1

cHAPTER

An Introduction to
·Assurance, Auditing,
and Related Services

A. ASSURANCE SERVICES

1. Which of the following statements best ,describes assuranc~

,, , services?
A. Independent professional services that are Intended to en-
&
- hance 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 ~ased on the results of an -
audit. .
C. The prP.paratlon of fi'nanclal statements or the coUectlon,
dasslfication, and summarization of other financial infor-
mation. ,
 . CPA EJ<AMINA noN REVIEWER: Au om NG THEORY

D. de51gned for ,the Improvement of operations, re-

• suiting in better outcomes.

A · ranee engagements performed ~y professional account-

: are intended to enhance the credibility of information .
~out a s~bject matter by evaluating whet~er -the subject
~atter conforms in all material respects with suitable crite-
ria, thereby improving the likelihood that the information
will meet the needs of an ·intended user. .

The level of assurance provided by the professional account-.

ant's conclusion conveys the degree of confidence that the in-
tended user may place in the credibility of the-subject matter.

2 Which of the following is not an assurance service?

Examination of prospective-financial lnfomiatfon
B. Audit of historical financial statements ·.
C. Review offlnandal statements ·
·D..
&Compilation·of financial ·Information
. . / .
'

Services pem ·NI b ·. · -· '

assu · onn · yprofessional accountants that are-not- ·
trance engagements Include the foJJowing· . . .
. Agreed-Upon procedures · • · ·
2. . Compilation of fina al
# • .
3. Preparation of tax r~:. or other i~fonnati~n .
pressed, and tax c . J~s where no conclusion is ex-
4. Mana onsu ting . . . .. . .
5 0th gement consulting . .. - . .
· . - er.advisory
· services .· -· , .
3. 'Which ofthefo,r' . - . ·. .
erect an assuran OWfng Professional ...
A. A_managem:ntengagement? .services would be consid-
vlce to tonsultJ , · ·
a. An
D a dlent ng engagerne· t .
qu1~a9ernent to rePo n to.proVide IT ad-
ents. rt on corn 1
. . Plance With sta . tut . .
. , ory re-
I
cHAPfER :1 /vi lmoducllon lo Aiaurance; Audllng,.11111 Related Sm:es 3

c. '
An Income tax engagement to prepare tax returns.
·o..A compilation of financial statements from a dlent's ac-
counting records.

4. Which.of the following best descri~ the objective

-
of an as-
surance engagement? . .
A. Improve the company's outcomes.
B. Compare th~ company's information and ·policies with
,those of other entitles.
c. Enhance the credibility of information In order to improve.
& the likelihood that the Information will meet the needs of
an Intended
. user.
o. Assist In preparing the company's financial statements·.
' .

The objective of an assurance engagement is "for a profes- ·

sional accountant to ' evaluate· or measure a subject -matter
that is the .responsibility of another .party against identified
suitable. criteria, anp to express conclusion that:provldes
the intended us·er with ·a level of a~urance about the subject
matter. .
·An assurance engagement is intende8 to enhance'the credibtl-
it;y · of information about a ~ubj~ matter by' evaluiting
whether the subject matter .cpnforms in a~l material respects
• with suitable criteria, thereby improving tl:t.e lil<elihood .that ·
• I the information will meet the Jteeds of an intended .user.
I I

, , \ • • • •. . • l

s. Assurance services differ from consulting services in that they

'I. •Focus on.provld_
ing advice.• ·
II. Involve mqnitortng of one party by another.

A. I only
· c. Both I and Ii
ct Neither I nor Il
& B. II only

'\ ·
 1111111

. .
CPA EXAM/NATION REVIEWER: AUDITING THEo
'' Ft'(
'
. Assurance services differ from ·consulting services in that
me~ ' '
1. .Focus on enhancing the ·credibility of information ra.
ther than providing advice. ·
2. TyPically i~volve situations fn which one party wa,its
to monitor another. _ . .

Consulting services are usually two-~~rty arrapgeme~ts that

focus on providing advice oq how to use the information (or
better outcomes. ·
'

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

gagement?
A. 2 . C.· , 4
&
B. 3 D. 5
- . . I

~n assurance .engagement involves three (3) separate par- .

ties: • . • ·
t A practitioher,· .
2.. A responsible party, and
3. Intended users.
7• An assurance enga · ·
· · • ·
elements? 9em,ent should hav~ which of the following
A Subject matter Criteria·
.Yes ,
. .N o
I

B. No
&
C. Yes . Yes .
o. No Yes
A . . . .
n assurance en -
ments-: gagement should h .
ave the following ele-
1. At·hree-party • ·
a a relationsh. . .
. Professional lp involving:
accountant;
CtiAPTER 1 An Introduction to Assurance, Audning, and Related Services 5

b. a responsible party; and

c. intended users
2. Asubject matter
3. Suitable criteria
4.. Sufficient appropriate evidence
5. An assurance report

8. TJ,e Philippine Framework for Assurance Engagements

A. Contains ba~ic principles, essential procedures, and re-
lated guidance for the 1:>erformance of assurance engage-
ments.
&
B. Defines and ,describes the elements and objectives of an~
assurance engagement, and identifies eng~gements 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 his-
torical financial information.
D. Establishes- standards ,and provides procedural require-
ments for the performance of assurance engagements.

The Framew9rk defines and·describes the elements and ob-

jectives of an assurance engagement and identifies engage- ·
ments to which Philippine S~ndards on Auditing (PSAs),
Philippine Standards on Review Engagements (PSREs), and
Philippine Standards·on Assurance Engagements (PSAEs) ap-
ply.
.The Framework does not itself establish .standards or pro-
vjde procedural requirements for the performance of assur-
ance engagements.
 (.PA EXAMINA T/ON REVIEWER:
. I
AUDITING TH.:.
c:.O~
6
pSAs f·SREs, and PSAES' c~ntaln basic principles, essenu
procedures and related. guidance, consistent with the coi~
cepts in the Framework. for the performance of assuranee
ngagernents. ·
a,A.s In public practice who perform assurance engagements
9 are governed by the following, except ·
A. ?hlllppine Framework for ASSurance Engagements
e. Code of Ethics for p,qessional Accountants in the Philip-
pines · ·
c. Phillpprne standards on _Related ~rvices
C
D. Philippine Standards on Quality Control
' '
The Philippine Stan<latds on Related Services (PSRSs) are to
be ,applied tO n(!n-assurance engagements such as compila-
tion and a~reed-upon·p,9cedures·engagements.

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

intended users ·
A. Should be from different entities.
B. ·Should _be_from the same entity. -
&
c. May be from the same entity or different entities.
· Are both responsible _for determining· the ·nature, tirrnng
0
and extent,of the procedures to be performed.

,\ccording
gagements tothethe
resPhili ~pme
. Framework for Assurance En· .
' pons1ble party' d h · · · ·
be from differententif .. . an t e intended users may
. . •1es or the same entity. . ·
AnswerD 1·s mcorrect
· b ··
ble for determining th ecause th e pra~ti'oner is r~ponsi·
· · an d· -extent of proce·
·dures to be performed.e nature' tim mg
CHAP"tER 1 An ln~oductlon to Assurance, Auditing, aoo Related Services 7

11. The subject matter of an ~ssurance

-
engagement may Include
' -
Anandal Internal Compliance
Inform@ tion Controls with Regulation
&
A. Yes Yes Yes
B. No No No
C. Yes No Yes
D. No , Yes No

According to the Philippine Framework for Assurance· En-

gagements, an assurance _engagement's subject matter may
i~clude the following:
·• F\nancial performance or conditions, such as historical or
prospective fina~cial position, financial performance, and
c~sh flows:
_• Non-financfal performance or conditions, for. example,
performance of an ·entity. '
• Physical characteristics; for example, capacity of a facility.
' '

' • System~ and pr:oces~es, for example, an entity's internal .

, control or IT system. ·.__ .
- • Behavio_r, such as corporate governance, compliance with .
· . · regulation, and human r~source practices.

12. For assurance(engagements regarding historical financial in-

formation, reasonable assurance engagements are called
&A. Audits C.- Cqmpilatlons -·
I

~- Reviews o. Examl'nations
For assurance engagements regarding historical financial in-
formation, reasonable assurance engagements ar~ called au-
dits, while limited assurance eng~gements are called ·reviews. _

13. When performing ah ·assurance service, professional account~

ants use standards.or benchmarksto evaluate or measure the'
-
 8 CPA EXAM/NATION REVIEWER: AUDITING THE:o~'t

subject matter of an assurance engagement. These are re-

ferred to In the Framework as .. . ·
&
A. Criteria · C. Cond1t1ons
a~~s
Criteria are the standards or benchmarks used to evaluate
or measure the subject matter of an assuranc~ engagement
These are important because they establish and· infor~ the
intended user of the basis against which the subject matter
has been evaluated or measured in forming the conclusion.

For.example, in an audit of financial statements; the auditor

provides assurance as· to whether the financial ·statements
present fairly, in all material respects, an entity's financial po-
sition, financial performance, and cash fl~ws by using the fi-
. nancia) reporting f~amework to evaluate their preparation
and presentation.

14. The criteria against which the subject matter of the assurance ·
en~agement is to be.- evaluated or measured should possess
which of the following characteristics? ·
CRVA-R
- >

'Relevant · ConCise
&A. Neutral
B. Yes No Yes
C. No Yes No
D. Yes No No
No Yes Yes
According to the Ph ·1. . - -
gagernents, sufrable ;r~~PI?e :ramework for Assurance_Eil-
acteristics: _ eria 5 ould ~ave the foHowing char-

t Relevance
• Relevant . . ·
d . . . criteria contrib -
ec1s1~n-making by th . Ute to conclusions that assist
,. e intended users. .
CHAPTER 1 An Introduction to Assurance, Audtting, and Related Services 9

2. Completeness
• Criteria are sufficiently complete when relevant fac- .
tors that could affect the conclusions in the context of
the engagement are not omitted.
• Complete criteria include, where relevant, bench-
marks for presentation and disclosure._
3. Reliability ·
• Rel!able criteria allow reasonably consistent evalua-
tion or 11.1easurement of the subject matter including,
where relevant, presentation and disclosure, when
used in similar circumstances by similarly qualified ·
practitioners.
4. N eutrality
• Neutral criteria contribute to conclusions that are
free from bias.
5. Understandability .
• Understandable criteria contribute to conclusions
that are clear,.comprehensive, and not subject to sig-
nificantly _different interpretations.

15. Relevant criteria contribute to conclusions that are

A. Free from bias.
B. aear and comprehensive.
C. -Subject to different interpretations.
&
D. Useful for decision making.

· 16. Criteria that are embodied In laws or regulations, or'issued by-

authorized or recognized bodies of experts that follow a traQs-
.parent due process are called
A. Suitable criteria .
&B. Established criteria
c. Specifically developed criteria
r
10 CPA EXAMINATION REVIEWER: AUDITING THto~

o. General criteria
,.
The Framework states that criteria can eithe'r be establishe
or specificaUy developed. . ·

Established criteria are those that ar~embod'ied in Jaws 0

regulations, or i~sued by authorized qr re~ogriized bodies.

_SpecificaJly developed criteria ,are those designed for tfo

purpose of the engagement. · ·
\ '

17. In an assurance ·engagement, the person ·or -persons, eithe1

as .individuals or representatives of an entity, responsible for
the subject matter is the· · ·
A. Intended ,US~r .
&B. Responsible, party
C. Professional accountant
D. Client.
. .

The respopsible party is the one responsible for the subject

matter of an 'assu.r ance engagement. · ·

For example, an entity's management is responsible for-the

preparation and presentation of finaHcial ··s tatements or the
establishment ~nd impl~mentation of internal control.
,.. ·'
The. responsible ~arty_may or may not be the -party who.- en-·
' . g~ges the professional accountant. · ·
18
· · :r ':~!:u~a;ce·engagement, the persdn or class of pel'Sorls
-a specific .prof~ssfonal accountant prepares the report for
-A , use or purpose is the - ·
& . Intended user
B. · Responsible ·party
C. Manage~ent
CHAPTER An ln~uctlon to Assurance, Auditing, and Related Services ,. 11

D. Oient

The intended user is the person or class of persons for whom

the professional accountant prepares the·report for a specific
use or purpose. ·

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

or· measurement of a subject matter against criteria is called
' &
A. Supject matter information ·
B. Subject matter
C. Assurance
D. Conclusion
The term -"subject matter information'' is used in the Framew,
work for Assurance Engage~ents to mean the outcome of the
evaluation or measurement of a-subject matter.
' I

According to the Frame~ork, it is the subject matter infor-

mation about which the practitioner gathers suffkientappro-
priate evjdence to provide a reasonable basis for expressing
a conclusion in an assurance report

20. In some assurance engagements, the evaluation or measure~

ment of the subject matter -is -performed by the responsible
-party, and the subject matter Information Is In toe f~rm of an
assertion
-
by the·responsible party tha~ is made,available to
· intended users. These engagements are called ., - _
A. Direct reporting engagements · ·
&s. Assertion-based engagemE!nts 1
c. Non-assurance engagements -
· D. _Recurring engagements
21. The following are characteristics of "direct r~porting~' assur-
ance engagements~ ex~pt
r
12 CPA EXAMINATION REVIEWER: AUDITING TtiE:oFty

O The subject matter Information is in the form of an asser

A. tion by the responsible party that is made available to 11i;
Intended -users. ,
B. The subject matter irifonnation is provided to the intended
usersrin the assurance report.
c. The practitioner either directly performs the evaluation or
measurement of the subject matter or obtains a represen-
tation frorri the responsible party that has performed -the
evaluation or measurement. , ·
D. The representation ofthe responsible party that has per.
fanned the evaluation or measuremerit of the subject .
matter is not available to the intended users. ·

22. What type of assurance engagement is involved when the

p~actitioner expresses a positive form of conclusion?
A. limited assurance engagement
B. Positive assurance engagement ..
OC. , Reasonab_le assurance engagement
D. Absolute assurance engagement ·

According to the Framework th b. .

.assurance engagement is a e_0 • f ec~ive.9f,a reasonable
ment riSk to an acceptabJ 1o:duct1~n in assurance engage-
the engagement as the b f, level in the circumstances of
. of the practitioner's
. · cone
. aJs1s.
us1on.or aPosi.t.ive form of expression
. .
23. What type , f · · -
.. o assurance .
ractitioner expresses a n:09~9ement is involved When the
a· :easonabfe assurance Qabve form of conclusion? .
. egative assura engagement . . .
· Dc. L"Assertion b nee engagement
O • · - ased assur
. ,m,ted assuranc ance engagement
· e engagement ·
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 1·3

According to the Framework, the objective of a limited as-

surance engagement is a reduction in assurance engage-
a
ment risk to level that is acceptable in the circumstances of
the engagement, but where ·the risk is greater than for a re~-
sonable assurance e_ngagement, as the basis for a nega~ve
form .of expression of the practitioner's conclusion.

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

dusion1: · · .
"Based on our work described in this report, nothing has ·come to
our attention that causes us to believe that internal control is not ef-
fective, in all material respects, based on ABC criteria."
What type of assurance engagement was performed?
e
A. Limited ass_urarice engagem~nt ·
B.. Reasonable assuranc~ engagement
I
C. 'Nega·tive assurance engagement
• .

D. Positive assurance engagement

25. In·assertion-based assurance engagements,the evaluation or
measurement of the subject. matter against criteria is per-
formed by the · ,. · · ·
A. Intended·.users C. Practitioner
OB. Responsible party D. MSC
In assertion-base~ ~ssurance engagements, the evaluati'OQ or
measurement Qf the subject matter agi!ins,t criteria is per~
fonoed by the responsible party and the subject matte!'.' in-
,· formation (outcome) is in the form of an assertion by the re-
sponsible_party ihat is made available to th'e intended users.
' • ' 4

. 26. The following statements relate to the three parties involved .·

In an assurance engagement. Which is correct? .·e

A. .The responsible party and the intended users should be

from different entities. ·
- 14 . .CPA EXA¥1NA noN REVIEWER: AU~ITING THE:o~'i

B. A p·raC,tttioner should. d~line a proposed assurance en-

gagement 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
8 · 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. . .
. .

According to the Framework, the responsible party 'is the

person-(or persons) who: ·
•· In a dire~ reporting engagement, is responsible for
the subject matter; _or _
• In
an assertion~based·engagement, is responsible for
the subject matter inforpiation (th,e assertion),· and·
may be responsible for the subject matter.

27., A proposed aSSUrance engagenient can be accepted when the ·

practitioner's preliminary knowledge abo-u t the engagement ·
circumstances indicates that relevant ethical·requirements will
be satisfied ·and . . · . .
I. The. s~bje~ matter of the engagement is appropriate. ·
II. The cr,tena to be used are suitable
- and are ·available to
the intended users. ' ·
nI.. The practitioner has access to Sufficient
-
appropriate evi-
dence to support the· conclusion~ . . . .
IV. The conclusion ls to be contained in itt rt ,
V. There is• a rational purpose &o . wr en repo . .
· th e·engagement.
•1 r

A. I, II, and III only .

B. ~, II, N; and V only
C. I, II, III, and IV only
D. I, II, III, IV, and V .
&
 CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 15
''

A proposed assurance engagement can be accepted when the

practitioner's pr_eliminary knowledge of the engagement cir-
·cumstances indicates that relevant ethical requirements such
as independence and professional compet,mce will be met
and the engagement exhibits all of the rt,aracteristics de-
scribed in statements I to V.

ctitioner should accept an assurance e. ,gagement only if

28. A pra_ -

A. The subject matter is In the form of financial information.

B. The criteria to be used are not available to the intended
users. .
AC. The practitioners conclusion is to be contained In a written
report.
D. The subject matt~r is the responsibility ·of either the in-
tended.users or the practltio'1er..

