Excel Professional Services, Inc.
Management Firm of Professional Review and Training Center (PRTC)
(LUZON) Manila 87339344 * Calamba City, Laguna * Dasmariñas City, Cavite * Lipa City,
Batangas (0917) 8852769 * (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032)
2537900 loc. 218 (MINDANAO) Cagayan De Oro (0917) 7081465 * Davao City (082) 2250049
AUDITING THEORY
AT.3002 – Introduction to Audit
& Audit Standard-Setting Process
References:
a. Preface to the International Standards and Philippine Standards
b. PSA 200 (Revised and Redrafted), Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Philippine Standards on Auditing
DISCUSSION QUESTIONS
Definition of Auditing
1. The following phrases relate to the definition of
auditing. Which one is incorrect?
a. Auditing is a systematic process.
b. Objectively obtaining and evaluating evidence
about assertions. 6.
c. Assertions about economic actions and events.
d. Degree of correspondence between assertions and
auditing standards.
2. The single feature that most clearly distinguishes
auditing, attestation, and assurance is the
a. type of service being rendered.
b. training required to perform the service. 7.
c. scope of services.
d. CPA’s approach to the service.
Types of Audits
According to Subject Matter
3. The primary reason for a financial statement audit by
a CPA independent of the company is to
a. Ensure that the financial statements are free from
errors whether due to fraud or error.
b. Comply with SEC’s requirement that financial According to Auditor
statements shall be certified by a CPA.
c. Provided increased assurance to users as to the 8.
fairness of the financial statements.
d. Transfer the responsibility regarding the financial
statements from the management to the auditor.
4. A typical objective of an operational audit is to
determine whether an entity's
a. Financial statements fairly present financial
position and cash flows. 9.
b. Financial statements present fairly the results of
operations.
c. Financial statements fairly present financial
position, results of operations, and cash flows.
d. Specific operating units are functioning efficiently
and effectively.
5. Operational auditing is geared towards
a. Future improvements of an organization to
achieve the objectives set by management.
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R.C.P. SOLIMAN/ K.J. UY
MAY 2021
b. The integrity of accounting and financial records
of an entity.
c. Verification that the company’s financial reports
are in accordance with the standards.
d. Compliance with government-mandated rules and
regulations.
A type of audit the purpose of which is to determine
whether the auditee is following specific procedures
or rule
a. Operational audit.
b. Financial audit.
c. Compliance audit.
d. Management audit.
Which of the following statements is true concerning
a compliance audit?
a. Compliance audits are only performed by
government auditors.
b. Risks such as inherent risk, control risk, and
detection risk are not appropriate in the planning
and performance of a compliance audit.
c. Criteria normally used include laws, regulations,
or provisions of a contract or agreement.
d. A report on compliance can only include negative
assurance.
Which of the following types of auditing is performed
most commonly by independent CPAs on a
contractual basis?
a. Internal audits
b. Government audits
c. Due diligence
d. External auditing
The following statements relate to internal auditing.
Which of the following statements is incorrect?
a. Internal audits are performed by an entity’s
employees or by personnel contracted for that
purpose.
b. Internal auditing has evolved into a highly
professional activity that extends beyond the
appraisal of the efficiency and effectiveness of an
entity’s operations.
c. Internal audit areas include providing assurance
and consulting services relating to entity’s risk
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EXCEL PROFESSIONAL SERVICES, INC.
management, control, and governance process
aimed at adding value to the organization.
d. To be effective, internal auditors should submit
their reports to the senior management.
10. To make the internal audit department independent,
he should report directly to the a. Board of Directors.
b. Audit committee.
c. Stockholders.
d. Controller.
11. Governmental auditing’s scope include examinations
leading to the expression of opinions on the
1) Fairness of financial information
2) Efficiency and economy of operations
3) Effectiveness of operations
4) Compliance
a. 1 and 4
b. 1 only
c. 2 and 3
d. 1,2,3 and 4
12. This constitutional Commission has the power,
authority, and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of,
and expenditures or users of funds and property,
owned or held in trust by, or pertaining to, the
government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned or
controlled corporations and recommend measures to
improve the efficiency and effectiveness of
government operations.
a. Board of Accountancy
b. Auditing and Assurance Standards Council
c. Bureau of Internal Revenue
d. Commission on Audit
Audits of Historical Financial Statements
13. An independent CPA is conducting an audit of the
financial statements of Ace Corporation under PSAs.
The independent CPA is expected to
a. Express an opinion as to the fairness of Ace
Corporation's financial statements.
b. Guarantee the accuracy of the financial
statements of Ace Corporation.
c. Make a testimonial that Ace Corporation is a good
choice for investment purposes.
d. Certify that Ace Corporation will be profitable in
the next ten (10) years.
14. An “integrated audit”, as required by Sarbanes-Oxley
Act for U.S. public companies, includes an audit of a.
The company’s internal controls.
b. The company’s financial statements.
c. The company’s compliance with its rules and
policies.
d. Both a and b.
15. An audit can have a significant effect on:
a. Information risk
b. Business risk
c. Interest rate
d. Inflation rate
16. The underlying reasons that create demand for users
for reliable financial information do not include:
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a. Expression of an opinion as to the fairness of the
financial statements.
b. Transactions that are voluminous and complex.
c. Remoteness of users from preparers of financial
statements.
d. Investors and other users need to make
important
decisions about the company.
17. Which of the following are assertions about account
balances at the balance sheet date?
a. Occurrence, cut-off, classification, completeness
and accuracy.
b. Existence, rights and obligations, completeness
and valuation and allocation.
c. Occurrence and rights and obligations,
completeness, classification and understandability
and accuracy and valuation.
d. All of the above.
18. Assertions about classes of transactions and events
for the period under audit least likely include
a. Transactions and events that have been recorded
have occurred and pertain to the entity.
b. All transactions and events that should have been
recorded have been recorded.
c. Transactions and events have been recorded in
