPA Firms, Internal Auditors

Answer 85

a

Question 86

Which is not one of the three phases in an operational audit?

a. Evidence accumulation and evaluation
b. Planning
c. Reporting and follow-up
d. Training and supervising employees

Answer 86

d

Question 87

In performing an operational audit, the auditor primarily relies on which of the following procedures?

a. Physical inspection
b. Analytical procedures
c. Inquiry and observation
d. Tracing and vouching

Answer 87

c

Question 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, programs 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

Answer 88

a

Question 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

Answer 89

a

Question 90

Which of the following activities would generally account for a significant proportion of the 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 the entity’s operations

Answer 90

d

Question 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

Answer 91

d

Question 92

The primary orientation of operation auditing is towards

a. Future improvements to accomplish the goals of management
b. The accuracy of the data reflected in management’s financial records
c. The verification that a company’s financial report is fairly presented
d. Past protection provided by existing internal control

Answer 92

a

Question 93

The purpose of an internal audit is

I. To evaluate the adequacy and effectiveness of company’s internal controls
II. To determine the extent to which assigned responsibilities are actually carried out
III. To collect evidence on whether the company is continuing as a going concern

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

Answer 93

a

Question 94

What is the proper organizational role of internal auditing?

a. To serve 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

Answer 94

a

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 organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and 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 operations

Answer D is incorrect because internal auditors serve not only the audit committee of the board of directors but also the entity’s management

Question 95

Which of the following best describes the scope of internal auditing as it has developed to date?

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 assets
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

Answer 95

a

Internal auditing includes the audit of:

1. Financial and operating information
2. Compliance with policies, plans, procedures, laws, regulations, and contracts
3. The means of safeguarding assets and verifying their existence
4. The economy and efficiency with which resources are employed
5. Operations or programs to ascertain whether results are consistent with established objectives and goals and whether they are being carried out as prescribed

Answers A, B, and D are incomplete descriptions of the scope of internal auditing

Question 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 financial and operating data used in management’s decision making
c. To relieve management of the responsibility for establishing effective controls
d. To safeguard resources entrusted to the organization

Answer 96

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 organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

Answer B is incorrect because internal auditors do not ensure the accuracy, reliability, and timeliness of information used in decision making. They report on the status of operations

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

Question 97

The internal auditing profession has advanced primarily as a result of

a. Increased interest by BSA graduates and experienced auditors
b. Job qualification specifications that include added emphasis on background knowledge and skills
c. The limitation of financial statement audit scope
d. Increased complexity and sophistication of business operations

Answer 97

d

Internal auditing is an appraisal control that measures and evaluates other controls. The increased complexity and sophistication of business operations have required management to rely on this appraisal control

Answer A is incorrect because increased interest by BSA graduates and experienced auditors contributes to the advancement of 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 audit scope does not contribute to the advancement of the internal audit profession

Question 98

Which of the following actions would be an appropriate response 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 findings of fraud and illegal activity to the company president
d. None of the above

Answer 98

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 external 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

Question 99

Internal auditors review the adequacy of the company’s internal 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 internal control are corrected
d. Determine whether the internal control system ensures that financial statements are fairly presented

Answer 99

b

Internal auditors review the adequacy of the company’s internal control system primarily to ascertain that the company’s objectives and goals will be achieved efficiently and economically. Efficient performance implies the use of minimal resources to meet the company’s objectives and goals. Economical performance is the accomplishment of objectives and goals at a cost commensurate 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 financial statements

Question 100

The internal auditing department’s responsibility for deterring 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 activities

Answer 100

c

Internal auditors assist in the prevention of fraud by examining 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 an effective internal control system

Answer D is incorrect because internal auditors are not allowed to assume operating responsibilities

Question 101

In conducting an appraisal of the economy and efficiency with which the company resources are used, an internal auditor’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 established

Answer 101

d

The company’s management is responsible for setting operating 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 identified and corrected
4. Corrective action has been taken

Answers A and B are incorrect because they relate to the reliability and integrity of information