29. Which of the following state~ents Js true concerning evi-

dence in an assura_ nce 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 ls influenced not by its nature
but .by Its source.
D. uotaining more evidence may compensate for :its poor .
quality. · ·
Sufficiency is the meas~re of the quantity ofevidence. The
quantity of evidence needed is affected by the quality of such
evidence (the higher the qt•. 1lity, the less may be required) .
. However, merely obtaimug more eviden_ce may not compen-
..sate for its poor quality.
 16 CPA EXAM/NAT/ON REVIEWER: AUDITING THE:o
. ~,
Appropriat~ness is the ~e.asute of th~ quality_of_ evtdence
that is, its relevance and its rehabiUtyi The reliabdity of e\t:
idence is influenced by its source and.by its nature..

30. Assurance engagement risk is the risk . _

O
A. That the practitioner expresses an inappropriate concfu.
·sion when the subject matter information Is materially
misstated. . · .
s. Of expressing an inappropriate cortclusion when the -sub-
ject matter Information Is not materially misstated.
C. Through loss .from lltlgatfon, adverse publicity, or other
events arising ·;n connectio,:t with a subject matter re-
·-ported on. ,
D. Of expressing an inappropriate conclusion when the sub-
'
.ject _matter information is either materially.misstated or
(

not materially misstated.

_31. The-following are components of assurance engagement risk,
except ·' · •
A. Inherent risk . C. Detection risk .
8· Control risk &.o. Business risk
·Assurance ennanem t · k h ·· . ·. ·.·
· -a
O
en ns as the follow,ng ~omponents:-
1. The risk that the subie t . . ·
misstated Th' '. c matter information is materially
· is consists of: . ··.
a. · lnbere,it risk _ th • .· ; . - . _. _
ter information to e susce?t•brl_1ty of th~ subje~ mat~
that there are n -~ matenal m1sstatem~nt, assuming
b. . Con~ol risk - : re _ated controls; and .
occur .Will not t be risk t~at a misstatement that could
rected, on a timeJe 6r~vented,_or . detected and cor-
I •

.. . y ~s.1s by related internal controls.

2. Detectio -
t n risk - the risk th . .
ect a material misstat at the practitioner Will not de-
. ement that exists. -
 \

CHAPTER 1 An Introduction to Assurance; Audttlng, .and Related S8MC8S 17

32. An -
unmodified conclusion Is not appropriate for either rea-
-

sonable or limited assurance engagement when

A. arcumstances prevent the practitioner from obtaining ev- .
i~ence required to reduce assurance engagement risk to
the appropriate level. ·
B. The responsible party or th~ eJ1·gagiJtQ party imposes a
restriction ~at prevents the practitioner -from obtaining
evidence required to reduce assurance engagement risk
to the appropri~te level. ·
&C. Both A and B.
D. Neither A nor B~

According to-the ·Framework, an unmodified conclusion is

not appropriate for either type of assurance engagement in
the cas~ of a material Jimita~ion o~ the scope of the practi- _
tioner's work, whether imposed by the engagement circum-
stances or the engaging party or the responsible party.
,

33. The following statements relate to the performance of a~ as-

surance.engagement other than an audit or review of hlstori..
cal financial information covered by PSAs and ·PSREs.. Which
ls Incorrect?
A. Those persons who ·are to perform· the engagement
should collectively possess the necessary professional
competence. ,
e. The practitioner is preduded from using the work of per-
& sons from other ·professional disciplines.
c. The practitioner should consider materiality and assurance
engagement risk when planning and performing an assur-
ance engagement. \
o·.. The assurance report should.be in writing and should·con-
tain a cle~r expression of the practitioner's .condusion
about the subject matter information.
r 11111

CPA EXAMl{)IA.TION REVIEWER: AUDIT _

18 . . ING THE:on)

Th~ subject matter •and reiated

·d criteria
. of some assurance
gagements may inc.1u e_ aspects · requiring speciahz . . en.d
k nowl ed ge an d s kill s in
evidence. ·
the ac~umulation and eval . e
I uabon of
. - I .
The standards allow practitioner to engage/per~ons fro ·
other professional di~ciplines, referred to as1xperts. Ill
. '

34. Reducing ·assurance engagement risk to zero is very rarely

attainable or co~t beneficial-as a result/of the following factors,
except . · ,
A. The use of selective testing. . ·· . .
a.· The fact -that much of the evidence available -to the prac-
titioner is persuasive rather:tlJan conclusive.
&
C. The practitioner may not .have the required assurance
knoiNledge and skills to gather and evaluate evidence. ·
D. The use·ofju.dgmeo~ iry gatherir,g ~nc;I eva~uating evidence
and forming conclusions based on that eviderice.
3?. After accepting .an assurance engagement, ·a practitioner is
not allowed to change the engagement to a non-assurance
engagement, or from er teasonable assurance enqagement to
a limited assurance engagemen,t, ·except when there is r~a-
~nable justification for the change. · Which of the followtn9
ordinarily will justify a request for a change in 'the engage-
ment? · ·
I. A ~hange In circumstances that affects the intended Us·
ers requirements · · .
II. A-misunderstandi~g concerning the- nature· of the ·en-
gagement. .
A. I only
B. II only
!
C. Both I and II
D. Neither I nor II
· CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 19

B. AUDITING AND RELATED SERVICES

36. Which of the following standards are to be applied, as appro-

priate, in the audit of historical financial information?
A. PSREs C. PSRSs
B. PSAEs D. PSAs &
The Philippine S~andards on Auditing (PSAs) are to be ap-
plied, as appropriate, -in the audit of historical financial infor-
mation.

37. Which of the following standards are to be applied com pi- to -

.· lation engagements, engagef!lehts to apply agreed-upon pro-

c~dures to information, and other related services engage-
ments as ·specified by the AASO
C A. ·PSRSs ~. PSAEs
B~ PSAs D. , PSREs

- The Philippine Standards on Related Services (PSRSs) are to

, be applied to compilation engagem~nts, engagements to ap-
ply agreed-upon procedures to information, and .other re-
lated services engagements as specified.by the AASC .

38. The Philippine: Stc;1ndards _on Review Engagements (PSREs)

. are to ~e applied in
· A. The audit of historical flnan_clal information. _
B. ·_Assurance engageme;1ts dealing with subject matters
other than historical financial information.
& c. The review of historical financial information.
o. The review of both historical and prospective financial in-
formation. ·

39. PSRE 2400 (Revised), Engagements to Review Historical Fi-

nancial Staten,ents, applies to
r

20 CPA EXAMINATION REVIEWER: AUDITING THE:Of:t't

. A. Reviews of historical flnancfal statements of an a.udit cll-

~t ' ' ' '
s. Reviews·ot histo·rlcal financial statements ~Ya pra_~tfoner
& other than the entity's auditor.
·c. Reviews of historical financial o.r other information by a.
practitioner other than the entity's auditor•.
o~ · Reviews of historical financial or other ir,formation of an
audit dient.

PSRE 2400 (Revised) .deals with the practitioner's responsi-

bilities ~hen engaged to perform a review of historical finan-
cial statements, wlien' the practitioner is not the independent
aurfitor of the entity's financial stat~ments. ..
' '
, ,

This standard does not apply to a review of an entity's finan-

cial statements or interim fin~_ncial information by the en-
tity's independent auditor.- · '

4Q. The Philippine Stan_ dards on Assurance Engagements (PSAEs)

are to be applie<;t in , . ,' ·
&
A. Assu~ance enga~emeryts dealiryg with subject matters
. otn_er than histoncal ·flnahcial Information. : . _·
B. O>mpil~on. engagements . and agreerri~nts . to apply .
agreed upon proce~ores to mformation. . . . . .. .
C. The audit or review of historical financial . fi . , t· .
D. Assurance engagem ts ci . , in_or~~ 10n. ,
information. en eaJ,ng Wfth historical ~nancial

41. The Philippine Standard . · . ·. ·· ,

5
applied t~l on Qualrty Control (PSQCs} are to·be
A. Ass~rance engagements ' . ' ' I

u:
B. Rev,e~ engagements onl only. ,
C. Compdation and revie y. .
⑧ D~ All services that fail _engagements only. . . .
th
,
ards. d~r e AA.scrs engagement stand-: .
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 21

PSAs, P_SREs, PSAEs, and PSRSs are collectively referred to as

the AASC's Engagement Standards. .

PSQCs are to be applied for all services under these Engilge-

- .ment.Standards. . .
42. These statements are issue.d by the AASC to provide interpre-
tive guidance and .practical assistance to auditors in the im-
plementation of PSAs and to promote good practice.
A. PREPSs . C. PAEPs
&B. . PAPSs D. PRSPSs
. -
The AASC issues Practice Sta.tements to provide interpretive
guidance and practical assistance to practitioners in imple-
menting· the Engagement Standards and to promote good·
practice."
The following are the AASC engagement standards ·and the
related Practjce Statements.
. ,
Practice Statements
Engagement Standards
Philipine Auditing Practice
1. Philippine ,Standards on,Auditing (p SAs)
St~tements (PAPSs)
Philippine Review ~ngagement ·
2.. Philippine Standards on Review . . Practice Statements {PREPSs) .
Engagements (PSREs)
Plii11ppi~e Assurance
,3. Philippine Standards on Assurance . Engagement Practice
Engagements (PSAESs) . Statements (PAEPSs)
Philippine·Related Services
4. / Philippine ·Standards on Retaied . . l · Practice Statements (PRSPSs)
/ ~rvices (PSRSs)
, . '

The auditor's satisfaction as to the' reliab~lity of an assertion

43. t,eing made by one party for use by ano1:11er. party [s called
A. Opiniqn · C. Exa_mm~t1on
B. AsSi.Jrance D. Verification
 22· CPA EXAMINATION REVIEWER: AUDITING Tt•fl::o~~

Th term "assurance" means the practitioner's satisfaction

to :hereliability ofan assertion being made by one party,:
use by anothe,.. party. , .

The level of assurance that may be provided depends' on the

procedures · performed and the evidence coJJected by the
· practitioner. ·

44. What level of assurance is prov,ded.by the.auditor in an audit

. I .
. engagement?
A. Absolute .
B. High, but notabsolute .
c. Moderate ,
D. No assurance
. '

!n an audit engagement, the auditor provides a high, but not

-absoiute level of assurance that the financial statements are
free of material misstatement..

is expressed_positively in the·audit report as reasonable

I

This
assurance.

45. W~_at level of assurance is provided by the practitioner in a

review engagement?
A. N? ,assurance C. Reasonable
. B. -High, but not absolute o. Moderate
In a.review en h · .- . .
ate Iev~I f gagement, t e -pract1t1oner provides a moder-
1ss atement. ..
to
n~e tthat the information subject ~eview
is free of ~a~:sr~arlam
.--
This is exp~essed in the ti .. ..
ited) assurance. orm of a negative ( also called Jim-
. CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services
)
23

46. If requested t9 perform a review engagement for an entity In

which a practitioner has an Immaterial direct financial Interest,
the practitioner ·is
A. Independent because the financial interest is immaterial
and, therefore, may issue a review report.
B. Not independent and, therefore, may not issue a review
report.
C. Not independent and, therefore, may issue a review re- ·
port, but may not issue an auditor's opinion .
.D. Not independent and, therefore, may not be associated
with the financial statements.

Direct financial inlerests, even if immaterial, would create

a
significant threats to prc1ctitioner's independe~ce that is re-
quired when performing review engagements.
.
47. Which of the following is not generally considered aprocedure·
• I

followed by ·a pra.ctition~r in obtaining a re~sonable ba~is for

· th~1 expression of a review conclusion? . .
A~ -Obtain written representations from management.
B. Apply analytical procedures.
c. Make inquiries of management.
·o. Assess fraud risk.
Review engagements do not include assessment of the risk of .
fraud. Such engagements ord,narily include analytical proce~
du.res and inquiries of management. ·

PSRE. 2400-Revised (Engagements to Review Historical Fi-

nancial Statements)' requires the practitioner to request_a
written representation from management that it has fulfilled
its responsibilities described in the ~greed terms of e~gage~
ment.
 ' CPA EXAM/NAT/ON REVIEWER: AUDITIN G TH~o
24 . . .

. 48. Which of the followlng procedure~ should be applied

practitioner when performing a re~1ew engagement?
A. Obtaining a client representation letter from members 01
management. , · ·
.s. Communicating significant deficiencies discovered during
the assessment·of contro_
l risk. . '
c.. Sending bank cdntirtnation reQuests to th~ entity's finan-
cial fnstitutions. ·
o. Searching for unrecorded 'liabilities-bY. examining cash dis•
bursements in t'le subsequent period~ - ·

· 49. For the porpo_se of expressing negative assurance in the ·re-

view·report, the practitioner should obtain sufficient appropri-
ate evide1ke primarily through:· . · • · · · · . ·
A. Inquiry and·confirmatlori _ .- . . .
e..
Analyt;cal procedures ·and substantive tests ·of·details of
transactions and account balances ·
C. -eon_firmatiort and tests of controls · '
D. I,:iquiry and ~nalytical procedures
I . - , , . . . . ..

so. ·!0 revi~wing lacompany's financial statements, :a·practitioner

·is reqwred to · ·· • .- · . .
A. Sen~ bank confirmations. ·.· . '. . ·' ·
B. Obta!n knowledge of the client's industry ..
C. Obta,n -a signed . · · . · ,
o Ob · . engagement letter from the client
· . serve cllent's physical inventory. . . _ ·_·
51. In a review en . . .- . ·. .
the follow;ryg? gagem~nt, ·the ~ractitioner pelforms which of
Obtai~ an understanding . Tests .o·f
A.
Qf internal control I Tests of
B. Yes ' - I Q,OntrQ!§ transactions
Yes Yes . . .No. I .
C.
D. No· No Yes
. ..
No Yes Yes
No NO·
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 25

52. 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 wou.ld be disclosed in an audit. How-
ever, if the practitioner has become aware that information
coming to his/her attention may be materially misstated, the
practitioner should ·
A. Carry out additional or more extensive procedures as are
⑰
necessary to achieve limited asstJrance.
B. Withdraw·immediately from the engagement.
c. Perform a complete audit and issue a modified auditor's
1

repprt. · , . · ·
o..Downgrade the engagement to ,a compilation and issue
the appropriate report.
If the practitioner has reason to be\ieve that the information
subject to review·may bEi materially i'i)!sstated, _he/she should
· carry Outadditioiial or more extenSive procedures as are nec-
essacy.to be .able to expr~~s negative assurance or to confirm
that a modified conclusion is required.

53. The following statements ·re!a~e to. airevie~ of financial_stat~-

ments. Which Is ina>rred:? · ·
A.. The objective of a review of financial ·statements is to en- .
able a practitioner to,state whether anythi1ng has come to
the pr~ctjtioner's attention that cause~ the practitioner to
believe that the financial statements are not prepared In
acc;ordance with an identified ~nancial reporting frame-
work.
B. A review ,compris.es inquiry a,nq 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. ·
""'
., 26 CPA EXAMINATION REVIEWER: AUDITING THEORy

·o. The level of assurance provided in a review report is less

·than tha~ given in a'n audit rep~rt. . ·

While 'a re~ew involves the application of audit skiHs and

techniques and the gathering of evidence, it does not ordinar-
ily involve an assessment of accounting.and-internal control
systems. ·

54. The following statements relate to a review of interim financial

information performed by the ·entity's independent auditor.
Which is incorrect? 1 . .,
&A. Similar to a finarycial statement audit,~a review of interim
financial information is- designed to obtain reasonable as-
surance that the interim financial information is free from
-

material misstatement. .
B. A review of interim ~nancial information does not provi~e
a basis .for expressing an opinion whether the financiaUn·
formation ,is presented fairly, i11 all, material respects, in
accordance with an applic~bfe financial reporting ·frame-
work. · ,
C. In a revi~ of- interim financial information the auditor·
should have an understanding ·of th~ entity 'and·its envi~
ronment, including its internal control. · ·
D. A review of interim financial lnformatio'n.may bring signif-
icant matters affecting the ;·nterfm financiaf informa~ion to
th
~ auditor's attention, but it does not provide all of th e
evidence that would be require~ in an audit.

In c~ntrast to an audit, a review of interim financial. infor·

tmhat~on is not
- designed to ~btain ·reasonable:assurance t~at
e mt
- erim financi_a·l information is free from materia_
· - · J nus-
statement.
; .
The objecti Of - · - . , ·nterifll
fl . . ve an engagement to review an entity 5 1 a
nanc1al intorm at·ion 1s
. to enable
. · the au d.1tor t o ·evpress
,..
CHAPTER 1 An Introduction to·Assurance, Auditing, and Related Services 27

conclusion whether, on the basis -of the review, anything has

come to the auditor's attention that causes the auditor to be-
lieve that the interim financial informa~ion is not prepared,
. in all material ·respects, in accordance with an applicable fi-
nancial reporting framework.

55. A compilation engagement

A. Requires the practitioner to verify the accuracy or com-
pleteness of the information provided by management.
B. Requires the practitioner to gather evidence·to express an
opinion on the prepar~tion of the financial information.
&C. Is not an assurance engagement.
D. · Involves expression of a review conclusion on the prepa-
ration of the financial Information.

PSRS 4410 (Revised) states that a_compilation engagement is

not an assuranae engagement. . ·

The practitioner is not required to verify the accuracy or

completeness of the information provided by management
for the ,;ompilation, or otherwise to gather evidence -to ~x-
press an audit opinion or a review con<;=lusion on the prepa-
ration·of the financial information. ·

56. PSRS 4410 (Revised), CompHation Engagements, applies to

engagements where the practitioner assists management In
the preparation and presentation of
I. Historical or prospective financial information.·_
II. Non-financial information.
A. I only. & C. Both I and II.
B. II only. D. Neither I nor II.
 28 CPA EXAM/NATION REVIEWER: AUDmNG THEOA)

PSRS 4410 (Revised) applies to engagements where the prac-

titioner assists manageme~t in the preparation and presen-
tation of:
1) historic;al financial i1'formation. .
2) other financial information such as pro forma financial
information and.prospective financial information (e.g.,
budgets and forecasts) .:- ,
_ 3} non-financial information, for.example, greenhouse.gas
statements, statistical rJturns or other information re-
turns /

57.' Which ofth~ following professional·servfces may a practitioner

perform without·being ·required to issue a cpmpilation or re-
view report under PSRE _2400-RevlsecJ' {Review Engagements)
and PSRS 4410-Revised (Compilation
- Engagements)?
I.· Preparing a-working trial balance•... ·
II. Preparing standard monthly journal -entries.
A. only. &C. Both·I and II.
B. II only. D. Neithe~-.-f nor II. ·
I . ! ,
' . ; ..
a
58. In _co~pilation en_ gagem~nt, the pr;ctitlciner applies ac- .
·counting .and financial reporting expert(s_e ,to -assist manage-.
·ment In the preparation ·and presentatioh ·of financial lnfof·
of an entity i~ accordance with an acceptable financial
th~ ~ng ~ramework. What type of assurance is p~vid,ed by
A P P <=!'tioner when he/s~e ·performs this engagement? ·
· osltive assurance · · · · · .
8• N~gative ~ss·ura.nce ·
&
C. No assurance ·
D. Limited assurance
)

T.he procedures empJ ·d • ·

1
not designed 'a·nd d oye n compiJation engagements are
· o not enable th · •.
any assurance on th fi . . e pra~titioner to express
. · • e nanc1al.information.·
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 29

However, the practitioner's involvement provides so~e' ben-

efit to users of compiled financial information because the
work has ·been performed with due professional skill and
care.