the correct accounting period.
d. All assets, liabilities and equity interests that
should have been recorded have been recorded.
Audit Standard Setting Process
International Auditing and Assurance Standards Board
(IAASB)
19. The International Auditing and Assurance Standards
Board (IAASB) is an independent standard-setting
body that serves the public interest by setting
highquality international standards for auditing,
quality control, review, other assurance, and related
services, and by facilitating the convergence of
international and national standards.
The IAASB develops and issues, in the public interest
and under its own authority, high-quality auditing and
assurance standards and other pronouncements for
use around the world. a. True, False
b. False, True
c. True, True
d. False, False
IAASB Due Process and Working Procedures
20. A rigorous due process is followed by the IAASB in
developing its pronouncements and such due process
is critical to ensure that the views of those affected
by its standards are thoroughly considered. Which of
the following statements is incorrect regarding
IAASB’s development of its standards?
a. A project task force is ordinarily established with
the responsibility to develop a draft standard. The
task force develops its positions based on
appropriate research and consultation.
b. Exposure drafts are placed on the IAASB’s
website and are widely distributed for public
comment. The exposure period is ordinarily 30
days.
c. The comments and suggestions received as a
result of exposure are considered at an IAASB
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meeting, which is open to the public, and the
exposure draft is revised as appropriate.
d. Approval of exposure drafts, re-exposure drafts,
and final international standards is made by the
affirmative vote of at least two-thirds of the
IAASB members.
Auditing and Assurance Standards Council (AASC)
21. The Auditing and Assurance Standards Council
(AASC) is the body authorized to establish and
DO-IT-YOURSELF (DIY) DRILL
promulgate generally accepted auditing standards
(GAAS) in the Philippines.
At present, AASC pronouncements are mainly
adopted from the standards and practice statements
issued by the International Auditing and Assurance
Standards Board (IAASB). a. True, False
b. False, True
c. True, True
d. False, False
22. Which of the following statements about AASC and its
working procedures is incorrect?
a. The AASC’s Standards contain basic principles and
essential procedures together with related
guidance in the form of explanatory and other
material, including appendices.
b. Exposure draft of proposed Philippine Standard or
Practice Statements are widely distributed to
interested organizations and persons for
comment, the period of which is generally not
shorter than 90 days.
c. Issuance of exposure drafts requires approval by
a majority of the members of the Council;
issuance of final Philippine Standards and Practice
Statements, as well as interpretations, requires
approval of at least ten members.
d. Each final Philippine Standard and Practice
Statement, as well as interpretations, if deemed
appropriate, shall be submitted to the PRC
1. Auditing involves both a(an):
a. Documentation process and an evaluation
process.
b. Evaluation process and a reporting process.
c. Investigative process and a reporting process.
d. Documentation process and a reporting process.
2. Which of the following types of audit is performed in
order to determine whether an entity’s financial
statements are fairly stated, in all material respects,
in conformity with the generally accepted accounting
principles?
a. Operational audit
b. Financial statement audit
c. Compliance audit
d. Performance audit
3. A primary purpose of an operational audit is to
provide a. A means of assurance that internal
accounting controls are functioning as planned.
b. The results of internal examination of financial
and accounting matters to a company’s top level
management.
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through the BOA for approval after which the
pronouncements shall be published in the Official
Gazette. After publication, the AASC
pronouncement becomes operative 15 days from
publication in the Official Gazette.
Engagement Standards and Practice Statements
23. Which of the following standards are to be applied, as
appropriate, in the audits of historical financial
information?
a.
a.
a.
a.
Philippine Standards on Assurance Engagements
(PSAE)
b. Philippine Standards on Auditing
c. Philippine Standards on Review Engagements
d. Philippine Standards on Related Services
24. Philippine Standards on Quality Control (PSQCs) are
to be applied to
a. Assurance engagements only.
b. Review Engagements only.
c. Compilation and agreed-upon engagements only.
d. All services that fall under AASC’s engagement
standards.
25. These statements are issued by the AASC to provide
interpretative guidance and practical assistance to
auditors in the implementation of PSAs and to
promote good practice.
a. Philippine Auditing Practice Statements (PAPS)
b. Philippine Review Engagement Practice
Statements (PREPS)
c. Philippine Assurance Engagement
Practice
Statements (PAEPS)
d. Philippine Related Services Practice Statements
(PRSPS)
- now do the DIY drill –
c. A measure of management performance in
meeting organizational goals.
d. Aid to the independent auditor, who is conducting
the examination of the financial statements.
4. An audit which is undertaken in order to determine
whether the auditee is following specific procedures
or rules laid down by some higher authority is
classified as a(n)
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.
5. Internal auditing relates to an
a. Audit which is performed by professional
practitioner as an independent contractor
b. Audit which is incidentally concerned with the
detection and prevention of fraud
c. Audit wherein the auditor should be independent
of management both in fact and in mental
attitude
d. Audit which serves the needs of management
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6. Internal auditors may perform all of the following d. Each of these is a cause of information risk.
types of audits except
a. Operational audits 13. Which of the following statements does not properly
b. Compliance audits describe a limitation of an audit?
c. Computer system audits a. Many audit conclusions are made on the basis of
d. All of the above may be performed by internal examining all available evidence.
auditors b. Some evidence supporting peso representations
in the financial statements must be obtained by
7. Government auditing often extends beyond oral or written representation of management.
examination leading to the expressions of opinion on c. Human weakness, such as fatigue and
the fairness of financial presentation and includes carelessness, can cause auditors to overlook
audits of efficiency, effectiveness and a. Internal pertinent evidence or cause them to make the
control wrong conclusions.
b. Accuracy d. Judgment is used throughout
c. Evaluation the audit
d. Compliance engagement.

