w

Since 1977

AUDITING THEORY L. R. CABARLES/J.M. D. MAGLINAO

AT.2819—Performing Review and
Other Assurance Services Engagements MAY 2020

Suggested Readings:
1. PSRE 2400, Engagements to Review Historical Financial Statements
2. PSRE 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity
3. PSAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information
4. PSAE 3400, The Examination of Prospective Financial Information
5. PSAE 3402, Assurance Reports on Controls at a Service Organization
6. PSAE 3410, Assurance Engagements on Greenhouse Gas Statements
7. PSAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a
Prospectus
8. Chapters 19 and 20, Auditing: A Risk-Based Approach, Part 1-Theory 2019 Issue—1st Edition by
Cabarles/Ocampo/Valdez

DISCUSSION QUESTIONS
Review of Historical Financial Statements
1. The objective of a review engagement
a. Is to enable the auditor to express an opinion
whether the financial statements are prepared in
all material respects, in accordance with an
identified financial reporting framework
b. Is to enable the 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 believe that the
financial statements are not prepared in all
material respects, in accordance with an identified
financial reporting framework.
c. Is 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.
d. Is to use accounting expertise as opposed to
auditing expertise to collect, classify and
summarize financial information.
2. A review engagement differs in scope as compared to
an audit due to:
a. the subject matter of the service
b. the quantity and type of evidence obtained
c. ethical requirements with respect to independence
d. the users of the financial statements
3. Which of the following is least likely to be a procedure
included in an accountant’s review of interim financial
information of a public entity?
a. Compare disaggregated revenue data by month to
that of the previous interim period.
b. Read available minutes of meetings of
stockholders.
c. Observe counting of physical inventory.
d. Inquire of management concerning significant
journal entries and other adjustments.
4. The Review Report include the following:
a. b. c. d.
Reference to PSRE Yes No Yes No
A statement that a review
is limited to inquiries and
analytical procedures Yes Yes Yes No
Specific description of
procedures that have
been performed by the
auditor No Yes Yes Yes
A statement that an audit
has not been performed Yes Yes Yes Yes
5. In a review engagement, if there has been a material
scope limitation, the auditor should describe the
limitation in the review report and either
a. Express a qualification of the negative assurance
or not provide any assurance.
b. Express a qualification of the negative assurance
provided or issue an adverse statement that the
financial statement are not presented fairly.
c. Express an adverse statement that the financial
statements are not presented fairly or the auditor
not issue any assurance.
d. Not modify the negative assurance or not issue an
assurance.
6. A modification of the CPA’s report on a review of the
interim financial statements of a publicly held company
would be necessitated by which of the following?
a. An uncertainty.
b. Lack of consistency.
c. Reference to another accountant.
d. Inadequate disclosure.
Examination of Prospective Financial Information
7. Financial information based on assumptions about
events that may occur in the future and possible
actions by an entity.
a. Historical financial information
b. Prospective financial information
c. Pro forma financial information
d. Budgeted financial information
8. What is meant by a financial forecast?
a. A prospective financial statement that predicts an
entity’s expected financial position, results of
operations, and cash flows
b. A prospective financial statement that presents an
entity’s expected financial position, results of
operations, and cash flows
c. A prospective financial statement that predicts an
entity’s expected financial position, results of
operations, and cash flows based on one or more
hypothetical assumptions

Page 1 of 4 www.prtc.com.ph AT.2819

EXCEL PROFESSIONAL SERVICES, INC.