59. When performing a compilation -engagement, the practitioner

is required to
A. Assess internal ~ontrols.
B. Make inquiries of management to assess the reliability and
completene$s of the informati_on provided.
C. Verify matters ·and explanation~.
2
D. 'obtain a generai knowledg~ of
the business and opera-
tions Qf ,the entity. ·

· PSRS 4410-Revised (Compilation Engagements) requires the

practitioner to -.o btain an und~rstanding of the following mat-·
ters: . ·
a) The ~ntity's business and operations, inoluding the -
· entity's acc0t~nting' system and accqu~ting records;
· and . .
b) The applicable financial reporting framework, includ-
ing its application in the industry in which the entity
operates.

60. What assurance is provided by the auditor in an .agreed-upon =

procedures engagement? . .
A. Reasonable C. Mod,erate
B. Absolute &
D. ··No assurance

. In an ·agreed-upon procedures engagement, the auditor

· simpiy · provides, a report of .the factual findings and ex-
presses no assurance in his/her report.
 CPA EXAM/NAT/ON REVIEWER: AUDITING THEOR)
30

Users of the report make an assessment of the procedures

and findings rep_orted by the auditor and draw their own con-
dusions from the auditor's work.

61. In an engagement to perform agreed-upon procedures, an

auditor is engaged to
2A. carry out those procedures of an audit nature to which
the auditor and the entity and any appropriate third par·
ties have agreed and to report on factual findings.
B. Apply accounting and· financial reporting expertise to as·
sist management in the preparation and presentation of
financial information of an entity in accordance with an
applicable financial reporting framework. - · .
C. · Provide a moderate level of assurance that the information
is free of material misstatement.
D. e,-ovide a high, but not absolute, level of assurqnce that
the information is free of material misstatement.

-In an engagement t~ perform agreed-upon procedures, a~

auditor is engaged to carry out those procedures of.an aud~t
natur: to which the auditor and the entity and any appropri·
~te third parties have agreed and to report on factual fi nd·
mgs. , ·

The _report contains no assurance and is restric(ed to those

parties that have agreed
· · to-the procedures to be perforrn ed'
1
•

sfnee
mi . others, unaware of the reasons for the procedures, rnaY
smterpret the results. . .

Users of the rep Ort r • - ., be

audi.tor's work 5t
mu form their own conclusions froill t

62. A rePort may b b .

dures to specifie~ ased upon ~pplying agr~ed-upon pro~e;
· elements, accounts, o~ items of a financia
 CHAP.TER 1 An Introduction to Assurance, Auditing, and Related Services 31

statement. The users of the report should participate In es-

tablishing the procedurE!s to be performed. If the auditor can- r
not discuss the procedures with all the parties who will receive
the report, he/she may . · ·
wo
I. Discuss the. procedures to be applied with appropriate
representatives·of the parties involved.
II. Review relevant correspondence from the parties in-
volved. -
III. Distribute a draft .of th~ type of report that will be issued
to th~ parties involved.
A. I and II only C. II and III only
B. I and III only C
D. · I, .11, and III

PSRS 4400 (Engagements on Agreed-upon Procedures)

states, "In certain circumstances, for example, when the pro-·
cedures have'been agreed to between the regulator, industry
representatives_and representatives of the accounting pro-
fession, the auditor ma'y not be able to djscuss the procedures
with all the parties who will receive the report..In such cases,
the auditor may consider, for example, discussing the proce-
dures 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 that
will be issued." ·

63. An auditor may accept an engagement to perform specified

procedures on the specific subject matter of specified ele-
ments, accounts, or Items .o f 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.
 CPA ~XAMINA noN REVIEWER: AUDITING THEOR
32

PSRS 4400 states that the report is restricted to those partli

that have agreed tQ the procedures to •·be performed sine
others, unaware of the reasons for the procedures, may mii
interpret the results; ·
Answer A is incorrect .be~~use the report ·should include,
listing of the speci~~ procedu'res performed.
• I

Answer Bis incorrect b.ecause.~he financial statements need

a
not be prepared in accor4ance·with special purpose frame·
work.
'

Answer Dis incorrect because the auditor need not be the en·
tity's continuing auditor.
64. Reports on agreed-upon procedures are intended to be dis·
tributed.
A.
&
To only the involved parties, who are aware of the reasons
for the procedures• . · · ··
B, O~ly to the stockholders of the entity.
( c. To any party to whom the client wishes.
D. Only to the entity's management.
65. A~ engagem:nt ~o perform agreed-upon procedures ,nay·in-
volve ~e auditor mperforming·certain procedures concerning
J. Individual items of financial data. ·. ·
II. Asingle financial statement.
.. III. Acomplete set of 6nancfal statements.
s:A. I and II only .
II and III I
. .
C. I and III only
· on Y 2
D. I, II, and III
. 66. should
The report
containon an agreed-upon · procedures engagemeilt
CHAPTER 1 An Introduction to Assurance, Audttlg, and Related Services 33

&
A. Identification of the purpose for which the agreed-upon
procedures were perfonned. · .
B. An expression of positive assurance based on the specific
procedures perfonned.
C. A statem~nt that the auditor Is Independent of the entity.
D. A general description of tt,e procedures performed.

According to PSRS 4400, the ~eport on an agreed-upon pro- .

cedures engagement needs to .describe the purpose and the
agre.e d-upon procedures of the engagement in sufficient de-
tail 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 ex-
·pressed.

Answer C is incorrect b~cause the report· should contain a

statement'that the auditor is not in.d ependent of the ent~ty if
such is tbe case.

Answer D is incorrect because the report should include a

listing of the specific proc~dlires performed. ·

67. Which of the following engagements does not =

require com~
pllance.with independence requirements?
A. Compilation of financial Information.
&
B. Review of financial statements.
c. Examination of prospective financial lnfonnation• .
D. Audit of financial statements.

Independence is not a requirement for compilation and· e

agreed-upon !)rocedures engagements.

-
pr

CPA EXAMINATION REVIEWER. AUDITING )'HEOR~

34

68. Which of the following services, if dny, may a practitioner who

is not independent provide?
C
A. Compilations but not revie•Ns.
B. Reviews but not compilations ..
c. Reviews but not financial statement audits.
D. Agreed-upon procedures but not compilations.

69. A practitioner is associated with financial_information when

_I. The practitio'ner attaches a report to that financial infor·
mation.
II. The practitioner consents to the use of his/her name in a
professional connection. ·
A. I only & c~ Either I or II
B. II only D. Neither I nor II

A practitioher is associated with financial information when.

the practitioner attaches
- a report to that informatio11 or con·
sents to the use of his/her name in a professional connection,
If the practitioner is not associated in this manner, third p.ar·
e

ties can assume no responsibility of the practitioner.

C. DIFFEREN T TYPES OF AUDIT

I

FINANCIAL STATEMENT/INDEPENDENT AUDITING

70. . 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. . , ·
1
B. Obtain an absolute level of assurance that the financla
statements as a whole are free from material misstate..
m~t - -
&C. Enhance the degree of Confidence of intended users in the
financial statements.
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services · 35

_D. Assure the future vlablllty of the,entlfy by expressing an

opinion on the entity's financial statements.

An audit is condlJcted primarily to enhance the degree of con-

fidence of in~ended users in the financial statements. This
purpose is achieved by the auditor's expression of an opinion
on whether the ·Qnancial statements are prepared, in all ma-
terial respects, in accordance with an applicable financial re-
porting framework.

Answer A is incorrect because the financial statements sub-

. ject to the audit are th~se of the entity, prepared anq pre-
↑ sented by its management, with oversight from those
charged with goverl'.lance.

. Answer B is incorrect because 'the PSAs require the audit~r

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 state~ei:its does· not assure the future viability of
the .e ntity.
71. 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 C. Either I or.II
B. II only 0
D. Both I and II
 CPA EXAM/NAT/ON REVIEWER: AUDITING THEO~
36

A PSA is relevant when it is in effect and the circurnstanci

addressed by the PSA exist. ·

72. The overall objectives of the auditor in conducting an audit c

financial statements are
W
I. To obtain reasonable assurance about whether the fi
nandal statements as a whole are free from materia
mis~tement, whether qiused by fraud or error. ·
W
II. To report on the financial statements. _
III. To obtain conclusive rather th~fn ·persuasive e~idence.
N. To detect· all misstatements, whether due to fraud or
. ;

error.
A. I and II only C. I,_,II, -and Ill only•
OB. II and IV only D. I, II, III, and IV

The overall objectives of the auditor in conducting an audit of

financial statements are:
1. To obtain reasonable assurance about whether the fimin·
· cial statements as a whole are free from material misstate·
ment, whether caused by fraud or error, to enable the au·
ditor to express an opinion on whether the financial state·
ments are prepared, in all material respects~ in accordance
with an applicable financiai reporting framework; and

2. To report on the financial statements, and communicate ~s5

required by the PSAs, in accordance with the auditor
findings.
73. The auditor is required to obtain ·reasonable assurance ~bout
vyhethe~ the financial statements are free of material
statement, wh~t~er due to fraud or error. In ·all cases wh0 rt
m:~ ·
-
reasonable assurance cannot be obtained, the auditor's reP
should contain a/an
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services . 37

A. Unmodified opinion
B. Qualified or adverse opinion
O
C. Qualified or disdainier of opinion
D. Disclaimer of opinion

The standard provides that in all cases when reasonable a~-

surance cannot be obtained and a qualified opinion is insuffi- .
cient in the circumstances for purposes of reporting to the in-
tended users of the financial statements, the auditor should
disclaim an opinion or withdraw from the ~ngagement,
where wit!,drawal is legally permitted.

74. 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 statemer.ts.
B. To provide the auditor with all information, sl.lch as rec- .
ords and documentation, and other matters that a,.e rele-
vant to the preparation and presentation of the financial
statements. · · ·
-C. To provide unrestricted access to those within the entity ·
from ·whom the auditor determil,:les it necessary to obtain
audit evidence. .
D. To design, implement, and maintain internal control rele-
vant to the preparation and presentation of financial state-
ments that are free from material misstatement, whether
caused by fraud or error.
- - I .

Management, and where appropriate, tjiose ·charged with

governance, have responsibility for the preparation and
p

38 CPA EXAM/NATION REVIEWER: AUDITIN G THEORy

presentation of the fin~ncial statements in accordance With

the applicable.financial r(!porting framework. ..
The auditor has the responsibility to conduct the audit of fl.
nancial statements in accordance with relevant PSAs.

7S. The auditor is required to maintain professional skepticism

throughout the _audit. Which of tne following statements con-
cerning professional skepticism is false?
C
-

A. A belief that management and those charged with gov-

ernance 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 de-
termining the n~ture, timing, and extent of the audit pro-
cedures and ~valuating the results thereof.
C. Professional skepticism is ne~essary to the critical assess·
ment of audit evidence.·
D. Professional skepticism is an attitude that indudes ques·
tioning contradictory audit evidence obtained.
' .

I T~e au~itor is required to plan and perform the audit with

profess~onal skepticism.

~ddeOned
·

th in the standard,_ professional skepticism IS an a~-

tl e at includes a question! ng mind, being alert to conch·
ons whfch may • d' . . r
fr nd in icate possible misstatement due to erro
or aud, a a Critical assessment of a:udit evidellce. .
According to th .-
cisrn red e s_tandard, maintaining professional skeptt-
uces the nsks of: . · .
• OverJo k'
• 0 o tng unUsual circumstances.
Ver generali · d't
observati Qns. zmg when drawing conclusions from. au 1

-
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 39

• Using inappropriate assumptions in determining the na-

tur~, timing, and extent of the audit procedures and evalu-
ating the results thereof.

Although the auditor cannot be expected to disregard past

experience of the honesty and integrity of the entity's man-
agement and those charged with governance, a belief that
they are honest and hav~ integrity does not relieve the audi-
tor to maintain professional skepticism in conducting the au-
dit.

76. 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 cir-
cumstances of the engagement.
&
C. Is necessary in the evaluation of management's judg-
ments in applying the entity's applicable financial report-
ing framework. ·
o.. Is not used in making decisions about materiality and au-
dit risk.
According to the standard, professional judgment is neces-
sary to the proper conduct of an audit. The auditor exercises
, professional judgment in making decisions ~bout:
• Materiality and audit risk. ·
• The :nature, timing, arid 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 en-
tity's applicable financia~ reporting framework.
40 CPA EXAMINAnON'REVIEWER: AUDmNG'THEORy

• Conclusions to be drawn based on the audit evidence gath-

ered.

The auditor is required to ·document the exercise of profes-

sional judgment
The .documentation should enable an ·experienced auditor,
having no previous ·connection with the audit, to·understand
the significant professional judgments made in reaching con·
clusions on significant matters that arise during the audit.

_Professional judgment is not to be used as the justificapon for

decisions that are not otherwise supported by the facts-and
circumstances of ~he ~ngageme_nt or sufficient' appropriate
audit' evidence. . .

n. ·The primary r~ason .tor a financial ·statement audit by an in·

dependent CPA is to · ·
A. Provide increased assurance to users as to the fairness of
&
the financial statements. · ·
a. ·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. · · · -

Th~ ?bjective ·~f financial statement ~udit is to ,expr~ss. an

opimo~ as _to whether an ·entity's fin~ncial statements pre-
sen~ fairly, m-all material respects, its financial position, per:
form~nc7 and cash flows in accordam;;e with an applicable fi·
nanoal reporting framework.. .
78· 1ndependent auditing can best be described as
A. A branch of accounting. .
8• A professional activity -that measures and communicates
financial and business data. •
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 41

R
C. A discipline which attests to the results of accounting and
other functional operations and data.
D. A regulatory function that prevents the issuance of im-
. proper financial information.

The objective of an independent audit is to atte~t to (express

an opinion on) accounting information.

79. Which of the following statements Is correct concerning an---

auditor's responsibilities regarding financial statements? ·

A. An auditor's responsibilities for audited financial state-
A ments an~ confined to the expression of the auditor's opin-
ion.
B. The fair presentation of audited financial statements in ac-
cordanc~ w;th an appllcaqle flnan~ial reporting framework
·is an Implicit part Qf the auditor's ,:-~sponsibi~ities.
C. Making suggestions that are adopted abou~ the form and
· conten~ of an entity's financial statements impairs an au-
ditor's lndepend~nce. ., · · .
o. Toe ~udltor's report should provide an assurance as to tt,e
.
future viability
. .
of the
. eritity.
The auditor's responsibility for tne financial statements is
con~ned to the:expression .o f his/her opinion on them.

80. A financial statement audit aids in the communication of eco-

nomic data because the audit . .
A~ Assures the readers of financial statements th~t any fraud-
ulent activity has been c9rrected.. _
B. Guarantees that financial .data are fairly presented.
0
C; Lends credibility to the financial statements.
o. Confirms the accuracy of management's financial repre- ·
sentations. .
42 CPA'EXAMINATION REVIEWER: "UDITING THEOR)

In a financial statement audit, the auditor expresses an opin-

ion on the fairness of the audited financial statements.. The
auditor's opinion helps establish the d-edibil~ty of.the finan-
cial statements·.
·s1. Which of the following best describes the reason why an in·
dependent auditor ·reports on financial statements?
A. · A poorly designed internal control system may be in exist·
ence.
s. .Different interests may exist between the. company pre-
&. paring the statements an~ the persons using the state-
ments. · · ·
c. A misstatement of _account balances may exist and is gen-
erally corrected as the result ofthe independent auditor's
· work. ·
o. Amanagem~nt fraud may exist and it is more likely to be
· detected by independent auditors.· '

In making d~cisions, 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, knowi~g that its stewardship function is to be

evaluated
. . . on the basis . of the financi'al sta t ements, may ha"'e
y
incentives
. to resort to fraudulent fina .
nc1a1reporting.
. ' '
Thus, a possible conflict of intere .. ·
management and use f fl ~t may be assumed between
. · rs O manaal statements.
The auditor's role is ·to lend . . . . . .
cial statements by expressinc~edibll~ty to the audited finan-
presentation of the financial . g a? _opmion on the fairness of .
. flows of the company. · position, performance, ~nd cash
 II
I
1
I
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 43

82. Which of the following can be significantly·affected by a finan-

cial statement audit? ·
A. Business risk
OB. Infonnation risk ·
C. Inherent risk
D. The risk-free Interest rate

83. The primary responsibility for the adequacy of disclosure In

the financial statements rests with the ·
A.· Partner assigned to _the audit engagement.
&B. Management of the company.
-C; Securities and Exchange Commission. ·
D. Auditor in charge of the field work.

Management is responsible for the fairness of the represeil- .

· tations made through financial statements.

The auditor's responsibility is confined to the expression of

-~pini~n on the fairness of management represen~ations. ·

84. Which of the following elements does not relate to audit qual-
·ty?
I •
A. Audit competence·
B. Audit fees ·
&
c. Independe_ nce.
D. Due d_iligence
Audit quality is an overall concept that encompasses adher-
ence · to independence, auditor competence, due diligence,
and. quality control processes. · '
 """
44 CPA EXAMINATION REVIEWER: AUDITING·THEO~y

INTERNAL1OPERATI0NAL AUDITING .

