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(AT) 01 - Preface, Framework, Etc
(AT) 01 - Preface, Framework, Etc
AUDITING THEORY
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
2. Philippine Standards on Quality Control (PSQC) are to be applied for all services falling under the
AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public Sector.
2. Professional accountants should be aware of and consider Practice Statements applicable to the
engagement.
3. A professional accountant who does not consider and apply the guidance included in a relevant
Practice Statement should be prepared to explain how the basic principles and essential
procedures in the AASC’s Engagement Standard(s) addressed by the Practice Statement have been
compiled with.
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AUDIT THEORY 01
ASSURANCE ENGAGEMENTS
1. “Assurance engagement” means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement of a subject matter against criteria.
2. “Subject matter information” refers to the outcome of the evaluation or measurement of a subject
matter.
3. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users (assertion-based
engagements).
4. In other assurance engagements, the practitioners either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that
has performed evaluation or measurement that is not available to the intended users. The subject
matter information is provided to the intended users in the assurance report (direct reporting
engagements).
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AUDIT THEORY 01
OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE
WITH PSAs
1. In conducting an audit of financial statements, the auditor’s OVERALL OBJECTIVES are:
a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all materials respects, in accordance
with an applicable financial reporting framework; and
b) To reports on the financial statements, and communicate as required by the PSAS in accordance
with the auditor’s findings.
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review the
reliability of an assertion that is the responsibility of one party for use by another party.
3. A review does not ordinarily involve an assessment of accounting and internal control systems, test
of records and of responses to inquiries by obtaining corroborating evidence through inspection,
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AUDIT THEORY 01
observation, confirmation and computation, which are procedures ordinarily performed during an
audit.
4. The level of assurance provided in a review report less than that given in an audit report.
SUMMARY
Nature of Service Audit Review Agreed-upon Compilation
Procedures
Level of Assurance High, but not Moderate assurance No assurance No assurance
Provided absolute
assurance
Report Provided Positive assurance Negative assurance Factual Identification of
on assertion (s) on assertion (s) findings of information
(Audit Report) (Review Report) procedures complied
(Compilation
Report)
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2. Which of the following engagements is covered by the Framework for Assurance Engagements?
A. Consulting engagements.
B. Agreed-upon procedures engagement.
C. Preparation of tax returns.
D. Independent financial statements audit
7. Suitable criteria are required for reasonably consistent evaluation or measurement of the subject
matter of an assurance engagement. Which of the following statements concerning the
characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to
significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter
including, where relevant, presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear,
comprehensive, and not subject to different Interpretations.
8. Criteria that are embodied In laws or regulations, or issued by authorized or recognized bodies of
experts that follow a transparent due process are called
A. Suitable criteria
B. Established criteria
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10. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users. These engagements
are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements
11. ______________is the risk that the practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
A. Assurance engagement risk.
B. Business risk.
C. Client risk.
D. Information risk.
13. Which of the following statements is true concerning evidence in an assurance engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriate is the measure of the quality of evidence, that is, its reliability and per suaveness.
C. The reliability of evidence is Influenced nut by its nature nut by its source.
D. Obtaining more evidence may compensate far is poor quality.
14. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result
of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.
C. The practitioner may n
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AUDIT THEORY 01
D. To have the required assurance knowledge and skills to gather and evaluate evidence.
E. The use of limit in gathering anti evaluating evidence and farming conclusions based on that
evidence.
16. After accepting an assurance engagement, a practitioner is not allowed to change the engagement
to non-assurance engagement, or from a reasonable assurance engagement to a limited assurance
engagement, except when there is reasonable justification for the change. Which of the following
ordinarily will justify a request for a change in the engagement?
I. A change in circumstances that affects the intended users' requirements.
II. A misunderstanding concerning dilemma of the engagement.
A. I only
B. II only
C. Both 1 and II
D. Neither I nor II
17. Which of the following standards are to be applied, as appropriate, in the audit of historical
financial information?
A. PSRES
B. PSAB
C. PSRSs
D. PSAs
18. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in February
2008, applies to|
A. Review of any historical financial Information of an audit client.
B. Reviews of any historical financial Information by a practitioner other than the entity’s auditor
C. Reviews of historical financial or other information by a practitioner other than the entity’s
auditor
D. Reviews of historical financial or other information of an audit client.
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21. These statements are issued by the AASC to provide interpretive guidance and practical assistance
to auditors in the implementation of PSAs ad to promote good practice.
A. PREPSs C. PAEPs
B. PAPSs D. PRSPSs
27. An engagement o perform agreed upon procedures may involve the auditor in performing certain
procedures concerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
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28. A summary of findings rather that assurance is most likely to be included in a/an
A. Agreed-upon procedures report.
B. Compilation report.
C. Examination report.
D. Review report.
29. Inquiries and analytical procedures ordinarily form the basis for which type of engagement?
A. Agreed-upon procedure.
B. Audit
C. Examination
D. Review
33. 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 D. Both I and II
34. The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, •whether clue to fraud or error.
A. I and II only
B. II and IV only
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35. The auditor is required to maintain professional scepticism throughout the audit. Which of
following statements concerning professional scepticism is false?
A. A belief that management and those charged with governance are honest and have integrity
relieves the auditor of the need to maintain professional scepticism.
B. Maintaining professional scepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the result: thereof.
C. Professional scepticism is necessary to the critical assessment of audit evidence.
D. Professional scepticism is an attitude that includes questioning contradictory audit evidence
obtained.
36. Which of the following best describes the reason why independent auditors report on financial
statements?
A. A management fraud may exist and it is more likely to be detected by independent auditors.
B. Different interests may exist between the company preparing the statements and the
Persons using the statement.
C. A misstatement of account balances may exist and is gene.), corrected as the result of the
independent auditors' work.
D. Poorly designed internal control may be in existence.
37. Which of the following professionals has primary responsibility for the performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement
39. Operational audits generally have been conducted by Internal and COA auditors, but may be
performed by certified public accountants. A primary purpose of an operational audit is provide
A. A measure of the management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a company’s top-
level management.
C. Aid to the independent auditor, who conducting the examination of the financial statements.
D. A means of assurance that internal accounting controls are functioning as Planned.
40. Governmental auditing often extends beyond examinations leading to the expression of opinion
on the fairness of financial presentation and includes audit of efficiency, economy, effectiveness,
and also
A. Accuracy.
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B. Evaluation.
C. Compliance.
D. Internal control.
41. Which of the following terms best describes the audit of a taxpayer's return by a BIR auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.
44. An audit to determine whether an entity is following specific procedures or rules set down by some
higher authority is classified as a/an
A. Audit of financial statements.
B. Compliance audit.
C. Operation audit.
D. Product. Audit.
.
45. Which of the following is the most appropriate action to be taken by a CPA who has been asked to
perform a consulting services engagement concerning the analysis of a potential if he/she has little
experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with others to obtain
sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge
C. Accept the engagement and issue a report that contains his/her opinion on the achieve ability
of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on Auditing
(PSAs).
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AUDIT THEORY 01
47. Internal auditors should renew the means of physically safeguarding assets from losses
A. Exposure to the elements.
B. Under usage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified
49. Internal auditors review the adequacy of the company's internal control system primarily to
A. Help determine the nature, timing, and extent of tests necessary to achieve audit objectives.
B. Determine whether the internal control system provides reasonable assurance that the
company's objectives and goals are met efficiently and economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Determine whether the internal control system ensures that financial statements are fairly
presented.
50. Which of the following services, if any, may a practitioner who is not independent provide?
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures but not compilations.
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