d. A prospective financial statement that presents an payroll. Price, CPA, is expressing an opinion on a
entity’s expected financial position, results of description of the controls implemented at QSC
operations, and cash flows based on one or more regarding the processing of its customers' payroll
hypothetical assumptions transactions. Dunn expects to consider the effects of
Price's report on the Taft engagement. Price's report
9. Given one or more hypothetical assumptions, a should contain a(n)
responsible party may prepare, to the best of its a. Description of the scope and nature of Price's
knowledge and belief, an entity’s expected financial procedures.
position, results of operations, and cash flows. Such b. Statement that Dunn may assess control risk
prospective financial statements are known as based on Price's report.
a. Pro forma financial statements c. Assertion that Price assumes no responsibility to
b. Financial projections determine whether QSC's controls are suitably
c. Partial presentations designed.
d. Financial forecasts d. Opinion on the operating effectiveness of QSC's
internal controls.
10. A financial forecast consists of prospective financial
statements that present an entity’s expected financial 16. The auditor who audits the processing of transactions
position, results of operations, and cash flows. A by a service organization may issue a report on
forecast controls
a. Is based on the most conservative estimates. Implemented Operating effectiveness
b. Presents estimates given one or more hypothetical a. Yes Yes
assumptions. b. Yes No
c. Unlike a projection, may contain a range. c. No Yes
d. Is based on assumptions reflecting conditions d. No No
expected to exist and courses of action expected to
be taken. 17. In accordance with PSAE 3402, Assurance Reports on
Controls at a Service Organization, an auditor’s
11. Which of the following statements concerning modified opinion may be
prospective financial statements is correct? a. Qualified.
a. Only a financial forecast would normally be b. Adverse.
appropriate for limited use. c. Disclaimer.
b. Only a financial projection would normally be d. Any of the above.
appropriate for general use.
c. Any type of prospective financial statements would Engagements on Greenhouse Gas (GHG) Statements
normally be appropriate for limited use. 18. GHG statement is statement setting out constituent
d. Any type of prospective financial statements would elements and quantifying an entity’s GHG emissions
normally be appropriate for general use. for a period and, where applicable, comparative
information and explanatory notes including a
12. The party responsible for assumptions identified in the summary of significant quantification and reporting
preparation of prospective financial statements is policies. A GHG statement is sometimes known as?
usually a. Emissions inventory.
a. A third-party lending institution. b. Greenhouse gases.
b. The client’s management. c. Purchased offset.
c. The reporting accountant. d. Emissions factor.
d. The client’s independent auditor.
19. Given the link between greenhouse gas (GHG)
13. An examination of a financial forecast is a professional emissions and climate change, many entities are
service that involves quantifying their GHG emissions for internal
a. Compiling or assembling a financial forecast that is management purposes. Which of the following may
based on management's assumptions. also be a reason for preparing a GHG statement?
b. Limiting the distribution of the accountant's report a. A regulatory disclosure regime.
to management and the board of directors. b. An emissions trading scheme.
c. Assuming responsibility to update management on c. To inform investors and others on a voluntary
key events for one year after the report's date. basis that may be part of a sustainability report or
d. Evaluating the preparation of a financial forecast in an entity’s annual report.
and the support underlying management's d. All of the above.
assumptions.
20. The Philippine Framework for Assurance Engagements
14. When an accountant examines a financial forecast that (the Assurance Framework) notes that an assurance
fails to disclose several significant assumptions used to engagement may be either an attestation engagement
prepare the forecast, the accountant should describe or a direct engagement. PSAE 3410 deals only with
the assumptions in the accountant's report and issue which assurance engagement?
a(n) a. Attestation
a. "Except for" qualified opinion. b. Direct
b. "Subject to" qualified opinion. c. Both a and b
c. Unqualified opinion with a separate explanatory d. None of the above
paragraph.
d. Adverse opinion. 21. According to PSAE 3410 which of the following
assurance levels may be provided on GHG statement?
Assurance Reports on Controls at a Service a. Reasonable
Organization b. Limited
15. Dunn, CPA, is auditing the financial statements of Taft c. Both a and b
Co. Taft uses Quick Service Center (QSC) to process its d. None of the above