85. The following statements relate to internal auditing? Which

is incorrect?
A. Internal auditing is carried out within an entity by employ-
ees of the entity or by personnel contracted for the pur-
pose. .
B. -Internal auditing has become a function that evaluates
and improves an organization's risk management, control
and governance processes to add value to the organiza-
tion. '
& C. The internal auditor's judgments are subordinated to
those_of management. ·
D. Internal auditing has evolved into a highly professional ac-
tivity that extends beyond ·the _ appraisal _of the efficiency
and effec;:tiveness of ~n ·entity's operations.

86. Which of the following statements is an incorrect description

of the role internal auditors? · ·
A. Internal auditors should review the means of minimizing
risks and assist management processes. . . . .
B. Internal ·auditors should assess risks within the business
operations and those from outside the business.
C. Internal ·auditors should appraise the economy and effi"
ciency with which resources are employed. .· ..
&
D. Internal auditors should have authority and responsibihtY
for the activities they audit.
87 · Whi~h of the following statemen·ts is. not true in, respect of
the internal·auditor? · ·s
& . . · rI
A, The scope of audits performed .by the internal audito
primarily In respect of financial report audits. , ·ce
B. An internal auditor does not require a license to p~acti rid
C. Internal auditors are.usually employed by companies a
government units.
 CHAPTER 1 A~ Introduction to Assurance, AudHlng, and Related Services 45

D. Primary responsibility of the internal auditor Is t() the

board of directors. . '

88. Which of the following groups could be Involved in an opera-

tional audit? ·
Internal Government
CPA Firms Auditors Auditors
&
A. Yes Yes -Yes
B. Yes No No
C. No ,
No Yes
. D. Yes Yes No

89. Which is QOt one of the three phases in an operational audit?

A. Evid~nce accumulation and .evaluation ·
B. Planning
C. Reporting and follow-up
D. Training and supervising
& I •
employees
.

90. In performing ~n operational audit, the auditor primarily relies

on which of the followf ng procedures?
A. Physical Inspection
, B. Analytical procedures
& C. 'Inquiry and ob~ervation
D.' Tracing and vouching

91. The term "efficiency" in performance auditing refers to

&

A. Using resources to maximize output f9r c;t given input, Qr

&to minimize· input for any given quantity and quality of
output. _ . . _
B. The achievement of intended results of operations, pro-
grams or activities. ·
c. Th~ achievement of objectives .within a specified tim!;:
frame.
o. The acquisition of resources at appropriate times and
within a specified time frame.
46 CPA EXAMINATION If ~VIEWER: AUDITING THEORY

92. Before an effectiveness audit .can be performed, there must

be
O Specific criteria developed to define effectiveness.
A.
B. A compliance audit performed by a government auditor.
c. -A review performed by either .an independent or internal
auditor. ·
o. A financial. statement audit by an ind~pendent auditor.
93. ·Which of the following activities would generally account for
a significant propqrtion of ah internal ·auditor's time?
.A. Checking the company is complying with all of its rules
and regulations of operation.
B. Verifyirig all invoices before payment is made.
c. .Ensuring the company Js operating within budget.
·&o. Evijluating the effectiveness and efficiency'of all phases of
an entity's operations.

94, Which ~f the following is a·typical objective of an operational

audit?
A. To determine whether an entity's Internal control system
..· is adequat~ly operatin~ as designed. ·. • ·
B. To determine whether an entity's operational information
Is in accordance with PFRS. · .
c. To det:rmine ~hether an ehtity's financial statements pre-
sent fairly _the results· of operations. . . . . . . .
&
D. To determine whether an :entity's specific operating units
are functioning efficiently and.effectively. .
95. The primary orie tati · ·
A• .Futu · n on of operational auditing is towards ·
&
. men;~ 1mprovements to acco":plish the goals of O,anage-
e

B. The
.al accuracy of the data reflected in management's
. • ·t1nan -
Cl records.
C. The verification th · ·· irlY
presented. at a company's ·financlal report Is fa
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Servioes 47

D. Past protection provided by existing Internal control.

• I

96. The purpose of an internal audit is

I. To evaluate the adequacy and effectiveness of company's
-

internal controls. ·
II. To detennine the extent to which assigned responsibili-
ties ~re actually carried out. . . ·
III. To ·collect evidence on whether the company is continu-
ing as a going concern. ·· · .
O
A. I and II only C. II and III pnly
B. I and III only .D. I, II, and III·
' . ,

97. What is the proper organizational role of internal auditing?

& A. To serve as an independe·nt, objective assurance and con-
sulting 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 ef-
ficient operati~ns. · . ·•
D. To serve as the investigative arm of the audit committee
of the board of directors.

Internal auditing is defined as "an i11dependent, objective as-

surance and consulting activity designedto add value and im-
. prove an organization's operations. ·

It helps an organization accomplishlts objectives by bringing

a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, ~ontro~, an~ govern-
~nce process~s."
 C
. I

48
CPA EXAMINAnON REVIEWER: AUDITING THEO~y

Answer B is incorrect because whil!l it is true that internal

audit work reduces external audit fees, It Is not a reason for
haVing an internal audit department.

Answer Cis incorrect because the primary role of internal au-

diting is not limited to assessing the·•efficiency of OperatiOns.
. ' .

Answer D Is incorrec~ becallse internal auditors s<!rve not

onlyentity's
the the audit ~ommlttee of the board
management. · of directors but also

98. Which of the following best describes.the scope Of iriternal

auditing as it has developed to qate?
A. Internal ilQditing involves appraising the economy and ef·
_
ficiency with v,hich reso.urces are ·employed.
B. Internal ·auditing has evolved to verifying the existence of
assets·and revleWing the me~ns of safeguarding -assets.
O
C. Internal auditing has evolved to more of an operational
orientation from
a strictly financial orientation.
D. Internal auditing involves evaluating compliance with pol~ ·
icies, plans, pro~edures, laws,_and regulations.
Jnternal auditing fin.eludes the audit of:
l. Fiila.,cia! and ope~ating info'nnat1_on; . • . •ula·
2. Compliance_with policies, plans, procedures, laws, 1 eg
tions, and contracts; ,_· . .' their ex·
3. rh~ means of safeguarding assets and ver1fymg
. lstenl'e; . . . . ces are em·
4. The economy and efficiency with which res~ur
. ployed; and . ther results are
5 . Operations or programs to ascerta~n whe d oals and
· consistent with established objectives an_b. gd
whether they are 'being
· carne
• d o_ut as prescn e · .
CHAPTER 1 An Introduction lo Assurance, Auditing, and Related Services 49

Answers A, B, and Dare incomplete descriptions of the scope

of internal ~uditing. ·
-
99. Which of the following is considered a primary reason for cre-
=
ating an Internal audit department?
A. To evaluate and Improve the effec.tiveness of control pro-
e
cesses.
B. To ensure the accuracy, reliability, and timeliness of finan-
cial and operating data used in management's decision
making~ .. ·
c. To reli_eve management ofthe responsibility for establish-
ing effective controls. . . ·
D. To safeguard res_ources entrusted to the :organization.

Internal auditing is defined as "an independent, objective as-

surance pnd consulting activity designed to add value and im-
prove an organization's operatfons.

It helps ·an organization accomplish its objectives by bri~ging

a systematic, disciplined approach to evalµate and improve
the effectiveness of risk ma·nagement, control, and govern-
ance proc~sses."

Answer B is incorrect because internal auditors do not en~

sure the accuracy, reli~bility, and timeliness of informatjon
used in decision making. They report on the ~atus o( opera-
tions. ·

Answer Cis incorrect because management is responsible for

establishing and maintaining lnternal controls.

Answer D is incorrect because prescribed controls-not

management-safeguard the·organization's resources.
 CPA EXAM/,,,..,
AIA TJON REVIEWER: AUDITING
j
THEORY
50

. dt'tlng profession has advanced primarily as a

100. lhe ,ntema 1au ' - .
·,:S~~c~~ased interest by Bachelor of Science in Accountancy
· · (BSA) graduates and _exp~rienced a_uditors.
a. Job qualification spec1fic~t1ons that include added empha·
sis on background knowledge and skills. .
c. The limitation of financial statement audit scope. .
& D. Increased complexity and.sophistication of business opE:r·
ations. '
I ' •

Internal auditing is an appraisal control that measures and

evaluates other controls. The increased c~mplexity and so·
phistication of business operations have required manage·
ment to rely on this appraisal control.

Answer A .is incorr.~ct because increased interest by BSA

gr~duates and exp~rienced auditors contributes to the. ad-
vancement of the internal ·a udit profession, but it is not the
· Primary reason f'lr such advancement. ,:

. Answer B is incorrect because improved job. qualification

specifications of internal auditors result from -increased c~>1J1• ·
plexity and sophistication of business operations.
\

Answer ·c is incorrect because the limitation of external ~p.di~

scope dc,es not contribute to the advancement of the interna
audit profession. . ·

101. Which of the following actions wouid be an approprla_te rd .'

spo_nse by companies to Improve the public's perception ·
· their fl~andal reporting? .
e:· Increased ·adoption of audit committees. · · to
· Keeping external and internal auditing work separated
maintain Independence.
 CHAPTER 1 .An Introduction to Assurance, Auditing, and Related S8fVices
51

c.
Requiring internal auditors to report all signifi
cant findings
of fraud and lll'egal activity to the·company pre
D. None of the ·above. sident. · •

The aud it committee is composed of ou~ide

directors who
are ind epe nde nt of management. · '
ihe pri ma ry purpose.is to assure tha t the dir
ectors are exer-
cising du e car e and external.and internal
auditors are inde-
.pen den t of ma nag em ent .
J .

The following are-some of the audit committee's

functions:
1. Select the external auditors.
2.. Review the external auditor's overall au~
it plan.
3. Evaluate the results of external and inte
rnal audits.
4.. Review the internal. auditing work schedu
le, budget, etc.
. 5. Meet reg ula rly with the internal au~itin
g director.
The abp ve functions should increase public
I

confidence on the
fair pre sen tat ion of the company's financial
sta tem ent s.
102: Internal auditors review the adequacy of the
company's inter-
. nal control system primarily to •
A. Help .determine the nature, timing, and ext
ent _of tests
necessary to achieve au~it objectives. .
· B. Determine whether the internal ·control ,sys
tem provides
reasonable assurance .that the company's object
ives and
Q.oals are .met efficiently and e~onomically.
C. Ensure that mate~lal weakr,es~es in the sys
control are corrected. tem of internal
·
· D.. Determine whether the int~rnal corjtrol
system. ens
that financial statements are fairly pre$ented .
· · ures
 52 CPA EXAM/NA noN REVIEWI ·R: AUDITING THEOA~

Internal auditors review the aJequacy of the ~ompany's in-

ternal control system primari'iy to ascertain whether the sys.
tern provides reasonable as~urance th~t the company's ob-
jectives and goals will be achieved efficiently ·and economi-
cally.
.
'
Efficient performance impHes the use of minimal resources
to meet the company's objectives and goals.

Economical performance is the acco_mplisliment of objectives

and goals at a cost commensurate with the task.

An~e r A is incorrect bec~use external audito rs determine

anrl use the acceptable level of detection risk to determine
the nature, timing, ai:1d extent of substantive tests.
-
Answer C is incorrect because intern·aI audito rs do not have
author ity to ensure that IJJaterial weaknesses in the internal
control system are corrected.

Answer D is incorrect because the scope of interna l auditing

inclu~es, but i~ not limited to, determ ining the fairness of fi-
nanetal statements.
(

, 103. The internal auditing departrilent's responsibility for deterring

fraud Is to . ·
A. Establish an effective internal tr I
B. Maintain Internal control. con o system . .
c. Examine and evaluat th
o. Exercise operati eh e system of internal control.
ties. ng aut orlty over fraud prevention.~ctivl-

lnternal auditors assist in h . ·. .

ing and evaluating the s t e pre_vent1on of fraud by exam1n-
. Ystem_of internal control.
-
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 53

·· Answers A and B are in~orrect because management, not the

internal auditor, has the responsibility to establish and main-
tain an effective intern al control system. .

Answer D is incorr ect becau se internal auditors are not al.:. ·

lowed to assum e operat ing responsibilities.

104. In conducting an appraisal of the economy and efficiency with

which company resources are used, an internal auditor's re-
sponsibility Is to . l

A. Verify the accuracy of c;1sset valuation. ·

B. Review the reliability of operating information.
C. Verify the existence of assets. .
D. Determine whether dperating standards have been estab-
lished.

The compa ny's man~gement is responsible for setting oper~.

ating standa rds. The intern al audito r's responsibilities are to
.determine that: · ·
_ 1. Manag ement has established such standa rds. :
2. The standa rds are ·being met.
3. Deviations from establ ished standa rds are being identi-
fied and correc ted. · ··
4. Corrective action has been taken.

Answers A and 8 -are incorr ect becau se they relate to the re--
liability and integr ity of information.
- .

Answer C is incorr ect becaus~ verifying the existe nce of ·as-

s~ts relates to the safegu arding of assets. · ·
lOS. Internal auditors should ·review the means of ph;stcally saf _
guarding assets from losses arising from · · e
· A. Exposure to •the elements. ·

'
 .l

CPA EXAM/NAT/ON REVIEWER: AU

DI TI NG THEORY
54

B. Underusage ·of physical facilities.

iples.
C. Misapplication of accounting princ
D. Procedures that are not,costjustified.
the means employed
Inter nal auditors are required to review
from various types of
by tbe company tQ safeguard its assets
s su ch as tho se resulting from fire, theft, unscrupulous
losse
elements.
or illegal activities, and ,exposure to the
use they relate to effi-
A_nswers ·s an _d _D are· incoriiect beca ·
~iency of operations_. . .
s to th~ reliability of
Answer C is incorrect because it relate . ..
inf or ma tio n, no t ph ys ica l saf eg uards .

Op era tio na l a~
_ dits ge ne ral ~y h~ ve ~.een conducted by internal
106.
rmed by certified public
· and COA auditors,_ but may be perfo
ts. A·_ µn ma ry pu rpo se of an op erational audit is to
accoun tan . .
provide ··
rmance i.n meeting or-
A. A ~ea~ure of management perfo •
gamzational goals.
xaminations 0 f .fl . 'd · •
B. The results .of internal .em 1nanc1al an ac
co
·- un tin g ma tte rs to ·a co ,
c. Aid to the ind ep en de nt au di~ ~y
5
top_-level management.
15 conducting the ex·
alllin ati on of the fin ari cla l sta ~, .:~ o
· .
o. A me__ans of assurance tha. t .mt~rn~Its.accounting controls
are functioning as plan~ed
.
Operational auditing in vo1ves a syst ·
i
° f ·. ,
at ~n an. entity s act'IV•Jtie . . emat1c review and evalu-f
·t res rces and the effecti s 1n rel Ion to· tµe efficient use o
f
1
. i. s ou h' ; b'ec
t1ves. , . .Veness in acc . ompJ1·s 1ng1tso j -
pa

CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services

The objective of operational auditing is to as~ess perfor-

mance, identify areas for _improvement, and develop recom-
mendations. .

GOVERNMENTAL AUDITING

107. Governmental auditing -often extends beyond · examinations

leading to the expression of opinion on the fairness of finan-
cial p~esentation and includes audits of efficiency, economy,
effectiveness, and also ·
A. Accuracy
B. Compliance
C. Evaluation
D. Internal Control

A governmental audit is typically designed to deter mine

whet her. the auditee -~as complied with applicable laws' and
regulations.

108. A governmental audit may extend beyond an audit .le~ding to

the expressipn of an opinion on the fairness of financial
presentation to includ~
Program Economy,and
Results Compliance Efficiency
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes
The types of a~dits cond_ucted by_the Commission on Audit
(COA) are financial audi~ and.p erfor manc e audit. , . .

Performance •audit s include, economy, efficien

gr.am audits. . . cy, and pro-
 R: AU DI TI NG THEO~y
56 · CPA EXAMINATION REVIEWE

ud ed in th e sc op e of finan cia l an~ performance audits is

In cl
y has complied with applicable
de_ter m in in g wh et he r th e entit
la ws an d regulations.

tiv e of ~ pe rfo rm an ce au dit is to deterinlne whether

109~ An ·objec
an entity's -
on al inf or m ati on is in ac co rda nce with government
A~ Oper ati · .
auditing standdrds. ,
ific op er ating un its ar e fun ction ing economically and
B. Spec .
efficiently.
rly the results of opera-··
c. Rn an cia l sta tem en ts pre se nt .fai
tions.
erating as designed.
o. In te rn al· contr ol is ad eq ua tely op

economy, efficiency, and pro·

Pe rfo rm ~n ce au di ts include ·
gr am au
1 di ts.

an d efficien cy audits de te r~ in e wh et he r the en·

Ec on om y
efficiently.
· tit y's . re so ur ce s ar e utiliz.ed

· or effec tiv en ess au di ts de ter m in e whether the en·

Pr og ra m
be en effec tive in achie vin g' the desired results or ben-
tit y ha s · ·
efits of th e program or activity
.

ich _ of the follow ing sta tem en ts Is a standard appllcabJe to

110. Wh with G ment Au-
t~m en t ac co rda nce
financ,a~ sta au di~ In
· ovem .
diting Standards?
A. . au ditor sh ou ld de term' the
ine extent to which the eri-
.., s programs -achieve the ·des.,red level .of results. .
B. An auditor should
bfe measures of asse~s w_ hether the entity has reporta-
valid and
refiable. · eco~omy and efficiency that are
. ,
c. An auditor should
ing of internal conlitep,ort on the scope of the auditor's test-
ro.
cHAPTER 1 An Introduction to Assurance·, Audtting, and Related Services 57

o. An audito r should briefly describe in the auditor's report

the method of statistical sampling used In performing tests
of controls and substantive tests.

