CPA REVIEW SCHOOL OF THE PHILIPPINES AT-7701 Manila AUDITING THEORY CPA Review © PREFACE TO THE PHILIPPINE STANDARDS ON QUALITY CONTROL, AUDITING, REVIEW, OTHER ASSURANCE AND RELATED SERVICES PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS «FRAMEWORK OF PHILIPPINE STANDARDS ON AUDITING (PSA 120) © OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH PHILIPPINE STANDARDS ON AUDITING (PSA 200) The Authority Attaching to Philippine Standards Issued by the AASC ‘Standards ‘Application Philippine Standards on Auditing (PSAs) | + Audit of historical financial information . Philippine Standards on Review * Review of historical financial information Engagements (PSREs) Philippine Standards on Assurance * Assurance engagements dealing with Engagements (PSAES) subject matters other than historical financial information Philippine Standards on Related Services | + Compilation engagements (PSRSs) Engagements to apply agreed-upon procedures to information * Other related services engagements as specified by the AASC . PSAs, PSRES, PSAES and PSRSs are collectively referred to as the AASC’s Engagement Standards. . Philippine Standards on Quality Control (PSQC) are to be applied for all services falling under the AASC’s engagement standards. . Philippine Standards are applicable to engagements in the Public Sector. The Authority Attaching to Practice Statements Issued by the AASC . Philippine Practice Statements are issued to: * provide interpretive guidance and practical assistance to professional accountants in implementing Philippine Standards; and * promote good practice. . Professional accountants should be aware of and consider Practice Statements applicable to the engagement. }. 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 complied with, AASC Bulletins and AASC Alerts + A regular publication issued by the AASC to provide guidance to auditors In the application of PSAs. ‘+ Not part of PSAs and do not change the requirements of relevant PSAs. Pave 1 of 10 Pages:PAR - MANILA AT-7701 PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS. 1. The Framework doés not itself establish standards or provide procedural requirements for the performance of assurance engagements. 2. In addition to the Framework and PSAs, PSRES and PSAES, practitioners who perform assurance engagements are govemed by: * the Philippine Code of Ethics for Professional Accountants; and * Philippine Standards on Quality Control (PSQCs). ASSURANCE eranenen 1. “Assurance engagement” means an engagement In which a practitioner expresses 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 tet refers to the outcome of the evaluation or measurement of a subject matter, 3. In some assurance eng: 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 practitioner either directly performs the| evaluation or measurement of the subject matter, or obtains a representation from the responsible party ‘that has performed the evaluation ‘or measurement that is not available to the intended users. The subject matter jnformation is provided to the intended users in the assurance report (direct reporting e ). ‘Two Types of Assurance £1 1, Reasonable assurance engagement - the objective is a reduction in assurance ‘engagement risk to an acceptably low level in the circumstances of the engagement s the basis for a positive form of expression of the practitioner's conclusion. 2. Limited assurance engagement ~ the objective is a reduction in assurance engagement risk to a level that Is le In the circumstances of the engagement, but where the risk is greater than for ble assurance engagement, as a basis for a negative form of expression of the practitioner’s conclusion. Scope of the Framework | I The following are non-assurance engagements and therefore are not covered by the Framework: i. Engagements covered by PSRSs such as agreed-upon procedures. engagements and compilations of financial or other information. 2. The preparation of tax returns where no conclusion conveying assurance Is expressed. 3. Consulting (or advisory) engagements, such as management and tax consulting, Elements of an Assurance Engagement 1. Athree-party relationship involving: «a practitioner; ‘+ a responsible party; and + intended users. 2. An appropriate subject matter; 3. Sultable criteria; ~CPAR-MANILA AT-T7OL 4. Sufficient appropriate evidence; and 5, A written assurance report in the form appropriate to 2 reasonable assurance engagement or a limited assurance engagement. 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 freud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and b), To report on the finandal statements, and communicate as required by the PSAs, in ‘accordance with the auditor's findings. 2. The auditor SHALL: = Comply with all PSAs relevant to the audit. * Comply with relevant ethical requirements, including those pertaining to independence relating to financial statement audit engagements. «Plan and perform an audit with professional skepticism recognizing that ‘circumstances may exist that cause the financial statements to be materially misstated, © Exercise professional judgment in planning and performing an audit of financial statements. * Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably iow level. ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS. 1. The objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the practitioner's attention that causes the practitioner to beliéve that the financial statements are not prepared, in ali material respects, in ood nce with an identified financial reporting framework (negative assurance). 