8. Which of the following is not among the functions of 14. Which of the following standards are to be applied to
the audit committee? compilation engagements, engagements to apply
a. Review the external auditor’s overall audit plan agreed-upon procedures to information, and other
b. Meet regularly with the Chief Audit Executive of related services engagements as specified by the
the internal audit activity AASC?
c. Evaluate results of internal and external audits a. PSRSs
d. Set the strategic direction of the company and b. PSAs
supervise its day-to-day operations c. PSAEs
d. PSREs
9. The independent auditor’s opinion helps establish the
credibility of the financial statements. 15. Philippine Standards on Assurance Engagements
(PSAEs) are to be applied in
The independent auditor’s opinion is an assurance as a. Assurance engagements dealing with subject
to the efficiency or effectiveness with which matters other than historical financial information.
management has conducted the affairs of the entity. b. Compilation engagements and agreements to
a. The first statement is false, the second statement apply agreed-upon procedures to information.
is true c. The audit or review of historical financial
b. The first statement is true, the second statement information.
is true d. Assurance engagements dealing with historical
c. The first statement is false, the second statement financial information.
is false
d. The first statement is true, the second statement - end of AT.3002 -
is false
10. Which of the following statements is an example of an
assertion made by management in an entity's
financial statements?
a. The financial statements were prepared in an
unbiased manner.
b. All information requested by the auditor has been
provided by management.
c. The scope of the auditors' investigation was not
limited in any way by management.
d. Reported inventory balances reflect all related
transactions for the period.

11. Accuracy and valuation assertions about presentation

and disclosure means
a. Disclosed events, transactions, and other matters
have occurred and pertain to entity.
b. All disclosures that should have been included in
the financial statements have been included.
c. Financial information is appropriately presented
and described, and disclosures are clearly
expressed.
d. Financial and other information are disclosed
fairly
and at appropriate amounts.

12. Which of the following is a cause of information risk?

a. Voluminous data.
b. Biases and motives of the provider of information.
c. Remoteness of the provider of the information.

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