Government audito rs are·requir ed to prepa re a .written re-

port on the entity 's internal control arid assess ment of con-
trol risk made as part of a financial statem ent audit. .
. .
The audito r,' s report should include the following:
. . .
1. rhe scope of the audito r's work in obtaining an· under -
standi ng of the entity's internal control and in his/he r
assess ment of control risk.
2. The entity 's signifi~ant controls including those th~t are
establ ished to ensure co~pl iance with laws and regula-
tions that have a material impact on· the financial state-
ments .
. .
.
3. The conditions, including the identification· of mater ial
weakn esses, identified ~s a result of the audito r's work.

111. Reporting on internal control under Governmen~ Auditing

·Standards differs from reporting under generally accepted au-
diting standards in t)lat Gove~nment Auditing Standards re-
quire a
A. -Statement of positive assurar-,ce that internal control ac-
. tlvities designed to detect material errors and fraud were
tested. · .- -
B. Written report describing the entity's internal control ac-
tivities specifically designed to prevent fraud, abuse; and ·
illegal acts. - . .. . .
C. Statement of negative assurance that the ·internal control
activities not tested have an immaterial effect on the en- ·
tity's financial statements.
 N REVIEWER: AUDITING THEOR)
58 CPA EXAMINATIO

sc rib in g ea ch re po rtable condition ob-

ose considered mate-
D. Written report de
ing id en tific ation o f th
served, includ
rial weaknesses.· . .
.
ud it in g S ta nd ar ds re q u ir e au d it o rs to pre-
T h e G o v er n m en t A rol.
e entity's in te rn al cont
on th
p ar ~ a w ri tt en re p o rt
co nd iti on s, in cl ud in g the iden-
T h is re p o rt sh ou ld incl
w
ud
ea
e th
kn
e
es se s, di sc ov er ed a
.a~ result of
ti fi ca ti on o f m at er ia l
th e au d it o r' s w o rk
p o rt sh ou ld riot gi ve an y form o f assurance
H ow ev er , th e re es s of 'th e en tity 's in te rn al con-
ct iv en
o n th e de si gn an d effe ·
tr ol .
y o f ar , au di to r w ho is engaged to
t is the respons.ibi lit
112 Wha e financial s_taten:ients o f a government entlty? f in·
· audit th
ro l risk w ith re sp ec t to each component o
A. Assess cont · ·
tern al co ntro l.
si bility fo r as su rin g th at the entity complies
B. Assume respon s and regulations.
with applicable .1aw ib le financial state-
nd nd in g o f th e po ss
c. Obtain an u . oerf stlaaws and regulations having direct and
ment _effe~ ou nt s .re po rte d. ,
matenal e ff e ~ on am
e re as on ab le as . th t the
the ·audit to pr ov id surance a
.D. Design _ fre e o f m at er ia l
statements ar e
re ct .m l~ st at em ~nts resulting
from illegal acts having
di
or indirect effects.
ar e re qu ired ..
Governm en t au di to rs ta in an understand· .
na nc ia l st a't to ob
in g o ft h ~ possible fi a :~ e~ t ef fe ct s o f Jaws an d reg-
an d m re·
uJations having direct a effects on.~ m ou nt s
. P "r te d.
- l

'
cHAPTER 1 An Introduction to Assurance, Auditing, and.Related Services 59

Gov ern men t aud itor s are likewise req uire d to ma ke an

as-
ses sme nt wh eth er man age men t has iden tifie d suc h law s
tha t
might hav e suc h effects.

Answer A is inc orre ct bec aus e aud itor s ass ess con trol risk
in
term s of financial stat em ent assertions. ·
Ans wer Bis inc orre ct bec aus e man age men t is resp ons ible
for
ass urin g tha t the ent ity complies wit h applicable law
s and
reg ula tion s.

Answer D is inc orre ct bec aus e aud itor s are prim aril y
con-
cer ned wit h tho se tha t hav e dire ct and mat eria l effects
on fi-
nancial sta tem ent amo unt s.

113. ~The objective· of gover.nmental effectiveness or pro

gram au-
diting is to determine if toe desired results of a program
are
being achieved. What is the first step in conducting suc
h an
audit?
A.. Identify the legislative intent of th~ program bein
dited. g au-
. . . .
B. Collect quantifiable data on the program's SU!=Cess
or fail-
ure.
C. Determine the time frame to be audited.

.
D. ·evaluate the sy~tem used to measure results.
.

The aud it of a gov ern me nt pro gra m involves obt ain ing
info r-
mat ion abo u·t the costs, o_u tpu ts, ben efit s, and effe cts
pro gra m. of the
1
1 •

.
Aud itor s atte mp t to -me asu re the acc om plis hm ent s
. suc
t1ve d
ces s o f t.he pro gra m base d on. the actual i t an re1a-
leg isla tion tha t esta blis hed the program. n ent of the
60 CPA EXAM/NA Tl(?N REVIEWER: AUDm ~G THE0R1

, '

Answers B, C, and D are incorrect because the procedure.s de

scribed are subsequent steps.

D. CONS ULTING SERVICES

114. A pervasive characteristic of a CPA's role In a consulting ser·

vices engagement is that of being a(an)
A. Independent practitioner
B. Computer expert · I

C. Confidential reviewer
D. Objective advisor

Wh,le maintaining objectivity and integrity, the .CPA in a con·

suiting services en:gagement seives the client's· interest by
pursui ng ~he ' objectives estctblisq_ed by the understanding
with the client · · •

115. ~hie~ of the following .statements concerning consulting ser-

vices ,s false? . .
, ,,,. - A. The performance of consulting .services for audit clients
does not, in and of Itself, impair the auditor's. Indepen d-
ence. . .
B. Consulting services differ fi d _ 'A'S
function of attestin · un ament ally from the CP
c. Consulting servicesg to th e assertions Of other pc,~ies, ·
° rd10 arily Involve external_reporting.,,
o. Most CPAs, includin th05
vices, also provide ; e Who proyide audit and·tax ser
· onsu1ting services to their clients, ·
The performance of con, . , . .. . :
ose and benefit of th l~ult1ng s~ry1ces is usually for·. the sole
.
e c 1ent. .
, .
pa
11

cHAPTER
-
1 An lnlroductJon to Assurance, AUditing,. and Related Semces · a ·t

. .
116. .Which of the following are c~nsldered consulting services?
Advisory Transaction AssuraAce
Services Seryices Services
A. No Yes Yes
B. . Yes Yes No
C. Yes , No Yes
D. Yes · Yes ·Yes -
Ass~ranc;e service s are "indep endent profess ional se~ce s
that are intende d to enhanc e the .credibi lity of inform ation to
meet the needs of an'inte nded user."
. - ..
Assura nce service s do not encomp ass consult ing service s.
Adviso ry service s and transac tion service s are both consult -
ing service s. · ·

117. The form of communicatioo with a client in-a consulting ser-

vices engagement should be ·.
A. Either written or -oral. .
B. Written~ and a copy should .be·sent to ·management alone.
C. Oral, with appropriate documentation in working papers.
D. Written , and copies should be sen~ to both._ management
and the board of
.
directors. ·
I
. . .
The,for m of ~ommunication with a client in a con~ulting ser-
vice may be written or o~al depend ing on the: .
).. Unders tanding with the cUent; ., ·
2. · N_eed for a formal record;
3. Intend ed use of results ;
4. Signifi cance or s~nsitivity of ?1aterial cover~d; and ·
5. Degree results are commu nicated during ·the
,_ nt. . · · engage-
 62 CPA EXAM/NATION REVIEWER: AUDITI NG THEOR'

118. ·Which of the following· is the most appropriate action to b

taken by a CPA who has been asked to perform a consulttn!
s~rvices engagement concerning the analysts of a potentia
merger If he/she has little experience with the !ndustry In
volved?
A. Accept the engagement b_ut he/she shoul·d con~uct re•
search or consult with others to obtain sufficient compe-
tence. · .
B. Decline the ·engagement f?ecause he/she lacks sufficienl
knowledge. . .
C. Accept the engagement and issue a report that contains
his/her opinion on the achievability of the results of the
·merger. _ , _
o. Accept the engagement and perform It In accordance with
Philippine Standards on A~di~ng (PSAs). _

A CPA is not precluded from accepting th · bt

he/she should perform additional re engagement .u
·others to obtain a suffici·en·t 1 1 · search or b~onsult with
. . eve of kn owl edge a out the su b.·
ject of the engagement.

Answer B is inco.rrect becaus th. .

eng~geient. e e CPA need not·decline the

Answer Cis incorrect b . · ·

elude a caveat in his/h ecause a CPA ~s required t aI ways iil"
formation th . er report . o
at the prospecti on Prospec tive financia l in-
. ve results . . .
Answer Dis in ·· may not be achieved,
. correct b . , . .
are required to b ecaµse aud·ts . . .
Standards . e Performed in a• 'not consulting services,
_ · cc~rdance with ,Philippine

'

..J
-
CHAPTER 1 An Introduction to Assurance, Auditing, and Related Services 63

KEY ANS ·WERS

1. A 25. B 49. · D ·73. C 96. A

- 2. D 26. t so. B 74. -A 97. A
3. B 27. D 51. D 75. A 98. C
-
4. C 28. C 52 . . A 76. c· 99. A
s. B . · 29. A 53. C 77. A 100. D
6. B 30. A -54. A 78. C 101. A
7. C 31. D 55. C 79. A' · 102. , B

8. B 32. C 56. C 80. C 103. c ·-

-
33. B · 57. C 81. B 104. D
9. C
105. A
io. C 34. C 58. C 82. B

11. A 35. C 59.. ·o 83 . . B . 106. A

12. A 36. D 60. D 84. B 107. a

13. A 37. A 61. A · 85. c· 108. A

38. C 62. D 86. D 109. B

14. A
e. 63. C 87. A 110. C
15. D 39.
. 40~ A 64. A .88. A 111. ·o
~16. B
. . 65. D 89. D 112. C
17. B 41.· D
42. B 66. A 90. C 113. A
18. A
· 67. A , 91. A .114. D
19. A 43. B
·68. A · 92. A 115. C
20. B 44. B
45. D '69. C 93. D · 116. B
21. A
22. C 46. B 70. ·c 94. D 117. A
23. D 47, D 71. D 95. A 118. A
24. A 48.' A 72. A
 193

The Financial
Statement Audit:
Client Acceptance
. . ' . .

and Plantµng

1, In assessing whether ~o accept a client for an audit en- ·

, gagernert, an aud!tor should consider the . ·
1. Client's business risk
n. Auditor's business risk
A. I only C. Both and II
. .B. II only D. Neither I nor II

of
2. Which the following factors most likely would .cause an
auditor to decline a new audit engagement?
 194
CPA EXAM/NA noN REVIEWER. AUDITING 'llii;:oll-,

A. c.oncJUding that the entity's management PrObabiy 'ild<s

integrity.
B. An lnablllty to pe,tonn prullmlnary analytical P~ures
before assessing control·risk. · ·
C. An Inadequate understanding of the elltlty's intema1 Q)n-

D. t· dose
period.
proximity .to the end of the entity's reporu~g

PSQC 1 requires a firm (including a sole prac_titioner) to es-

tablish policies and procedures for the acceptance and con-
tinuance of client relationships and specific engagements,
designed to provide reasonable assurance that it Will only
accept engagements if it:
1) Is competent to perform the engagement; ,
2) Can comply with. relevant ethical requirements; and ·
3) Has considered the integrity of the client, an(! does
· not have Information to conclude that the entity's
. managem~nt lacks integrity, .

Answer Bis Incorrect because the auditor performs analyti-

cal procedu~es after accepting the engagement.

Answ_er Cis, incorrect because the auditor obtains an,under-

standmg of the entity's internal control system subsequent
to the acceptance of the ertgage.qient.

Answer Dis incorrect because d"

gagemeutnearotafterthe·end ::u 1~0 r m~y acc~t an en- ·
3 ,. . . e reporting period.
• Before.accepting an enga · · · .
auditor Is requ1rec1 to 9ement-to audit a new client, an
A. .Obtain a copy of the client's financ,·a· I st .t .
· a ements.
 .Jr"ER 4 The A'landal Statement A .
c~ ·- Udlt. Client~
Ind Planning
a. prepare a mernorand 1 9!5
quirements and documum setting forth th
c. Make Inquiries of the P~ntlng the Prellml e staffing re-
the consent of the pros ed~essor audlto~ary audit plan.
D, Discuss the manageme~ve dier.t. after obtaining
·d1ent's audit committee • representation le.. .
""er with the

pSA 300 (Plan_ning an Audit f .

. h o Finan . l ·
that t h e au. d itor
. •s .all. undertake the foll
c1a Statements)
. st at es
or to s t a rt1ng an 1mt1al audit: . owmg activities pri-
1) Performing procedures required b PSA .
. ontro I for an Audit of Fi
tY, C .Y 220 (Quali-
garding the acceptance of th na~c1al Stat~ments) re~
.the specific audit engagemen~;ca::t relationship and
2) Communicating with the predec -
ther~ has been a change of aud~~~~r ~uditor, ~here
.h L h' rs, m compliance
wrt re evant et 1cal requirements.

Answer A is i~correct because the entity's annual financial

statements w ill be prepared after the end of its report'
· d an; d t h e au
peno . d'1tor ' s acceptance· of the engagement will
mg
likely be prior to that time.

Answers B and D are incorrect because the procedures de-

scribed wHI be performed only after _the acceptance of the
engagement.
4. Which of the following conditions most likely would pose the
greatest risk ·in accept;ing a new-audit engagement?
A. There will be _a client-imposed scope llmltatlon. . .
B. The client's financial · reporting system h~s been m p\ace
for 10 years. · .·
C. The firm will have to hire an expert in one audit area.
D. Staff will need to be rescheduled to cover this new dlent.
196 a>A EXAM/NA noN REVIEWER: AUDITING ,.
fito~'r

According to PSA 210 (Agreeing the Terms of Aud·

gagements), the auditor shall not accept the engage~t En.
management or those .charged with governance imp ent if
limitation on the scope of the audito(s work in the ter::e a
a proposed audit engagement such that the auditor beJi of
the limitation wilJ result in the auditor disclaiming an e~es
0
ion on the financial statements. · · Pin-

5. Which of the following cir.cumstances would permit an inde-

pendent auditor·to accept an engagement after the end of
the reporting period? .•
A. Expectation of the operating effectiveness of controls.
a
B. Issuance of ~isclalmer of opinion as a result of inability
to conduct certain tests required by PSAs due to the tim-
ing of the acc;:eptar,ce of .the engagement.
' C. Remedy the llmit;itions resulting from accepting the en-
gagement after t:1e end of the reporting period, such as
those relating to th~ existence of physical inventory.
D. Receipt of an asse,:t;on fr~rri the predecessor auditor that'
the entity wi_ ll be able to continue as a ~olng conc~m.

Prior to accepting a proposed audit engagement subsequent

to the end of the entf fy's· reporting period, the auditor
sh9uld determine whether circumstances pern:iit an audit in
accordance with PSAs and expression of an unmodifi,ed
opinion.

Otherwise, the auditor should discuss with the prospective .

client-the possibility of rendering a qualified opinion or a
.disclaimer of opinion.

However, in some cases, the ·auditor may remedy the audi}

limitations such as by observing another physical count 0
inventories.
 c#'ri:R 4 The Financial Statement Audtt: Client Acceptance and Plaming 197

Answer A is incorrect because sufficienf . .

d1·n 'th . appropriate ev1-
.dence regar g e_ operating effectiveness of the entity's
internaldcontrol durmg th e year should be available after
year-en • · ·

AnsWer·B is incorrect
. because a·disclai·me r of opm1on
• • 1•s ap-
propriate on 1y 1f the auditor cannot resolve an issue by per-
.forming alternative procedures.

Answer D is incorrect because there is no need to obtain ·

representations regarding the prospective client's ability to
continue as a going concern from the predecessor auditor.

6. In an audit based on Philippine Standards on Auditing

(PSAs), a successor auditor would nonnally become satisfied
with opening balances by ·
A. Performing analytic review procedures.
s. Reviewing the predecessor's working papers.
c: Auditing the previous year's working papers. ·
·o. Interviewing client personnel.
7. A predecessor withdrew from the engagement after diSCO'i·.
ering that a client's financial statements are materially mis-
stated that it would not revise. If asked by the successor
auditor about the tennlnatlon of the engagement, the pre-
decessor should .
A. Suggest that the successor auditor should obtain the cli-
ent's consent to discuss the reasons.
B. Indicate that there was a misunderstanding.
C. State that the audit revealed material misstatement that
· the client would not revise.
D. Suggest that the successor audltpr ask the client.

L,,
 •vAMfNAnON.REVIEWER: AUDITING l'fito
. CPA EN"
t9S

th following is not correct regarding the cornn,

s. Whi~h of ;etween successor/inconiing and PredPra~-
nicaoons . ,
50t1 revious auditors. . ..
ie burdeii of initiating the commumcabon rests.111th
A. the predecessor auditor. . . ·
B. The burden of initiating the commurncat1on rests Wi~
the successor auditor. ·
8. The predecessor auditor may choose to provide a limited
response to .a successor auditor. ·
o. The predecessor auditor must receive his/her former cli-
ent's p~rmission prior to disclosing die11t information to
the auditor.

9. The auditor may accept or continue an audit engagement

only when the basis upon which it is to be performed has
been agreed, through
I. Establishing whether the preconditions for an audit are
present.
II. Confirming that there Is a common understanding .be-
tween the auditor and management and, where appro-
priate, those charged with governance of the terms of
the audit engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

As defined in PSA 210 (Agreeing the Terms of Audit En·

- gagements), "preconditions for an audit" refers to:
fa) The use by man' · · ·I
re O . . agement of an acceptable financ1a
. P rtmg framework in the preparation of the finan·
. c1al statements; and -
 4 The Financial Statement Audit: Client Acceptance and Planning 199
~rER
b) The agreement of management and, where appro-
priate those charged with governance to the prem·
fse on which an audit is conducted. .