Answer C is incorrect because verifying the existence of assets relates to the safeguarding of assets

Question 102

Internal auditors should review the means of physically safeguarding assets from losses arising from

a. Exposure to the elements
b. Under-usage of physical facilities
c. Misapplication of accounting principles
d. Procedures that are not cost justified

Answer 102

a

Internal auditors are required to review the means employed by the company to safeguard its assets from various types of losses such as those resulting from fire, theft, unscrupulous or illegal activities, and exposure to the elements

Answers B and D are incorrect because they relate to efficiency of operations

Answer C is incorrect because it relates to the reliability of information, not physical safeguards

Question 103

Operational audits generally have been conducted by internal 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 organizational goals
b. The results of internal examinations of financial and accounting 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

Answer 103

a

Operational auditing involves a systematic review and evaluation of an entity’s activities in relation to the efficient use of its resources and the effectiveness in accomplishing its objectives. The objectives of operational auditing is to assess performance, identify areas for improvement, and develop recommendations

Question 104

Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also

a. Accuracy
b. Compliance
c. Evaluation
d. Internal control

Answer 104

b

A governmental audit is typically designed to determine whether the auditee has complied with applicable laws and regulations

Question 105

A governmental audit may extend beyond an audit leading to the expression of an opinion on the fairness of financial presentation to include

a. Program Results, Compliance, Economy and Efficiency
b. Program Results, Compliance
c. Program Results, Economy and Efficiency
d. Compliance, Economy and Efficiency

Answer 105

a

The types of audits conducted by the COA are financial statement audit and performance audit. Performance audits include economy, efficiency, and program audits. Included in the scope of financial and performance audit is determining whether the entity has complied with applicable laws and regulations

Question 106

An objective of a performance audit is to determine whether an entity’s

a. Operational information is in accordance with government auditing standards
b. Specific operating units are functioning economically and efficiently
c. Financial statements present fairly the results of operations
d. Internal control is adequately operating as designed

Answer 106

b

Performance audits include economy, efficiency, and program audits. Economy and efficiency audits determine whether the entity’s resources are utilized efficiently

Program or effectiveness audits determine whether the entity has been effective in achieving the desired results or benefits of the program or activity

Question 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 which the entity’s programs achieve the desired level of results
b. An auditor should assess whether the entity has reportable 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 control and substantive tests

Answer 107

c

Question 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 activities designed to detect material error and fraud were tested
b. Written report describing the entity’s internal control activities 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 entity’s financial statements
d. Written report describing each reportable condition observed, including identification of those considered material weaknesses

Answer 108

d

Question 109

What 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 internal control
b. Assume responsibility for assuring that the entity complies with applicable laws and regulations
c. Obtain an understanding of the possible financial statement effects of laws and regulations having direct and material effects on amounts reported
d. Design the audit to provide reasonable assurance that the statements are free of material misstatements resulting from illegal acts having direct or indirect effects

Answer 109

c

Question 110

The objective of governmental effectiveness or program auditing is to determine if the desired results of a program are being achieved. What is the first step in conducting such an audit?

a. Identify the legislative intent of the program being audited
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

Answer 110

a

Question 111

The pervasive characteristic of a CPA’s role in a consulting services engagement is that of being a

a. Independent practitioner
b. Computer expert
c. Confidential reviewer
d. Objective advisor

Answer 111

d

Question 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 independence
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
d. Most CPAs, including those who provide audit and tax services, also provide consulting services to their clients

Answer 112

c

Question 113

Which of the following are considered consulting services?

a. Transaction Services, Assurance Services
b. Advisory Services, Transaction Services
c. Advisory Services, Assurance Services
d. Advisory Services, Transaction Services, Assurance Services

Answer 113

b

Question 114

The form of communication with a client in a consulting services 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 BOD

Answer 114

a

Question 115

Which of the following is the most appropriate action to be taken by a CPA who has been asked to perform a consulting services engagement concerning the analysis of a potential merger if he/she has little experience with the industry involved?

a. Accept the engagement but he/she should conduct research or consult with others to obtain sufficient competence
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

Answer 115

a

Question 116

As used in the Philippine Framework for Assurance Engagements, the term “practitioner” refers to a CPA in public practice

T or F?