Page 2 of 4 www.prtc.com.ph AT.2819

EXCEL PROFESSIONAL SERVICES, INC.
Report on the Compilation of Pro Forma Financial
Information Included in a Prospectus
22. Pro forma financial information is
a. Financial information shown together with
adjustments to illustrate the impact of an event or
transaction on unadjusted financial information as
if the event had occurred or the transaction had
been undertaken at an earlier date selected for
purposes of the illustration.
b. Adjustments to unadjusted financial information
that illustrate the impact of a significant event or
transaction (“event” or “transaction”) as if the
event had occurred or the transaction had been
undertaken at an earlier date selected for purposes
of the illustration. [Pro forma adjustments]
c. A document issued pursuant to legal or regulatory
requirements relating to the entity’s securities on
which it is intended that a third party should make
an investment decision. [Prospectus]
d. Financial information of the entity to which pro
forma adjustments are applied by the responsible
party. [Unadjusted financial information]
23. In accordance with PSAE 3420, it is presumed that pro
forma financial information is presented in columnar
format consisting of the following except
a. Unadjusted financial information.
b. Pro forma adjustments.
c. Resulting pro forma column.
d. Prospective financial information.
24. In accordance with PSAE 3420, which of the following
performs compilation of pro forma financial
information?
a. The practitioner.
b. The responsible party.
c. The intended users.
d. All of the above.
25. In an engagement to report on the compilation of pro
forma financial information included in a prospectus
performed in accordance with PSAE 3420, the level of
assurance conveyed is
a. Absolute c. Limited
b. Reasonable d. None
26. An accountant's report on an examination of pro forma
financial information should include a
a. Statement that the entity's internal control was not
relied on in the review.
b. Disclaimer of opinion on the financial statements
from which the pro forma financial information is
derived.
c. Caveat that it is uncertain whether the transaction
or event reflected in the pro forma financial
information will ever occur.
d. Reference to the financial statements from which
the historical financial information is derived.
Letters for Underwriters
27. In connection with a public offering of first mortgage
bonds by Henson Corp., the bond underwriter has
asked Henson’s CPA to furnish him with a comfort
letter giving as much assurance as possible relative to
Henson’s unaudited financial statements for the three
months ended March 31, 2019.
The CPA had expressed an unqualified opinion on
Henson’s financial statements for the year ended
December 31, 2018 and he has performed a limited
review of Henson’s financial statements for the three
months ended March 31, 2019. Nothing has come to
his attention that would indicate that the March 31,
Page 3 of 4 www.prtc.com.ph
2019 statements are not properly presented. Under
these circumstances, the CPA’s response to the
underwriter’s request should be to:
a. furnish to the underwriters an opinion that the
March 31, 2019 statements are fairly presented
subject to year-end audit adjustments.
b. give negative assurance as to the March 31, 2019
financial statements but disclaim an opinion on
these statements.
c. inform the underwriters that no comfort letter is
possible without an audit of the financial
statements for the three months ended March 31,
2019.
d. Furnish to the underwriters an adverse opinion
covering financial statements for the three months
ended March 31, 2019.
28. Which of the following statements is correct concerning
letters for underwriters, commonly referred to as
comfort letters?
a. Letters for underwriters are required by the SEC
the initial public sale of registered securities.
b. Letters for underwriters typically give negative
assurance on unaudited interim financial
information.
c. Letters for underwriters usually are included in the
registration statement accompanying a prospectus.
d. Letters for underwriters ordinarily update auditors'
opinions on the prior year's financial statements.
29. Comfort letters ordinarily are addressed to
a. Creditor financial institutions.
b. The client's audit committee.
c. The Securities and Exchange Commission.
d. Underwriters of securities.
30. Comfort letters ordinarily are signed by the client's
a. Independent auditor.
b. Underwriter of securities.
c. Audit committee.
d. Senior management.
Management Discussion and Analysis (MD&A)
31. Which of the following is not an objective of a CPA's
examination of a client's management discussion and
analysis (MD&A) prepared pursuant to Securities and
Exchange Commission rules and regulations?
a. The historical amounts have been accurately
derived, in all material respects, from the entity's
financial statements.
b. The underlying information, determinations,
estimates and assumptions of the entity provide a
reasonable basis for the disclosures contained
herein.
c. The presentation includes the required elements of
MD&A.
d. The presentation is in conformity with rules and
regulations adopted by the Securities and
Exchange Commission.
32. Which of the following is an assertion embodied in
management's discussion and analysis (MD&A)?
a. Valuation.
b. Reliability.
c. Consistency with the financial statements.
d. Rights and obligations.
Trust Services
33. The WebTrust seal of assurance relates most directly
to
a. Financial statements maintained on the Internet.
b. Health care facilities.
c. Risk assurance procedures.
AT.2819
EXCEL PROFESSIONAL SERVICES, INC.