The auditor establishes whether the preconditions for an

audit are present by:
1) De.termining whether the financial reporting frame-
. work to be applied in the preparation of the financial
statements is acceptable; and
2) Obtaining management's agreement that it acknowl-
edges and .understands its respons.ibilities that are
fundamental to the conduct of an audit in accordance
with PSAs. '

, . An audit is conduct:d on the premise that management

10 and, where appropriate, those charged with governance,
have acknowledged and understand that they have respon-
sibiliti~S that are fundamertal to the conduct of an audit in
accordance with PSAs. Which of the following is not one of
those responsibilities? ·
A. The preparation of financial statements in accordance
with relevant pronouncements issued by the AASC.
B. The establishment and maintenance of an adequate in-
ternal control system that is · necessary to enable the
preparation of financial statements· that are free from
material misstatement, whether due to fraud or.error. ·
C. To provide the auditor with access to all Information that
Is relevant to the preparation of the financial statements .
such as records, documentation, and other matters. _
D. To provide the auditor with unrestrictep access to per-
sons within the entity from which the auditor" determines ·
it necessary to obtain audit evidence.

hr,
200
CPA EXAMINA noN REVIEWER: AUDlllNc ,.Ii
to~
~anagement is responsible for the preparation of the ·
cial statements in accordance with the appllcabJe :Qa~
cl~! reporting framework, including where relevant Qhan.
fair presentation.. t eir

ll. ~e aUdltor shall agree the tenns of the audit engage,n

With~anagement or those charged with govemance, as
propnate. The agreed terms shall be recorded in a/an · P.
A. Engagement letter ·
B. Letter of audit Inquiry .
C. Management represeo~ation letter
D. Confirmationletter
The standard states that it is in the interests of both the en-
tity and·the auditor that the auditor sends an audit engage- ,
ment letter before the comµi~ncement of the audit to help
avoid misunderstandings with respect to the ~udit. ..

.The engagement letter shall in~lude:

·a) The-objective and scope of toe audit of the financial
statements;
b) The responsibilities of the auditor;
C). The responsibilities of management;
d) ldentificatjon of the ·applicable financial reporting
framework for the preparation of the_ financial
statements; and
e) Reference to the expected form and content of any ,
r~ports to be issued by the -auditor and a statement
that there may be circumstances·in which a report
maf differ from its expected form and content.
12. The following matters are generally included in an auditOr'S·
ngagement,letter, except
e_ ·
 fER 4 The Anandal Statement Audit: Client J.r-..._
· ~noe and Planning 201

A, n,e factors to be. considered ·

materiality. In determining the overall
8. n,e fact that because of the test
ent limitations of an audit t .nature ~nd other lnher-
Hmltations of Internal con~ol OQether wit~ the Jn~rent
risk that even some material ' there Is an unavoidable
undiscovered.· misstatements may remain
c. n,e scope of the audit.
o. Management's responsibility
. for the fi nanc,a
•. 1statements.

13. The following are usually included in an 8 d't1 01..,

ment letter, except · u s engage
_

A. List of audit procedures to be used ·in inventory observa-

tion.
B,· The financial statements are the -~esponsibility of the
company's management.
c. A reference to PFRS. ·
o. A reference to PSAs.
14. Which of the following statements would least likely appear
in an auditor's engagement letter?
A. our audit will be made with the objective of our express-
ing an opinion on the financial statements. .
B. We remind you that the responsibility for the prepara.tion
of financial statements Including adequate disclosure is
that of the management of the entity.
C. After performing ou_ r pre11m·1nary analytical procedures,
· we will discuss with you the other procedures we consid-
er necessary to complete the engagement.
D. Our fees, which will billed as work progresses, are
based on the time required by the individuals assigned to
the engagement pl1.1s out-of-pocket expenses.
 CPA EXAM/NATION REVIEWER: AUOl'J"f t..•
2~
.
An auditor Is required to establlsh an understand
lS. dlent regarding the services to be performed forlng 1-v~
gagement. This understanding generally includes each h
A. The auditor's respon~ibillty to apply the cone en,
rtality in planning and performing the audit. ept Of n-iat
a. Management's responsibility for providing th e-
with an assessment of the risk of material rn· e aud;to
due to fraud. 155taten-ien;
c. The auditor's responsibility for ensuring th
charged with governance are aware of any ~t .those
deficiencies in Internal control that may come ;~9~fltant
ditor's attention. . · e au.
o. Management's responsibility for errors and the ill
tivities of employees that may cause material rn~sstQal ac-
ment. . . . ate-

An auditor's engagement letter shall include, _among oth

things, the auditor's responsibility to communicate to tho er
charged with governance ·of the client significant intern:~
control deficiencies that may be discovered during the audit.

Answer A is incorrect because determining materiality in

planning and performing an audit is a responsibility that the
auditor is not required to share with the client.

Answer Bis incorrect because the auditor assesses the risk

of material misstatement.

Answer D is incorrect because management is not responsi·

ble for the errots and illegal activities of employees.

. 16. An auditor's engaqement letter most likely will include for

A~ A request for permission to contact the client's lawver _
assi~tance in identifying litigation, cl~ims, and asse55
ments.
ctJJf 4 The .Flnanclal Statement Audit: 'Client AcoePlance and Planning 203

A reminder that management

6· acts committed by employees. Is responsible for Illegal
C ,i,e auditor's.: preliminary assess
· relating to misstatements artsln m;nt of the ·risk factors
dal reporting~ 9· rom fraudulent flnan-
D· Management's acknowledgment of •
· such. Internal control as it dete Its responsiblllty for
15
able the preparation of financla~nes . necessary to en-
trom material misstatement. tatements that are free

Among ,the ~atters a~d~~ssed in an engagement letter is

managements respons1b1hty for: •
a) The preparation and fair presentation of the finan-
cial stateme~ts in accordance with Philippine Finan-
cial _Reporting Standards; and ·
b) .Such internal contro! as it determines is necessary to
enable the preparation of financial statements that
are free from material misstatement, whether due to
fraud or error.

Answer· A is incorrect because management is responsible

for adopting policies and procedures to identify, evaluafe,
and account for litigation, claims, and assessments.

Answer B is incorrect because management is responsible

for ensuring that the entity's operations are ~onducted in
accordance with laws and regulations. However, it is not re.;
of
sponsible for 'illegal acts employees that are unrelated to
the entity's business-activity. · .
'
Answer C is incorrect because an auditor submits an. en- .
gagement letter befo~e the commencement of the audit.
Prior to_performing proc~dures, the auditor does not assess
 204 CPA EXAMINATION REVIEWER: AUDITING ll-f
. to~~
the risk ·factors relating to mi~statements th~t may a .
fro~ fraudulent financial reporting. • t1s·e .

17. The auditor of a parent entity is a!soctthe auditor of its corn

ponent. Which of the fo11owing ,a ors may i'1_tluence •
auditor's decision whether to send a separate engagen,~e
letter to the entity's component? · nt
A. Whether a separate auditor's report is to be, iSSUP.d on
the component.
e. The component's management does not accept Its re- .
sponslbilities that are·fundamental to the coAduct of an
audit. . ,
c. The financi.al reporting framework used by the compo-·
nent is unacceptable. .
D. The preconditions for an audit of the compone~t's finan-
cial statements- are not present.

The following factor~ may influence the auditor's decision

whether to send.a separate audit engagemen~ letter to the
comp.onent: .
1) Who appoints the component auditor;
2) Whether a. separate auditor;s report is to be issued
.on the component; ·
3) Legal requirements in relation to audit appoint-
ments;
. 4) Degree of ownership by parent; ar;id
5) Degree ·of independence of the component manage-
ment from the parent entity. , · . .
. 18.. On recurring audits, the auditor may decide not to ·send a
new.engagement letter each period. Which of th~ following
. factors.may make it appropriate to send a new engagement
. letter? ' ·
 209

A I Q
.J..J Of special terms of lhe audit
,,w ~ ,.:.....,erli
I'~ .:::.- of senior management Y-
•• No YH No
,~~tlif,n·"'.!s1 or ,egulatolY req_uirements Yes No No No
" '' IVIJ fn tu Yes Yes Yes Yes
'ffC8'1' chan98 na re or SIZII of lhe 89
,iP. .s riu-:
"-_,;ry . . ..a1ness · y · Yes Yes · YH

ding to the standard, the following facto

.4c;(Orpriate to revise the terms of the audit rs may make It
sPrPer:iind the entity_of existing terms: • engagement or
.
, >,nY indication that the entity misunderstands th
objective and scope o(the audit e
, AnY r_evised or special terms of the audit engage-
ment. · ·
, A recent change of senior management.
, A significant change in ownership. · · · .
, Asignificant' change in n~ture or size of the enti_ty's
business. _ .
, A cJiangejn ·Jegal or regqlatory requirementS:
, A·chaiige . in · the
financial reporting framework
adopted in the- preparation of the financial
. state-

ments.
1The auditor shall not agree to a request from the entitY to
dlange the termS of the audit engagement or to change the ·
audit engagemerit to an engagement that oonvevs a tower
level of assurance when there Is nO rea5()nable justification
flt doing so. Which of the following may be consklered rea·
sonable Justifications for the change in the audit engage-
ment? . . . .

· I. ~ange in circumstances affedlng the need for ~e ·

rvrce. . . .. ·
 .
. ,AUDITING ·THe:o
206 CPA EXAM/NATION REVIEWER: ·

· ture of an audit as ON
II. A misunderstanding as to the na
inally requested. f the engagement, whether
III. A restriction on the scope caused by other drcurn..
O
imposed by· management or ·
$nces.
A. I and II only
B. I and III only
C.· II and III only
D~ I, II, and III ·
,. . e in circumstances that affects ·
PSA 210 states that a chang . u·nderstandf ng concerning
t he entity . or .a .mis
· 's requ1·rements ally req·u·ested may be con-
the nature of the service .0 r!gin ~esting a change in the
sidered a reasona~le basis ,or reg ·
audit. engagement
A restriction on the scope of the a~dit wou,Jd not be consid-
ered a reasonabJejustifica~ion for the change. .
For example, achange would not .be considered reaso~able
if the auditor is unable td obtain sufficient appropriate audit
evidence regarding receivables and the dient requ·ests that
, the audit engageme~t be changed to a r_eview engagement .
to avoid a qualified opini~n or a disclaime~ of opi~ion. .

20. Before.the:completion of the audit engagement an auditor

rt th · · that' p;ovides
·is requested to cha
· n~e e ~ngagement to one
a 1ower 1evel of assurance . If th . .
there is a reasonable • e auditor conclud_es that
·ment,'the report to b J~5tlfication for the change in engage-
A. Be that appropri!tess~ed would . . . . . .
B ment. , or the revised ~rms of el'igage-
. Include reference to the . ,. ,
. . original engagerJ1ent.
 4,·The FJnanCial Statement Audit: Client Acceptance and Planning 207
.
Jndude reference to any procedures that may have been
C, performed ln the original engagement.
Not ·1ndude reference to any procedures that may have
D, i,een performed, particularly when the new engagement
IS to undertake -agreed-upon procedu~es, .

pSA 210 states that if the auditor concludes that there is

reasonable Justifica~on to change the engagement and if the
audit work performed complies with the PSAs applicable to
the changed engagement, the report issued would be that ·
ropriate for the revised terms of engagement.
P '

In order to avoid' confusing the reader, the repQrt would noi

· include reference to: . . ·
a) The ori~nar engagement; or
bJ ~ny proc·edures that may have been pe•rformed .in
the original engagement, except where. the engage-
ment is changed to an engagement to undertake
agreed-upon procedures and thus; referel'.'ce to the
procedures perforrned_)is a normal part of the r'!port..

21. If the au~ftor is unable to agree to a change of the engage-

. ment and Is not permitted to continue the orig~nal engage-
ment, the auditor should .
A. Insist on continuing the original engagement.
B. Express a ·qualified opinion.
c. Express an adverse. opinion.
D. Withdraw from the engagement.

Under PSA 210, if the auditor is unable to agree to a change

~f the engagement and is not permitted to continu~ the orig-
inal engagement, the auditor should withdraw and consider .
Wh~ther there is· any obligation, either contractual or oth-
. etwis~, to report to other parties, such -as the board of dire~-
 CPA EXAMINATION REVIEWER: .4L1Prf1N G THEO~
208

tors or shareholders the . mstances necessitating th

"thd , c ir cu e
Wl rawal.
th
22• Planning an audit Involves
I. Establishing the overall audit strilcegy tor e· engage..

ment
JI. Developing an audit plan.
A. I only
B. II only
C. Both I arid II
~- N either I nor II
23. Which of the following activities shoi.rld be_ performed bY the
auditor at the t,eginnl119 of the Cl/rrent audit engagement?
- 1. Perform procedures regarding .the continuance of the
dient rela!fonshlp and the specific audit engagement.
n. Evah.1ate compliance wtth relevant ethical requll'ements
. indudlll9 independence. - _ - '
lll. Establish an understanding of the terms of ttie engage-
ment ·
A. I and II only
B. II and III only
C. I and Ill only
'
D. I, II, and III \

- 24. Initial a~lt planning Involves -- - .. -

A. Identify the dient's rea the following matters, except
g- Schedule engagement :n for the engagement.
D. ~velop an overall audit : ~nd auditor'S exi>erts, -
. equest that bank b I -- ra egy. -
ances be confirmed.
- - .
 I •

e~ 4 The Financial Statement Audff:. Client Acceptance and Plan, ,Ing 209
crJfr ..
· equate planning helps to ensure that
Ad ·
A a Q
. roprlate attention Is devoted
APP important-areas of the audit
:ntial problems ~re Identified
No Yes Yes No '
P~nd resolved on a timely basis Yes Yes No No
'fhe audit engagement. ls properly ,
organized and managed . Yes Yes ·No No

The benefits of adequate planning include the following:

• Helping the auditor to devote appropriate attention
.to important areas of the audit. . ·
• Helping the .auditor identify, and resolve potential
problems on a timely basis.
• Helping the audito~-properly organize and manage
the aµdit engagement so that it is performed fn an ef-
fective and
-
efficient
.
manner.
'
• Assisting in .the selection_· of engagement team mem- ·
bers with appropriate J~vels of capabilities and com-.
petence to respon(.l to anticipated' risks, and the
. proper assignment ~f work to .th~m.
• • Facilitating· the direction· and supervision of eµgage-
ment team members . and the review of their work.
. . ·
• Assisting, where\ .applicable, iri ·coQrdf
. .
nation. .of work .
done by auditors of components and experts. . · -
1~· Which.of the-following statements co~cernlng ~udlt pl~nnlng
Is Incorrect? . _ · ,
A. Planning is a·discrete phase of an audit. ·
8· Planning Is a·continual and Iterative process.
c. In recurring audit, ·planning ·otten begins shortly after
(or In connection with} the completion of the previous
 . MINA r,ON REVIEWER: AUDITING lf.t~
CPA EXA lliii()~'f
2fO I

d continues until the completion of the cu

audit an t . tre~t
. audit ,:::-:'udlt, the auditor considers the t1rnil1
o. ~; planning activities and audit procedures that9Of
to be completed prior to the performance of further au~~·
_ __,. . It
pfU\,~ures.

The standard states, '.'Planning is not 3 ~iscrete phase of an

audit but rather a continual and iter~t1ve process that be:
gins shortly after (or in connection ~1th) th~ completion of
the previous audit and continues until the completion of the
current audit engagei:nent. Planning, how.ever, includes
consideration of the timing of certain activities and audit
procedures that need .to 'be c9mpleted. prior to the perfor-
mance of further audi procedures." ··

27. In performing an audit.of financial statements, the auditor

should obtain a sufticlent knowledge. of a client's business
anq industry to
A. Develop an attitude of professional skepticism concern~
Ing management's fin_ancial statement·assertions.
B. Make constructive suggesti'ons concerning improvements
·. to the dlent's Internal control.
~- ,Evaluate whether the aggregation of known misstate-
. ments caU$es the financial statements 'taken as a whole
· to be materially misstated. ·
D. U~derstand the events and transactions that may have
an effect on the client's financial stateme~ts. , _. . _

:T~e auditor, is requ~r~d to

have or obtain ·a s·ufficient
knowledge of the client's business and industry·to identify
nd
~dhu erstand the events, transa·ctions and practices that, ·
m t e audit ' · d · ' ·
the fin . °r 5 JU gment, may have a significant effect on
anc1a1statements. . ·
 4 Th8 Fk1andai 8t-.nent Audit Cllent ACQlptaq and P1anrq 2f1
.
Wfllch of the following Is the.least llkely procedure to be per-
,. In planning a fl~andal statement audit?
seledi"9 a sample of sales lnVOlces for comparison with
A, shipping doeuments.
eoorcfinatfng · the ,assistance of entity personnel In data
9· ~ration. _
C Reading the current year's Interim ff nandal statements.
: 01scussJng matters that may affect the audit with flnn
0
personnel res~nsible for non-audit services to the entl-_
ty. .

selecting a sample o_f sales invoices for comparison with

shipping documents 1s a substantive test.procedure. Sub·
stantive tests are performed to accumulate sufficient appro-
. priate audit evidence, not to pla~ th_e audit .

Answers B, C, and D·are all_planning procedures.

