ACTG 11 – ASSURANCE PRINCIPLES

BS Accountancy, SY 2019-2020
3RD Year, 2ND Semester
PRELIMS

Student Name: ________________________________________________________________________

Date: ___________________________________________________________________________________
TRUE or FALSE

Instructions: Indicate T or F beside the numbers. Please avoid erasures.

1. The CPA’s conclusion provides a level of assurance about the subject matter. (T)

2. The main difference between auditors and accountants is the auditor’s ability to interpret PSAs. (F)

3. The responsible party expresses a conclusion that provides a level of assurance as to whether the subject
matter conforms, in all material respects, with the identified suitable criteria. (F)

4. An audit benefits the public. (T)

5. Evidence obtained directly by the practitioner is less reliable than evidence obtained indirectly or by
inference. (F)

6. External auditors must have independence and freedom from management constraint. (T)

7. Appropriateness refers to quantity, while sufficiency refers to quality, of evidential matter. (F)

8. Auditing requires that data should be externally generated. (F)

9. In the case of an audit of financial statements, the suitable criteria to be used are Philippine Standards on
Auditing (PSAs). (F)

10. The major beneficiaries of an internal audit are management and third party users of the financial
statement. (F)

11. Criteria are the standard or benchmarks used to evaluate or measure the subject matter of an assurance
engagement. (T)

12. An operational audit conducted by an internal auditor is intended to provide an aid in the independent
auditor examining the financial statements. (F)

13. The subject matter of an assurance engagement may be presented as a point in time or covering a period of
time. (T)

14. External auditing refers to financial statement audits performed by independent auditors. (T)

15. The responsible party may also be one of the intended users. (T)

16. Compliance audits are used to determine adherence to rules and regulations set by the auditor. (F)

17. The intended user is the person or class of persons who engages the professional accountant/CPA. (F)
 18. Compared to the auditor of the past, the auditor of today focuses on the detection of fraud and error. (F)

19. The responsible party is always the one who engages the professional accountant. (F)

20. The use of selective testing is one of the reasons why auditors can provide reasonable, but not absolute,
assurance on the fairness of financial statements. (T)

21. The responsible party is the person responsible for the subject matter. (T)

22. An audit, if properly conducted, ensures that fraud is prevented. (F)

23. A professional accountant may agree to perform an assurance engagement which they are not competent
to carry out. (F)

24. Information risk is the risk that information provided to users may be materially misstated. (T)

25. The term practitioner is narrower in scope compared to the term auditor. (F)

26. After conducting an audit and release of the auditor’s report, the primary responsibility on the fairness of
the financial statements is shifted to the auditor. (F)

27. The responsible party and the intended user need to be from separate organizations. (F)

28. An independent audit aids in the communication of economic data because the audit guarantees that
financial data are fairly presented. (F)

29. Assurance engagements performed by professional accountants are intended to enhance the credibility of
information. (T)

30. An independent auditor may participate in preparing financial statements, including accompanying notes.
(F)

MULTIPLE CHOICE

Instructions: Encircle the letter of the correct answer. Please avoid erasures.

1. BROADLY defined, the subject matter of ANY audit consists of

a. Financial statements
b. Economic data
c. Assertions (x)
d. Operating data

2. The following phrases relate to the definition of auditing. Which one is incorrect?
a. Systematic process
b. Objectively obtaining and evaluating evidence
c. Assertions about economic actions and events
d. Degree of correspondence between assertions and GAAP (x)

3. These are the standards or benchmarks used to evaluate or measure the subject matter of an assurance
engagement
a. Criteria (x)
b. Engagement process
c. Assertions
d. Generally accepted auditing standards
4. Auditing includes both a (an)
a. Documentation process and an evaluation process
b. Evaluation process and a reporting process
c. Investigative process and a reporting process (x)
d. Documentation process and a reporting process

5. The criteria for evaluating quantitative information vary. For example, in the case of an independent audit
of financial statements by CPA firms, the criteria are usually the
a. PFRS or PFRS for SMEs (x)
b. Philippine Standards on Auditing
c. National Internal Revenue Code
d. Regulations of the Securities and Exchange Commission

6. For what reason does an independent auditor gather evidence?

a. To detect fraud
b. To appraise the internal control system
c. To assess management performance
d. To form an opinion on the financial statements (x)