Answer 116

True

Question 117

In a limited assurance engagement, the practitioner expresses his/her conclusion in positive form

T or F?

Answer 117

False

Question 118

Common examples of assurance engagements are engagements to apply agreed-upon procedures and consulting

T or F?

Answer 118

False

Question 119

When an assurance engagement is part of a larger engagement (for example, a business acquisition consulting engagement which includes a requirement to provide assurance on historical financial information), the Philippine Framework for Assurance Engagements shall be applied only to the assurance portion of the engagement

T or F?

Answer 119

True

Question 120

In some cases, the ethical requirement on professional competence can be satisfied by using the work of individuals from other disciplines referred to in the standards as experts

T or F?

Answer 120

True

Question 121

In a direct reporting engagement, the responsible party is responsible for the subject matter of the engagement

T or F?

Answer 121

True

Question 122

Under all situations, the responsible party is the party who engages the practitioner (i.e., the engaging party)

T or F?

Answer 122

False

Question 123

The responsible party can be one of those for whom the practitioner prepares the assurance report

T or F?

Answer 123

True

Question 124

In an engagement to provide assurance about the effectiveness of an entity’s internal control, the subject matter is the assertion of management about its effectiveness

T or F?

Answer 124

False

Question 125

An appropriate subject matter is one that is capable of consistent evaluation or measurement against the identified criteria

T or F?

Answer 125

True

Question 126

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

T or F?

Answer 126

False

Question 127

The quantity of evidence is affected by the risk of the subject 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 required)

T or F?

Answer 127

False

Question 128

Assurance engagement risk is the possibility that the practitioner will express an inappropriate conclusion on a subject matter information that is materially misstated

T or F?

Answer 128

True

Question 129

The conclusion “In our opinion, internal control is effective in all material respects, based on XYZ criteria.” expresses a reasonable assurance in positive form

T or F?

Answer 129

True

Question 130

The practitioner’s conclusion in an assertion-based engagement can be worded in terms of the intended users’ assertion

T or F?

Answer 130

False

Question 131

PSA 120 (Framework of Philippine Standards on Auditing) applies to audits and related services such as taxation and consultancy

T or F?

Answer 131

False

Question 132

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

T or F?

Answer 132

False

Question 133

For agreed-upon procedures and compilation engagements, no assurance is expressed

T or F?

Answer 133

False

Question 134

Because most of the evidence available to the auditor is conclusive, rather than persuasive, in nature, absolute assurance in auditing is not attainable

T or F?

Answer 134

False

Question 135

A review of financial statements normally involves an assessment of an entity’s accounting and internal control systems

T or F?

Answer 135

False

Question 136

A practitioner engaged to perform related services such as agreed-upon procedures, review, and compilation need not be the auditor of the entity’s financial statements

T or F?

Answer 136

True

Question 137

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

T or F?

Answer 137

True

Question 138

Independence is not a requirement for a compilation engagement

T or F?

Answer 138

True

Question 139

In a financial statement audit, reasonable assurance is obtained when the auditor has gathered sufficiently appropriate audit evidence to reduce audit risk to an acceptably low level

T or F?

Answer 139

True

Question 140

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

T or F?

Answer 140

True

Question 141

Audit risk is the risk that the auditor will provide an unmodified opinion on the financial statements that are, in fact, materially misstated

T or F?

Answer 141

True

Question 142

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)

T or F?

Answer 142

False

Question 143

A summary of findings rather than assurance is most likely to be included in an examination report

T or F?

Answer 143

False

Question 144

The risk that information is misstated is referred to as information risk

T or F?

Answer 144

True

Question 145

The work of internal auditors is primarily for the benefit of the entity’s management and its board of directors

T or F?

Answer 145

True