29. The establl;hment of an overall audit strategy involves

1. Determining the characteristics of the engagement that
define its scope. -
II. Ascertaining the reporting objectives of the engagement
to plan the timing of th'e audit and the nature of the
communications required.
III. considering the important factors that will determine
. of the eng~gement team's efforts.
the focus
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

PS~ 300 _(Planning an A~dit of Financial Statements) re:.

quires the auditor to establish an overall aud(t strategy that
 NATION REV/EWEJ:: AUDITING 'h.
. CPA £)(AMI • .,tat\
212 . "(1

1
g and dfrr.ctfon of the audit
sets the scope, tf m~nt of the audit plan. ' and tha
gµtdes the deveJopm . . . I
. hi the overall audit strategy, ,the auditor
In establiS ng .. . _is re.
quired to_:
·tify the characteristics of the engagelllen
a) Id en . . t th
define its scope; . . at
b) Ascertain the reporting obje~ives of the engagenie
to plan the timing of ~he audit and the nature of nt
communications required; . . . the
c) Consider the factors that, in the auditor's profes .
'fi t . d' . s1on.
al judgment,
r

. are s1gn1
•
1can m 1recting the eng
age.
ment team's~efforts; - ·
d) Consider the results of ~reliminary engagement ac.
tivities and, where apphcable, whether knowledg
gained on othe'r engagements perfo~med by the en~
gagement .
partner for. the entity is relevant; and ··
'

e) Ascertain t~e.nature, timing and extent of re~ources

necessary to perform the engagement.
'
30. _Which of the following should be lnduded In the audit plan?
I. Toe nature, ·timing and extent of planned risk a5Se$· ·
-ment procedures.
II. The nature, tlmlng and extent of planned further audit
procedures at the assertion level. · -. i
A. I only
B. n ·only
c. Bo,th I _and n
.D. Neither I ~or II
 4 Th8 Ftnancial Statement Audit: .Client Acceptance and Plamlng 2 13
~¢'- ·.
e audit plan shall lncl~de a description of:
111
a) The nature, tlmf ng and extent of planned risk as·
sessment procedures, as determined under PSA 315
(ld~ntifylng and Assessing the Risks of Material Mis·
statement through Understanding the Entity and fts
Environment)
b) The nature, timing and extent of planned further au-
dit procedures at the assertion JeveJ,.as determined
under P~A 330· (The Au~itor's Responses to As·
sessed Risks). •

Which of the.foll~wing ma~ers would an aud!tor least llk~ly

31. consider when setting the direction of the audit? ·
A, The selectio~ of the engagement .team and the assign-·
. ·ment of audit work to the team members. .
The engagement budget Which includes consideration of
8· the appropriate amount of time to allot for areas where
there may be higher risks of material misstatement
c. The availability of client personnel and data.
o. The manner in which the auditor emphasizes to en-
. gagement team membe~ the need to maintain a ques-
tioning mind and to exercise professional skepticism in
the gathering and evaluation of audit evldenc~. ·

The availability of client personnel and data is a matter to

consider when establishing the scope of the au~it.

32. Which of.the following matters would an auditor most likely'

consider when establishing the scope of the audit? ·
A. The expected audit coverage, indudfng the number ·and
locations of the entity's components be included.
B. The entity's tim·etable for reporting, such as at Interim
and final stages. · ·
 £VIEWER: AUDITING
,AINA r,ON R .
'11-ttC)~
Cf'AEJ(A

2, t A the·entity's management coneer,u

discussion with unlcatfons. on the status of a~
c. me ~~
the throughout
co,;:trom the audit procedures.
engagement and the exPectec,

,:!111es result!: there Is a higher risk of material llils-

D AUdl
t areas whe
· statement. ..
atters to·consider when detenninln
B and Care m t th t· · g
Answers . . . 5 of the engagemen , e 1mrng of th
..ting obJectJVe . . d e
the repo, u f communications require .
audit, and the nature o .
. a matter to consider when
Answer 9 is . setting the direction
.
of the audit

33 In the ~anni~g-stage of an,audit engagement, !he auditor is

· . d t. perform audit procedures to obtam an under-
require o . t · I dh •
standing of the entity .and its env,ronmen , me u mg 1~ In-
ternal control. Th~e procedures are called .
A. Risk assessment procedures
B. Substantive tests
c.Tests of controls -
D. Dual-purpose te$

' The audit procedures to obtain an •understanding of the en-

nal control are
tity and its envir~nment, including its inter_
referred to as "risk assessment procedures" because some
of the informa~ion obtained through these procedures may
b_e used as audit evidence to support assessments of tbe
risks of material misstatement ,
34 1
' . ~ planning lhe audit engagement, the auditOr should con-
s er each of the followtng, except
:·. : ty~ of opinion that is likely to be expressed.
• e enbty's accounting llOlicies and Procedures. .
c#reR 4 nie Financial Statement Audit: Client Acceptance and Plannlng 215

c.MatterS relating to the entity's business and the Industry

In which It operates. .
D, Materiality level and a1:1dlt risk.

The natu~e of the repo1: expected to be is~ued (e.g;, a report

on consohdated financial statements) should be considered
in planning an audit engagement.

The type of opinion to be rendered is determined after the

performance of audit procedures. . ·

Audit · programs are modified to suit the circumstances of

5
3· particular engagements. A _complete audit program usually.
should be developed · · . ·
A, When the engagement letter Is prepared.
s. After obtaining an understanding of the control environ-
ment and control activities.component of the entity's in-
ternal control. · ·
c. After the auditor has obtained an understanding of the
entity and its environment~ Including its-internal control
· . and. assessed the risks of material misstatement.
D. Prior to beginning t~e actual audit work.

Only after obtaining knowledge ()f the entity and its envi-
ronment, .including its internal control and assessing the
risks of material misstatement can the .auditor determine
the nature, timing,· and extent of substantive tests of finan- .
cial statement assertions.
36.. Io designing written audit programs, an auditor should .es-
tablish specific audit objectives that relate primarily to the
A. Selected audit techniques. ·
,B. Cost-benefit of gathering audit evidence.
C. Timing of. audit procedures.
D. Ananclal statement assertions. ·.
 .•,,R· AUDITIN G...._.
11
216 CPA EXAMtNA r,oN REVIE f'r' • • 8:0~

· d fn the a.udlt prograrn sh

The audit procedures.include ftident appropriate audiou1d
enable the auditor to gather su esentadons ·embodied I t e,,.
idence about management repr nthe
entity's financial statements•
. tions are called managern
Such management representa · . , ent
assertions.
. . . ·rten audit pro_grams, the auditor de-
Henc~, 10 designing
. wri . bg
d·t b,iectives1n • hto f th.ose management
·
velops spea 6c au 1 o ,
assertions.
• An audit program should be designded foredeac;h intodividual ~u-
37
roc ures .
dit .and should incorporate steps .an • p_ ·
A. Detect and eliminate fraud of any type_ .·
- B. Gather sufficient amount of management information
available. !
·c. Provide assurances that the objectives of the audit are
satisfied.
. ·. .
r
D. Insure that only_material items are audited.

A written audit program sets forth, in reasonable detail the

specific audit p~ocedures that in the auditor's judgmen; are
necessary to satisfy t~e sp~cific audit objectives.
38. Which of the following i5 . .
trolling the audit eng ·an aspect of scheduling and con-
. · agement?
A. Including In the en · · . ·
minimum and mat gageme~t letter an estimate of the
B. Writing a conclusi~~~~ a~~1t fee. · .
ing how the results~~ ;dividu~f working papers indica~
report. · e audit will affect the auditor's
C Performing audit work .. .
been clo~ed for the per?"d·ly after the entity's books have
. io .under aud·t·I• . .
 4 The Financial Statement Audit: Ctient Acx:epta .
,AP~ ·· • nee 8nd Planning 217
Gl'V" .
JncludlnQ In the audit program
D, d actual time. a column for budgeted
. an ' '

audit program/plan serves as a set

file ts involved in the audit and ~f instructions to as-
ststand the proper execution of th as a means to control and
recor . e work.
. SY including a column fo.r estimated and actual time for each
audit step; th e audit ·program ~an be a useful tool for con-
trolling and scheduling the audit work .

In connection with the planning p_hase of an audit engage-

39, rnent, which of the f~ll.owln~ statements Is always correct?
A, Anal staffing deci 5,ons must be made prior to completion
of the planning stage. . · .
. , observation of it:1ventory count should be performed at
6
year-end. ·.
c. A portion of the audit of a.continuing audit client can be
performed at Interim dates. . . ·
o. An engagemen.t should not be accepted after the client's
financial year-end.
. . . r
40, The auditor shall undertake which of the following activities
prior to starting an Initial audit? ·
I. Performing procedures required by PSA 220 (Quaiity
. Control for an Audit of Financial Statements) regarding
the acceptance of the cl1ent rela~onshlp and the specific·
audit engagement. . · .. .
.II. Communicating with the predecessor auditor, where
· there has been a change of aud_ltors, in compliance with
relevant ethical requirements. ,
A. I only
B. II only . ,
 Slafemenl Audft: Cli nt~ Ind Plenni,g 217
4 n,e
I'~
the audit' program a column ,or budgeted
. . ,iLJdJng rIntime
[rf\-1
0. and actUa •

audit program/plan serves as a set off nstructfons to as-

,rhe nts involved In the ~udft and as a means to control and
sJst' d the proper execution of the work.
,.ecor
mcluding a colu~n fo_r esti mated and actual time for each
8Yd.t step, the audit ·program can be a useful tool for con-
au 11 g and scheduling the audit work
1
trol n
connection with the planning phase of an audit ~ngage-
~· In nt, which of the f~l!owln~ statem~nts Is always correct?
me final staffln~ decisions must be made prior to completion
A, f the plannmg stage.
~t,servation of inventory count should be performed at
9 . . .
· year-end.
A portion of the audit of a continuing audit client can be
C. performed at interim dates. . .
D An engagement should not be accepted after the client's
· financial year-end. .
r

The auditor ~hall u~~~rtake which of the following acti~ities

~. prior to starting an mrtial audit? . . ·.
r. Performing proced_ures required by PSA 220 (Quality
Control for an Audit of Anandal Statements) regarding
· the acceptance of the client refationshlp and the specific
audit engagement. ·
II. Communicating with the predecessor auditor, where
there has been a change of auditors, in compliance with
relevant ethical requirements.
A. I only
B. n only .
 : AUD~TING 'Tf-fto1t
y
218 AM/NATION REV~EWER
CPA EX

C. Bther I or II
D. Both I and II
an audit en gage m ent,~ proposed (succes.
41. Bef~re accepting shou ld m ake Inqu iries o f the Previous
sor/1ncomlng) auditor l~ g the previous audlt?r's
or ) audito r re ga rd
(predecess rs o f co nt in ui ng ac co unt,ng slgn1n..
atte
A. Evaluation o f all m · -
canc e,
to th e re as on s fo r th e change o f audi-
B. Understanding as
tors.
e co ns iste nc y in th e application of
C. Awareness o f th
riods.
PAS/PFRS between pe uent events occurring since the
eq
D. Opinion on any subs as is su ed . _ · .
o
p_ rt w
previous auditor's re
ir es th e pr op os ed au ditor to communi-
T h e st an d ar d requ us au di to r be fo re accepting the
prev io
ca te di re ct ly with the
en ga ge m en t.
. .

ou ld in it ia te th e co mmunication,
sh
T h e pr op os e_d auditor ie nt pe rm is si on to · communi-
ta in cl
al th ou gh both m us t ob
cate.
qu ir e ab o u t re as o n s tor the
The pr op os ed auditor sh
, d~ sa
ou
gr
ld
ee m
in
en ts w ith manageinent con-
cha~ge in audi~o rs Q ce dures, and
cipl es an d au di ting pr
ce rn in g a~counting ~rin ity o f th e en ti ty 's management ·
_facts be~ring on the in
tegr
· ,
ditor is required to d t . different levels of
42. Th e au l rt y fie er m ine three
· materiallty:• (1) mater ~ ~ e finan cial statements as a
~ a t:
whole,. (2) perforinanc: na l,ty, an d (3 ) · .
A. Overall materiality
B. Planning materiality ,
c. General materiality
~- Specific materiality
r
4 The Ffnandal Statement AUdlt: Client Acee ta
· P nee and ~lannlng 219
he audf tor fs required to determt
'f ateriality. These are ne th ree-.different levels
ofrn
1. Materfalf ty for the financial sta
(also called overall mat . 1 tements as a whole
··or eria ity' gener ·1 t rf 1·
tolerable misstateme~t) a ma e a 1ty,
2. Performance materiality (also call d I .
riality or scoping materiality) e P anning mate-
3·. ·M~teriality applied to spedflc classes of transaction~
account balances or disclosures_(also called·specifi~
materiality or individual materiality)

43• wt,at n:1ateriality level would be considered by the auditor to

determine whether the proposed adjustments··are significant
or not? ·
A. overall materiality
s. Scoping materiality
c. Specific materiality
o. Performance materiality
'-

AASC Bulletin, Series 001 of 2010 states, "Materiality for the

financial statements as a whale (herei.ilafter referred to as
the "overall materiality") is the materiality determined at
the overall financial statement level. This ~ateriality level
helps the auditor determine whether the pr9posed audit ad-
justments are significant or not If the audit adjustments ex-
ceed this level, the auditor may need to ~djust the fiµancial
statements."

· What materfallty level is used by the au~ltor In determining

Which line Items In the financial statements are to be tested? ·
:· ~erau materiality
c' Performance materiality
· 5J>edfic materiality
 R: A U D IT IN G
l' fttoit,
220 CPA EXAMJA,.~A
,., noN REVIEWE

. Individual materiality
D . . Per.ce
e · ted as_a ce tain
r
Performanc materJalJty, ca lcula
g of finan :1•
a ed in sco pin
ve~all. materiality, is us uditor. .
aJ
:~ of o test~d y the a
ems to be b
s .a ement J1ne it
c o un ts in th e financ;al
a t significant a c
il l e
_n su re th
This w ov ere d by audit testing.
re c
. statements a
t se t by th e a uditor for /Jar-
. Is the am~un nt ba la nces or discJo-
45. ns , a c co u
es o f transactio
ticular class wer than over- ·
ll though lo
fluence the
tatem e nts, w e
miss
sures fo r which ld reasonably ·be expected to in ts.
all materiality cioouns of users of the financial statemen
economic decis
· o rm a n c e materiality
A. P erf
teriality
B. Planning ma ality
teri
C. Specific ma riality
te
D. General ma late d by mul-
ls is ca lc u
f th e re qu ire d materiality leve p ria te b enchmark
hic h o a pp ro
46. · W
a c e ~ a in p e rc entage by the nt o f a n entity's fi-
tiplying element or. co m p o ne
h is e ith e r a n
whic
nts?
nancial stateme riality
A. ·Overall mate riality ·
a. Planning maateteriality
c. Scoping m
o. Specific materiality
are n o rm ally considered by
th ~ following factors
h enchmark for
!!,:U~!~~ ~i
47. W h ic ~ f r iate b
a pp r op
~:r"3ningovethraell materiality?
a. ng
·'
p o r, en ts o f th e entity' fi ana.al statements
I. Com d regulations s n
II.· L aw s a n
entity
III. _Nature of the
 22 1
The Financial Statement Audit: Clktnl Acceptance and Plsnn/ng
'¢~ 4
I' C. II and III only
I and II only
:: .I and III only D. I, 11, and III

e foUowf ng factors are normally con

sfdered fn choosing
fh pproprfate be.nchmark:
the a
tements
• Components of the entity's financfaJ sta
ents
, Focus of the users of_the financial statem
• Nature of the·entity ·
• ownership structure of the entity
• Vol~tility of the benchmark identified
• Laws and regulations (e.g., SEC)
ning materiality Is ·
Which of the ·following statements concer
ct' . ·
48, not c:orre ·
ategy, the auditor
·A, When : establ~shing the. o~erall..audit str al statements
nci
' shall determine mater1alrty for the fina
.as a whole.
the entity, there is
s. If, fn the spe cffic circumstance s of
ctions, account
one or · more particular classes of transa
ents of ,~..sser
balances or disclosures for which misstatem
al statements as
amounts than materlality for the financi
a·whole could reasonably be expected to infls·of the fi-
uence th~
.basi
economic decisions of users taken on the
nanciai statements, the auditor shall als
o determine the
ular ·dasses of
materiallty •1·evel or levels to· those partic ·
- transactions, -account balances or disclosurrcis es. ·.
-
c. Determining materiality lnvolv~s the exe e of ,profes
sional Judgment.
D. The materiality level f9r the flnancfal
statements as a
whole determined fn planning. stage ·of th~ audit_
should not be affected by changes in the
circumstances
'
_of the engagement.
222 . CPA EXAMINATION REVIEWER: AUDITING '11ito~

PSA 320 (Materiality in Planning ao d P_e~fo~~ing an.Audit)

5
states that materiality for the fin~n~a a ements as
whole (and, if applicable, the matenahty !e;e: or levels for
particular classes of transactions, accounlt : ances or dis.
O
closures) may need to be revised as a resu :
• A h . . cumstances that occurr~d during th
c ange 1n or . fa maJor · _e
audit (e.g., a decision to dispose O part of the
entity's business); •
• New information; or
• A change in the auditor's understanding 6~ the entity
-and its operations as a result of performing further
audit procedures.
49. Which of the following,·would an auditor most likely use in
determining a prel_iminary judgment about materiality? .
A. The contents of the·management representation letter.
B. The anticipated sample size of the planned substantive
~- . . .

c. The entity's annualized Interim financial statements- ·

D. The r~ults of internal control questionnaire. ·
The measurement of a prelimin . .
relates to an annuaLfi ( ary ~ater1abty level usually
igure e.g., net income). ..
so. An auditor shall consid .. ·. ·.
'I. Determining th er materiality when
· e nature ti
~ur~~- ' ming, and extent of audit pro-
n. Evaluating the effi . .
I only ect of misstatements.
B. II only
~· Both I and It
. Neither I nor II
 4 The Financial Statement Audit: Client Acceptance and Planning 223

he auditor consfders mat crtaUty when determining the na-

:e
1' re, timing, and extent of audit procedures and evaluating
etfect of misstatements. .