d. Web sites. a. Internal control over financial reporting.

b. SysTrust.
34. A CPA's examination report relating to a WebTrust c. Web siteAssociate.
engagement is most likely to include d. Web Trust.
a. An opinion on whether the site is "hackproof."
b. An opinion on whether the site meets the 36. A client's refusal to provide a written assertion in a
WebTrust criteria. Trust Services engagement is most likely to result in
c. Negative assurance on whether the site is which of the following types of opinions?
electronically secure. a. Adverse.
d. No opinion or other assurance, but a summary of b. Disclaimer.
findings relating to the Web site. c. Qualified.
d. Unqualified with explanatory language.
35. An engagement in which a CPA considers security,
availability, processing integrity, online privacy, and/or
confidentiality over any type of defined electronic - now do the DIY drill -
system is most likely to considered which of the
following types of engagements?

DO-IT-YOURSELF (DIY) DRILL

1. Review engagements are often used by: b. Read the minutes of the board of directors’
a. Small, owner-managed companies meetings.
b. mid-market public companies c. Inspect the open purchase order file.
c. large public companies d. Perform cut-off tests for cash receipts and
d. government agencies disbursements.

2. Which of the following procedures would most likely be
included in a review engagement of a nonpublic entity?
a. Preparing a bank transfer schedule.
b. Inquiring about related-party transactions.
c. Assessing internal control.
d. Performing cutoff tests on sales and purchases
transactions.
3. Which of the following services performed by a CPA is
an example of an assurance engagement that requires
the CPA to be independent in fact and appearance?
a. Compilation of financial statements
b. Review of financial statements
c. Management consulting services
d. Giving tax advice
4. Because the same CPA firm does both the annual audit
and the public company interim financial statement
review, they are referred to as _______.
a. bookkeepers
b. accountants
c. auditors
d. CPAs
5. An accountant’s review report on interim financial
information of a public entity is most likely to include a
a. Statement that the interim financial information
was examined in accordance with standards of the
Public Company Accounting Oversight Board.
b. Statement that the interim financial information is
the responsibility of the entity’s shareholders.
c. Description of the procedures for a review.
d. Statement that a review of interim financial
information is less in scope than a compilation
conducted in accordance with standards.
6. Which of the following procedures ordinarily should be
applied when an independent accountant conducts a
review of interim financial information of a publicly
held entity?
a. Verify changes in key account balances.
7. A forecast is a form of future-oriented financial
information. Which of the following best describes the
nature of a forecast?
a. A forecast is based on the auditor’s judgment
concerning hypothetical future economic
conditions.
b. A forecast presents a broad range of possible
future economic conditions.
c. A forecast presents possible future scenarios
consistent with the purpose of the information.
d. A forecast is based on management’s judgment of
the most likely future economic conditions.
8. Accepting an engagement to examine an entity's
financial projection most likely would be appropriate if
the projection were to be distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a prospectus or
a registration statement.
c. A bank with which the entity is negotiating for a
loan.
d. All stockholders of record as of the report date.
9. Which of the following statements is correct relating to
an auditor's review engagements on an entity's
management discussion and analysis (MD&A)?
a. A review consists principally of applying analytical
procedures and search and verification procedures.
b. The review report of a public entity should be
restricted to the use of specified parties.
c. No consideration of internal control is necessary.
d. The report issued will ordinarily include a summary
of findings, but no negative assurance.
10. An auditor should not issue a report on
a. The achievability of forecasts.
b. Internal control.
c. Management performance.
d. Quarterly financial information.
J - end of AT.2819 - J

Page 4 of 4 www.prtc.com.ph AT.2819