7. Which of the following is not an element of assurance engagements

a. Subject matter
b. Engagement process (x)
c. Evidence
d. Suitable criteria

8. A type of audit the purpose of which is to determine whether the client is following specific procedures or
rules set down by some higher authority
a. Operational audit
b. Compliance audit (x)
c. Financial audit
d. Detailed audit

9. An audit of financial statements is conducted to determine if the

a. Organization is operating efficiently and effectively
b. Auditee is following specific procedures or rules set down by some higher authority
c. Overall financial statements are stated in accordance with the applicable financial reporting
framework (x)
d. Client’s internal control is functioning as intended

10. This is an independent appraisal activity established within an entity as a service to the entity
a. Independent auditing
b. Internal audit function (x)
c. Government auditing
d. Compliance audit function

11. In financial statement audits, the audit process should be conducted in accordance with
a. The audit program
b. Philippine Standards on Auditing (x)
c. Philippine Accounting Standards
d. Philippine Financial Reporting Standards
12. Internal auditing relates to an
a. Audit which serves the needs of management (x)
b. Audit which is performed by a professional practitioner as an independent contractor
c. Audit which is incidentally concerned with the detection and prevention of fraud
d. Audit wherein the auditor should be independent of management both in fact and in mental
attitude

13. The person or class of persons for whom the professional accountant prepares the report for a specific use
or purpose
a. Professional accountant
b. Responsible party
c. Intended users (x)
d. None of the above

14. The auditor communicates the results of his/her work through the medium of the
a. Engagement letter
b. Management representation letter
c. Financial statements
d. Audit report (x)

15. Which of the following types of audit uses laws and regulations as its criteria
a. Operational audit
b. Financial statement audit
c. Compliance audit (x)
d. Performance audit

16. Internal auditors cannot be totally independent

a. Since they do not possess the CPA license
b. As long as an employer-employee relationship exists (x)
c. Because they don’t audit financial statements
d. Unless their immediate supervisor is a CPA

17. In performing an assurance engagement, a professional accountant typically

a. Supplies litigation support services
b. Assesses control risk at a low level
c. Expresses a conclusion about an assertion (x)
d. Provides management consulting advice

18. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter
b. Audit report (x)
c. Management letter
d. Financial statements

19. Which of the following forms may the subject matter of an assurance engagement take
a. Historical financial information
b. Systems and processes
c. Behavior
d. All of them (x)

20. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis?
a. Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing (x)
21. Which of the following has the primary responsibility for the fairness of the representations made in the
financial statements
a. Client’s management (x)
b. Audit committee
c. Independent auditor
d. Board of Accountancy

22. An audit can have a significant effect on

a. Information risk (x)
b. Business risk
c. Risk-free interest rate
d. All of these

23. Which of the following best describes the reason why an independent auditor reports on financial
statements?
a. A management fraud may exist and it is more likely to be reported by independent auditors
b. Different interests may exist between the company preparing the statements and the persons using
the statements (x)
c. A misstatement of account balances was corrected as the result of the independent auditor’s work
d. An excellent internal control system was in existence

24. By providing high level of assurance on audit reports on financial statements, the auditor
a. Guarantees the fair presentation of the financial statements
b. Confirms the accuracy of the financial statements
c. Enhances the credibility of the financial statements (x)
d. Assures the readers that fraudulent activities of employees have been detected

25. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements (x)
b. Detect fraud
c. Evaluate management
d. Evaluate internal controls
26. An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as
a. Due professional care
b. Professional skepticism (x)
c. Reasonable assurance
d. Supervision

27. Which of the following is more difficult to evaluate objectively

a. Efficiency and effectiveness of operations (x)
b. Compliance with government regulations
c. Presentation of financial statements in accordance with GAAP
d. All the three above are equally difficult

28. Which of the following characteristics is not considered necessary in determining whether the criteria is
suitable
a. Relevance
b. Neutrality
c. Reliability
d. Sufficiency (x)
29. The auditor’s satisfaction as to the reliability of an assertion being made by one party is called
a. Assurance (x)
b. Audit risk
c. Precision
d. Materiality

30. When a CPA has obtained sufficient appropriate evidence to conclude that the subject matter conforms, in
all material respects, with identified suitable criteria, he/she can provide a(n)
a. Limited assurance
b. Absolute assurance
c. Reasonable assurance (x)
d. No assurance