It is an appraisal Activity establ.lshed within an entity. Its

51. (Unctions indude, among other things, exam.lnlng, evaluat-
lnQ, and monitoring th~ adequacy and effectiveness o~ the
aceounting an_d Internal control systems.
A, extemal auditing .
8 Intemal auditing
c: . Governmental auditing
D, Internal control .
..,

52, Wh1ch ·;s not a

similarity between external and internal audi-
tors? . · .
A. B,oth consider materiality and risk in their work.
s. Both use similar methodologies In performing their work.
c. Both must be competent.
o. Both must be.independent of the company.
' .
53, The external auditor should obtain a sufficient understanding
of the ·internal audit function because .
A. The ·und.erstanding of the internal audit function ·1s ·.an
· Important substantive test to:be performed by the exter-
nal auditor. . · .
B. The audit programs; working papers, and reports of ·in-
. temal auditors may often b~ used as a substitute for the
work of the ·external auditor's staff. · , .
Ci The procedures . performed by the internal ·. audit staff·
may eliminate the external auditor's need for considering
internal control. · ·
D. ~e Work performed by internal auditors may:be a factor
rn determining the nature,· timing, and extent of the ex-
ternal auditor's procedures. ·
 R: A U D IT IN G THe:o~'(
I

224 CPA EXAMINAnON REVIEWE

0 obtain_ a sufft.
e ex te rr- aJ au di to ~ t.
The st an da rd re qu ir es th
•

de rs ta nd in g of in te rn al au di t activitie~ to identity
ci en t un is st at em en t in th e tlnan.
se ss th e ris ks of m at er ia l m
an d as pe rf or m fu rt he r audft
an d to de si gn an ·d
cial st at em en ts
procedures.
rn al au di t fu nc tio n is a fa ct or th at may influ.
Thus, an inte of th e ex te rn al auditor's
tu re , tim in g, an d ex te nt
en ce th e na
procedures. ·

di tin g ca n af fect th e sc op e of th e external audi-

54. Internal au .
fin an cia l sta tem en ts by
tor's audit of dit or 's ne ed to perform de-
e ex te rn al au
~- Decreasing th
tailed tests. ical inventory
B. Eliminating t~ e need. to · observe th e phys
· · ·
taking.
to lim it his/her au di t to the
c. win
Allo_ g the external auditor
.
test procedures
· . performance of substantive au di to r to man-
D. Limiting di rect t~sting by th e ex ternal
t assertio ~s not dire ctly .te sted by in te rn al audit- ·
~gemen
1ng.
is an . in correct t t . ·
55 . W hich of th e fo llo wi ng s a em en t concem,ng
int er na l au dl
. . '_the retatfonship of the
a . ,to r an q the.scope · of-the
dit of an -e nt ity 's fin
· external au naa statements?
no t .-
A. The external auditor Isfun ct1 req u,~ ec 1 to give consideration
to the int er na l au dit
din g to Id
0
~ be yo nd ob ta in in g. a suffl·
de nt _u nd ers tan
ss
m iss tat em en t of t~ :tlfy an d as se th e risks of
3: ~r ia 1
tl~anclal statements and to .
.~8· Th -~ n a nd pe rfo rm fli rth
audit procedures •
• : -~ Internal auditor:s mayerde te r 1· · r
au ijft pro ed
O ures should be "'! ne the ex te nt to · wh ich
: employed by th e external
au ditor
. · , 'I
 and Plnllng 225
4 The F!nlnCial Slllament Audt Ciani~

in circu msta nc es , the· Internal auditors may

c. Under certa au ditor In J)erfonnlng substantive
assist th e ex te rnal
tests and tests of controls•
tu re, tim in g, an d ex te nt of the external auditor's
. 0• na
tant ive te sts m ~y be affe cte d by the work of Internal
subs ·
auditors.
.
.
go rical ly states th at th e external auditor
The standard cate in io n ex p~ssed, and
b~ Jity fo r the au di t op
bas soJe res~o~~i an y use made of inter-
s1b1hty no t redu ced by
that respon is
nal auditing.

rela ting to the au dit of an entity's financial

AJi judgments aJ a1:1ditor.
statements ar e·those of the extem
ining wh et he r the wo rk of the internal auditors is
56. In dete rm dit, the external
ua te fo r pu rpos es of _the ·au
Hkely to be adeq
al auditor's
auditor shall evaluate the ·intern
A. Efficiency and experience
s. Independence and reisovierywskskillsllls
c. Training and superv ivity
D.-·Competence and object

The external auditor shall eval

ua te:
ternal audit function; ·
• The ob je ct iv ity of the in
Th e tech ni ca f co m pe te nc ~ of the Intern~ auditors; ·
•
W he ther th e w or k of the internal auditors is likely.to
• n~) care; and
be carried out with due professio
• Wheth er th er e· is likely to ~e effective communica-
n be tw ee n th e in te rn al audi tors and the external
tio
auditor.
 CPA EXAM/NA no N REVIEWER:
AU DI TI NG l'fi~o
22 6

ing the tec hn ica l co m rt!ten ce of an l~ternal auditor

obtain lnforrnau0,
57. .In as se ss
na l au dit or mo st Jfk~fy . wo uld
an exter n
ab ou t the tation, reports, and
ty of wo rki ng pa pe r do cu m en
A. Quali
recommendations. in~ernal audito~ reports
B. Or ga nizati on al lev el to wh ich the
the internal auditors du:
C. Influence of management on
ties. and ethical values.
D. Entity's commitment to Integrity
internal auditor, the ex.
In assessing the competence of an
tors, such as th e following:
te m al auditor should consider fac
nal experience
• Educational level and professio
ntinuing education
• Pro°fessional certificati~n and co
ocedures
• Audit po-licies, programs, a_nd pr
· Su pe rv ision an d rev iew of th e internal auditor's ac-
•
tivities
ing assignments
• Departmental practices regard
~u ality of wo rking pa pe r do cumentation, repo.rts,
• ,
and recommendations
perfdrmance
•· Evaluation of the internaJ auditor's
I

C an d ar · ct because they •. all reJate to

An sw ers
b. . . ' ·' B D e in co rre
cpmpetence. . .
o 1ectiv1ty rather than technical

the followin is fa lse sta .

SB. Which ofern au dit or'~ , ak temen t about the use
of the int al
A. The PSAs do not a110 wor by the external auditor?
work of the Internal ~. e extemai
th auditor to use the
au ,tor. .
As do no t II
B. PS a ow the ex. ternal au.ditor to ·substitute ~e
wo,rk o~ the internal
fo r .the work of the external
-c au ditor rn Cr ltlc al Ju d au ditor
. The .PSAs state thatQments. rk of the internal
Is to be us ed ' ~
- " spec ific wo
auditor and tested.
'
1 5 be evaluated
ould _
 4 The Financial Statement Audit Client Acceptance and Planning 227
G~ff~ .
pSAs state· that, when considering whether to use the
D, work of the Internal auditor, the external auditor should
consider the intemal auditor's competence and obJectivl·
W· .
fhe coordl~atfon of activities between lntema, and external
59· udltors .
: Eliminates duplication of audit efforts.
8: Indudes the_exchange of audit reports and management
letters. · ·
c. Prevents ·external auditors from_having access to the
programs used by internal-auditors. . .
o. Prohibits the i~ternal audi.tor from using the same audit
techniques as external auditors and vice versa. ·
. .
coordination of internal and external audit efforts·helps !o
ensure adequate,audit coverage and to minimize duplication
of autl_it efforts.-Coordination involves: - .
• Meetings at appropriate intervals during the period
to discuss matters of mutual interest.
• Access to each other's audit programs and working
papers.
, Exchange of audit r~ports and management lett,ers.

60. Whicti of- the following ·are induded in the activities of the ·
internal audit function? · · ·
I. Monitoring of Internal co~trol.
II. Examination of financial and operating information_•.
III. _
Review of operating activities. 1 /

A. I and Il only
-s. I and 'III only ·
C. II and III only
D.. I, II, and III
228 · CPA EXAMINA noN REVIEWER: AUD111NQ
' ' ' °llig:C)~
The activities of the internal audit function may incl
&: II ·ng· . · Ude 0ne
or more of the 10 OWi •
• Monitoring of internal control. · .
• Examination of financial and operating inform
• Review of operating activities. . . , atton.
• Review of compliance with laws.and regul~tions. ·
• . Risk manag~ment ;
• Governance
61. . i Is an in~ividual or organization po~ing ex•·
pertise in a field other ,than acc~un_t!ng or a~d1ting, whese
work In that field Is used by·the auditor to a~s,st the auditor
In obtaining sufficient appropriate .audit evidence. ·.
A. Auditor's expert · · ·
B. Management's er.pert
c. Expert
D. Specialist . ·

62. _ _ _.... Is an Indlvidu.al or organization possessing ~-

pertise i_n a field. oth~r than accou11ting ·or auditing, whose
work in ,tf:lat field Is used by the entity t() assist the entity In
preparing the financial statements.
,A. Auditor's expert ·
a. Management's expert
C. Expert
D. Specialist
ditor
63• When planning· to use the _work of an expert, the au_
should evaluate the expert's - .
1• Professional competence
n. Objectivity
A. I only
B. II onfy
C. Both I and II
 dlt : Cli en t A, .,,. _.
4 Th e F1rianclal Sta tem en t AU · --P la nc e an d Pla ml ng 229
~r f;P . .

N ei th er I no r II
o. . ·
w ln g st at em en ts Is ·
Wfllch o f th e fo llo k an ex pe ,t ~ rr ec t co nc er ni ng th e
or
64· udltor's us e o f th erewqu
o f
. a Th e au di to r ls ire d to
pe rfo ·
s as rm su bs ta nt e teiv
·
st pr o-
to ve rif y th e ex pe rt'
A- ce du re s pt lo ns an d' fln dl ng s.
by
ou ld ob ta in a su m
s ,h e au di to r sh l~ ns us ed u~ ~e rs ta nd fn ~ of th e
m pt
· m et ho ds an d as su ve an un ex pe rt . ·
t ha
er st an dl nq of th e na -
ou ld no
C. :n ,e en tit y sh be pe rfo rm -d bd
tu re o f th e w or k Id to e Y th e ex pe rt . f
. · ex pe rt s h ou no t ha ve an un de rs tand.1ng o ·th e au-
D· Th e_,, · b ti ·- e o.f th e ex_pe rt' s fl n di ng s.
di to , s co rr o or a ye us
e fo r th e ap pr op i- ia te ne ss and re a _
The ex pe rt is r· re sp on si
pt
bl
. ns
io
. an d m et ho ds us ed .
so na bl en es s o as su m
is e, .
_~u di to r d_ o~ s no t ha ve ~h e sa m e ex pe rtet h-
Be~aus-=: th e s1 t1o n to ch aJ Je ng e th e ex pe rt
's m
· he /sh e 1s no
_ t 1n t~ e po
ods an d as su m pt io ns .
to
e st an da rd s ta te s th at th e au di to r w ill n ·e ed ds
Ho we ve r, th ih e as su m pt io ns an d
m 'et h~
de rs ta nd in g of
_obtain an un
w he th er th ey .a re ap pr op ri at e an d re a-
used an d to co ns id er . kn ow le dg e of th e en tit y" s bu si -
is /h er
sonable, ba se d -o n ,h
he r pr oc ed ur es .
~ess an d th e re su lt s of ot
.th e ex pe rt 's fi nd in gs
co r-
co rr ~c t be ca us e, if
id -:
Answer A is in em en t as se rt io ns be in g co ns
fi na nc ia l st at
roborate th e on ab Jy co nc lu de th at ~u ~c
ie nt
ud it or m ay re a~ _
ered, th e .a en ob ta in ed .
s be
ap pr op ria te ev id en ce ha
rr ec t be ca us e th e au di to r, -th ~ en ti -
Answers Can d D ar e in co
rt sh ou ld ha ve an un de rs ta nd in g ab ou t th e
ty, an d th e ex pe th e w or k to be pe rf o~ ed .
d ob je ct iv e 0£
nature, sc op e, an
,
CPA EXAM/NA no_N REVIEWER: AUDITING
~o : ~,
65. Which of the following Is not an 'expert upon Whose
auditor may rely? Wo~ a
A. An actuary. ·
e. An fndfvldual with expertise in complex mOdelln
purpose of valuing financial instruments. 9 for ~e
c. An expert In taxation law.
o. An individual with ~pertise In applying methocts
. counting for deferred lncome·tax. - Of ac~

66. If the '7SUlts: of. the expert's '\york·do not provide suffj ·
app~opn_ate aud1~ evidence or ~re not consistent with
audit evidence, the auditor should
!~
· vu~
A. Report matter to·the appropriate regulatory agen
of .the government. · cy
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unmodified opinion with reference to the
w~rk of the expert.

If the results of the expert's wqrk do not provide sufficient

. appropriate audit evidence or are not consistent with other
audit evidence, the auditor should resolve the matter. ·
The auditor may ·need to discuss the matter with the entity
•and the expert, apply additional audit procedures,.possibly
. engage another expert, or ~odify the auditor's report.
. ' . ...

67. When issuing an unmodified auditor's report, the auditor

A. May refer to the .work of an expert. . ·
B. Should refer to the work of an expert to indicate a dM-
sion of responsibility. . ·
c. Should Include In the auditor's report the identity of the
. expert and the extent of the expert's involvement.
D. Should not refer to the expe·rfs work. .
 rE~ 4 The Financial Statement AUdlt: Client Ac 231
r,JI' ceptance and Planning

rhe standar~ prohibits the audit

work .when issuing an unrnodifie:r to _ref~r to the expert's
such a reference might be misu d a.uditor s rep,~rt because
don of the auditor's opinion O n ;~s.t~od to be a qualifica-
neither of which is intended. · r a •vision of responsibility,

In using the work of an expert an aud.itor referred to the .

68, expert's findings in the auditor's're
ate reportl ng practice If the port. This Is an appropri-
A. Auditor,. a.s .a·result of the expert's work, decides to Indi-
cate a d1vrs1on of responsibility .with the expert
e. Expert is awa!e that his/her wor k will be used to evalu-
•
-ate ~e assertions in the financial statements.
c. Audrtor, as a result of the expert's ' work issues a r~port
that contains a~ unmodified opiniQn. '
o. ~uditor, as a result oft ~ ex~rt's work , adds _an·empha-
srs-of-matter paragraph in his/her unmodified ·auditor's
report. · ·

J 11ot refer to the expert's .work in an audi-

"
An aud itor shal
tor's report containing an unmodified opinion.

However, if as a resuJt of the expert's work. auditor de- the

cides to express a modified opinion, it may be ·a ppr opr iate -
in explaining the nature ofth e modification-to refer to
or
describe the expert's wo rk ·

69; As used in PSA 600, Special · CorislderatJons. - Audi~ of

Group Ananclal . Statements (Including the Work of
Component Auditors), __ __ is an· entity or b~siness
activity· for which group or component management pre-
pares financial Information that should be induded in ~e
group ffnandal statements. · ,
A. Component ·
B, ·Group ·
 .
W ER: A U D ITING .l l i to~'r
n o N REVIE
CPA EXAM/NA .
232

n ific a n t c o m ponent
C. S ig
G ro u p m a n a gement th a t indude the
D. e n ts
m
t are ta/lea
ta te
In P S A 6 0 0 financial s o m p o n e n
70. As use d
fo rm a ti o n ~ f m o re than on e c
financial In l s ta tements
e n t fl n a n d a
A. Compon
p fi n a n c ia l ~ te m e n ts
B. Gro u
d fi n a n d a l s ta tements
C. Consolidate ncial statements
fina
D. Common e r p e rs o n in the ffrm
th
_ _ is th e partner or o n g a g e m ent and lts
The _ _ u d it e
71.
s p o n s ib le fo r t;t,e .group a port on the group ff. _
who is re th e auditor's re
, a n d fo r lf o f th e firm.
performance e h a .

d on b
l s ta te m e n ts that Is. issue
nan d a .

__
m e n t p a rtn e r
A~ Engage e n g a g e m e nt partner
n t
B. Compone
c. Princpipaelnaguagdeitomrent partner
D. Grou u nd e rs tanding
ta in a n
e n g a g e m e n t team shall ob
72. The group
nt to
that is -suftide ti~ c a t;o n o f c omponents
rm ? ' re v is e its .-Initial iden .
_
I._Con fi ·significant.
that a re lik e ly to b e
m e n t o f th e group
th e o f m a te
terial missta fraud or error.
n. : 5 s ~ statements, whether due to
ri s k s
manaal
A. I_only - .
B. II only
I
C. Both I and I
r II
D. Neither I no .
u p en g a g e m -.
to re q u e s t a comp<r_
73. I f the gro
nent a u d ito r to p e rfo
rm
e n t team plans
fi na n
work on the team shall obtain an
c ia l In fo rmation of
e n t th e
a compo n
g o f g ro u p e ngagement
understandin
 4 The FlnancfaJ Statement Audit Client Acceptance and Planning 233
ct4P're~
J. Whether the component ~Udltor understands and will
comply with the ethical ·requ_lrements that are relevant.
to the group audit and, kl Particular, Is Independent.
JI. -n,e cdnponent-auditor's professional competence.
• I

A ronly
· II only
iD, Nefther
eoth I and II
I nor II

74, . ect'. .
,A,.,co~ .
· Which of the fol~owing statemdnts concerning group audits. is
.
n,e group engag~ment team has the responslblttty to es-
' tablish an overall group audit strategy and audit plan.
determine the materi-
8 The group engagement team shall
.· ality for the group flnancia'I statements as a whole when
establishing the overall group audit strategy.
.·c. The compof)ent engagement partner ··shall review the
- overall group·audit str~tegy -and group audit plan.
the terms
0, The group engagement partner shall agree on
of the group audit engage~ent In accordance·'With PSA
210.

7s, An auditor who,_at the r,equest of the

group engagement
team, performs wor!< on financial Information relate~ to a
component for the gro.up audit Is a
A. Group auditor
B. Component aud~tor ,
c. Component engagement team .,
1
D. Group eng~gement team
 CPA EXAMINATION REVIEWER: AUDITING "tli
ta~'t
KE Y ANSWERS

J.C 26. A ' 51, ~

2. A 27. D 52. D
3. C 28. A 53. D .
4. A 29. D 54. A
5. C 30. C 55. a·
6. B 31. C 56. · .D
7. A 32. A
I

57. A
8. A 33. A 58. A
9. C 34. . A 59. B
10. A 35. C· 60. · D
11. A 36. D 61. A
12. A 37; C, 62. B
13., A 38. D 63. C
14. C 39. C 64. B
. 15." C 40. D 65. D
16. D· 41. B 66. B
17. A 42. D 67. . i>
18. A -43. A 68. C ·
I

19. A 44. B 69. A

20; A 45. C 70. B
21. D 46. ·A 71-. D
22. C 47. D ' .72. C
23. D 48. D 73. C
24: D 49. C 74. .c.
25. B so. C 75. B