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 invoive an assessment of accounting and intemal control systems, tests of records and of responses to inquiries by obtaining corroborating evidence through’ inspection, observation, confirmation and computation, which are procedures ordinarily performed during an audit. 4, The'level of assurance provided in a review report Is fess than that given in an audit report. ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING FINANCIAL INFORMATION 1. In.an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on FACTUAL FINDINGS. 2. The recipients of the report must form their own conclusion from the report of the auditor. 3. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results. ENGAGEMENTS TO. COMPILE FINANCIAL INFORMATION 1, In a compilation engagement, the accountant is engaged. to use accounting expertise as ‘opposed to auditing expertise to collect, classify, and summarize financial information, 2. It ordinarily entails reducing detailed data to manageable and understandable form without a requirement to test the asséttions underlying that information.CPAR - MANILA ae 3. The procedures performed are not designed and do not enable the accountant to express ‘any assurance on the financial information. 4, Users of complied financial information derive some benefit as a result of the accountants involvement because the service has been performed with due professional skill and care. ‘UES inquiry 4 SUMMARY weqoeeneu eS : ‘Nature of Sarice is Review | Agreedupon Procedures | __Compilatfon Level of Assurance Provided | High, butnicl | Moderate No No absolute BUEN ‘assurance assuranoa assurance: en roe prrera Report Provided Positive Negative Factual Identification of . assurance on | assurance on fieinge of pyogcires Information ester | aver eat “ {Compilation Raper) powne One OBEMONEE EnOPOPENET HOR = VGN GOK MULTIPLE CHOICE QUESTIONS 1: Which of the following statements best describes assurance services? ‘A. Independent professional services that are intended to enhance the credibility of information to meet the needs of an intended user. B. Services designed to express an opinion on the falmess of Nistorical financial statements based on the resuits of an audit. C. The preparation cf financial statements .or the collection, classification, and summarization of other financial information. D. Services designed for the improvement of operations, resulting in better outcomes. cormuttoryss 2. Which of the following is not an assurance service? ‘A. Examination of prospective financial information B, Audit of historical financial statements CC. Review of financial statements 1D. Compitation of financial information 3. Assurance services differ from consulting services in that they 1. Focus.on providing advice. {D., Involve monitoring of one party by another. A, Lonly C. Both Tand IT 8B. only D. Neither I nor IL 4, How many separate parties are involved in an assurance engagement? A? a4 8 3 D5 5. An assurance engagement should have which of the following elements? ‘Subject matter Criteria A Yes No B. No Yes c Yes Yes Do. No No 6. The subject matter of an assurance engagement may indude Financial Internal ‘Compliance Infomation Controls. with Reaulation A Yes ‘Yes Yes B No No No G Yes No Yes D. No Yes No(PAR = MANILA ALTO 2 10. 11. 12. 13. 14. 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. wncrersxONAGWIE OOWNG B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disciosure, when used in similar circumstances by similarly qualified practitioners. wiicrxe, 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. ance (St aerwAioit 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 8. Established criteria C. Specifically developed criteria aesiqnea ter A PACEOMLAE ECOPQEM Ent Havote D. General criteria In an assurance engagement, the outcome of the evaluation or measurement of a subject | matter against criteria is called | ‘A. Subject matter information 8. Subject matter C. Assurance D. Conclusion 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 pcoctyNomer ENAMONES cute’ moter” B. Assertion-based engagements CC. Non-assurance engagements D. Recurring engagements ‘What type of assurance engagement is involved when the practitioner expresses a positive form of conclusion? ‘A. Limited assurance engagement ; B. Positive assurance engagement . Reasonable assurance engagement | D, Absolute assurance engagement What type of assurance engagement is involved when the practitioner expresses a negative form of conclusion? ‘A. Reasonable assurance engagement B. Negative assurance engagement C. Assertion-based assurance engagement D. Limited assurance engagement Which of the following statements is true concerning evidence in an assurance engagement? A. Sufficiency is the measure of the quantity of evidence. B. Appropriateness is the measure of the quality of evidence, that is, its reliability and persuasiveness. rebare jPEUOS WE Cd whewc.or C. The reliability of evidence is influenced rfot by its nature but by Its source. D, Obtaining more evidence may compensate for its poor quality. Assurance engagement risk is the risk ‘A. That the practitioner expresses an Inappropriate conclusion when the subject matter information is materiatly misstated.CPAR-MANILA AT-7702 8, Of expressing an inappropriate conclusion when the subject matter information is not materially misstated. €. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on. D. OF expressing an inappropriate conclusion when the subject matter information is ‘either materially misstated or not materially misstated. 15. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as. a result of the following factors, except A. The use of selective testing. B. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive. C. The practitioner may not have the required assurance knowledge and skills to gather and evaluate evidence. ‘D. The use of judgment in gathering and evaluating evidence and forming condusions based on that evidence. 16, The Pilppine Framework for Asurance Engagements . Contains basic principles, essential procedures, and related guidance for the ance of assurance engagements. B, Defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which PSAs, PSREs, and PSAEs apply. C. Provides a frame of reference for CPAs in public practice when performing audits, reviews, and compilations of historical financial information. . Establishes standards and provides procedural requirements for the performance of assurance engagements. 47. After accepting an assurance engagement, a practitioner Is not allowed to change the engagement to a non-assurance engagement, or from a reasonable assurance engagement to a limited assurance engagement, except when there is reasonable Justification for the change, Which of the following ordinarily will justify @ request for a change in the engagement? 1. A change in circumstances that affects the intended users’ requirements. 1. ‘A misunderstanding concerning the nature of the engagement, A. Tonly C Both I and 11 B. Honly D. Neither I nor 11 18, Which of the following standards are to be applied, as appropriate, in the audit of historical financial information? A. PSRES C, PSRSs B. PSAES D. PSAS 19. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in February 2008, applies to ‘A. Reviews of any historical financial information of an audit client. B. bang cof 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. 20. The Philippine Standards on Assurance Engagements (PSAEs) are to be applied in A. Assurance engagements dealing with subject matters other than historical financial information. B. Compilation engagements and agreements to apply agreed-upon procedures to information. C. The audit or review of historical financial information. D. Assurance engagements dealing with historical financial information. 21, The Philippine Standards on Quality Control (PSQCs) are to be applied to ‘A. Assurance engagements only.CPAR- MANILA, arr, 22, 24, 25. 26. 27. 29, B, Review engagements only. €. Compilation and review engagements only. D. All services that fall under the AASC’s engagement standards. ‘These statements are issued by the AASC to provide interpretive guidance and practical assistance to auditors in the implementation of PSAs and to promote good practice. ‘A. PREPSs C. PAEPS B. PAPSS D. PRSPSs: ‘What level of assurance is provided by the auditor in an audit engagement? A. Absolute C. Moderate 8. High, but not absolute D. No assurance ‘What level of assurance is provided by the practitioner in a review engagement? A. No assurance Reasonable B. High, but not absolute D. Moderate ‘When performing 2 compilation engagement, the accountant is required to \.. Assess internal controls. Make inquiries of management to assess the reliability and completeness of the information provided. Verify matters and explanations. Obtain a general knowiedge of the business and operations of the entity. > go 2 ‘What assurance is provided by the auditor in an agreed-upon procedures engagement? A. Reasonable B, Absolute C. Moderate D. No assurance ‘The review of a company’s financial statements by a CPA firm Is substantially less in scope of procedures than an audit. Requires detailed analysis of the major accounts. Is of similar scope as an audit and adds similar credibility to the statements. ‘Culminates in issuance of a report expressing the CPA’s opinion as to the faimess of the statements, ‘An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures concerning 1. Individuat items of financial data. TI. Asingle financial statement. IH. A complete set of financial statements, A. Land I only” B. Iand It! only C. Tand iil only D. 1,11, and 1 pep A summary of findings rather than assurance Is most likely to be included in a/an ‘A. Agreed-upon procedures report. 6. Compilation report. C. Examination report, D. Review report. Inquiries and analytical procedures ordinarily form the basis for which type of engagement? . Agreed-upon procedures. Audit. Examination. Review, goe>SPAR MANILA, ALTO 31. 32. 33. 34, ee 36. 37, Independence is not a requirement for which of the following engagements? Compiiation Review Agresd-upon Procedures No Yes No A B. No No No c Yes No Yes D. Yes Yes Yes A practitioner should accept an assurance engagement only if ‘A. The subject matter is in the form of financial information. B. The criteria to be used are not available to the intended users. C. The practitioner's conclusion is to be contained in a written report. D. The subject matter is the responsibility of either the intended users or the practitioner. A practitioner is associated with financial information when 1. The practitioner attaches a report to that financial information. IL. The practitioner consents to the use of his/her name in a professional connection. A. Tonly, B. Wonly C. Either Lor 1 D. Neither I nor IT ‘The auditor is required to comply with afl PSAs relevant to the audit of an entity's financial statements. A PSA is relevant to the audit when 1, The PSA isin effect. IL, The circumstances addressed by the PSA exist. A. Lonly . Either Tor 8, Tonly D. Both I and It ‘The overall objectives of the auditor in conducting an audit of financial statements are L. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether caused by fraud or error. IL. To report on the financial statements. II. To obtain conclusive rather than persuasive evidence. IV. To detect all misstatements, whether due to freud or error. Land If only Tand IV only 1, TI, and II only 1,11, If, and 1V pomp “The auditor is required to maintain professional skeptic'sm throughout the audit. Which of the following statements concerning professional skepticism is false? ‘A. A belief that management and those charged with governance are honest and have integrity relieves the auditor of the need to maintain professionel skepticism, 8, Maintaining professional skepticism throughout the audit reduces the risk of using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the resuits thereof. . Professional skepticism Is necessary to the critical assessment of audit evidence. D. Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained. Which of the following best describes the reason why Independent auditors report on financial statements? AA 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 statements. C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors’ work,CPAR- MANILA arya 38. 39, 41, a2. 8B. 45. 1D. Poorly designed internal control may be in existence. Which of the following professionals has primary responsibility for the performance of an audit? ‘A. The managing partner of the firm. 8. The senior assigned to the engagement. C. The manager assigned to the engagement. D, The partner in charge of the engagement. What is the proper organizational role of internal auditing? A. To serve as an independent, objective assurance and consulting activity that adds vaiue to operations. B. To assist the external aucitor in order to reduce external audit fees. C. To perform studies to assist in the attainment of more efficient operations. D, To serve as the investigative arm of the audit committee of the board of directors. Opérational audits generally have been conducted by internal and COA auditors, but may be performed by certified public accountants. A primary purpose of an operational audit is to provide A. A measure of management performance in meeting organizational goals. 8. The results of intemal examinations of financial and accounting matters to a ‘company’s top-level management. €. Ald to the independent auditor, who is conducting the examination of the financial ‘Statements. D. A means of assurance that internal accounting controls are functioning as planned. Govemmental auditing often extends beyond examinations leading to the expression of opinion on the faitness of financial presentation and includes audits of efficiency, economy, effectiveness, and also A. Accuracy. B. Evaluation. C. ‘Compliance. D. ‘Internal control. ‘Which of the following terms best describes the audit of a taxpayer's return by a BIR auditor? A. Operational audit, 8. Internal audit, C. Compliance audit. D. Goverment audit. Which of the following statements concerning consulting services is false? ‘A. The performance of consulting services for audit clients does not, in and of itself, impair the auditor's independence. Consulting services differ fundamentally from the CPA’s function of attesting to the assertions of other parties. Consulting services ordinarily involve external reporting. Most CPAs, including those who provide audit and tax services, also provide consuiting services to their clients, on @ ‘Operational auditing is primarily oriented toward A. Future improvements to accomplish the goals of management, 8. The accuracy of data reflected in management's financial records. C. The verification that a company’s financial statements are fairly presented. . Past protection provided by existing internal contol. ‘Which of the following is the most appropriate action to be taken by a CPA who has been asked to perform a consulting services engagement concerning the analysis of a potential merger if he/she has little experience with the industry involved? A. Accept the engagement but he/she should conduct research or consult with others to ‘obtain sufficient competence.GPAR MANILA ar7701 46. 47. B. Decline the engagement because he/she iacks sufficient knowledge. C. Accept the engagement and issue a report that contains his/her opinion on the achievability of the results of the merger. D. Accept the engagement and perform it in accordance with Philippine Standards on Auditing (PSAs), ‘An objective of a performance audit is to determine whether an entity's ‘A. Operational information is in accordance with government auditing standards. B. Specific operating units are functioning economically and efficiently. C. Financial statements present fairly the resuits of operations. D. Internal contro! is adequately operating as designed. ‘Internal auditors should review the means of physically safeguarding assets from losses arising from A. Exposure to the elements. B, Underusage of physical facilities. C. Misapplication of accounting principles. D, Procedures that are not cost justified. The intemal auditing department's responsibility for deterring fraud is to A. Establish an effective internal control system. B. Maintain internal control. C. Examine and evaluate the system of internal contol. D. Exercise operating authority over fraud prevention activities, Intemal 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 intemal 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. 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. . Reviews but not financial statement audits. D. Agreed-upon procedures but not compilations. END -