Activity 1 - Fundamentals to Auditing and

Assurance Services
Which of the following best describes the objective of an assurance engagement?
2 points

Improve the company’s outcomes.

Compare the company’s information and policies with those of other entities.
Enhance the credibility of information in order to improve the likelihood that the information will meet the
needs of an intended user.
Assist in preparing the company’s financial statements.

How many separate parties are involved in an assurance engagement?

2 points

2
3
4
5

The subject matter of an assurance engagement may include (1) financial information,
(2) internal controls and (3) compliance with regulation.
2 points

1 only
1 and 3 only
All items mentioned.
None of the items mentioned.

Relevant criteria contribute to conclusions that are

2 points

Free from bias.

Clear and comprehensive.
Subject to different interpretations.
Useful for decision making.

In an assurance engagement, the person or person, either as individuals or

representatives of an entity, responsible for the subject matter is the
2 points

Intended user
Responsible party
Professional accountant
Client
In an assurance engagement, the outcome of the evaluation or measurement of a
subject matter against criteria is called
2 points

Subject matter information

Subject matter
Assurance
Conclusion

The following are characteristics of direct reporting assurance engagements, EXCEPT

2 points

The subject matter information is in the form of an assertion by the responsible party that is made available
to the intended users.
The subject matter information is provided to the intended users in the assurance report.
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.
The representation of the responsible part that has performed the evaluation of measurement of the subject
matter is not available to the intended users.

What type of assurance engagement is involved when the practitioner expresses a

positive form of conclusion
2 points

Limited assurance engagement

Positive assurance engagement
Reasonable assurance engagement
Absolute assurance engagement

The following statements relate to the three parties involved in an assurance

engagement. Which is correct?
2 points

The responsible party and the intended users should be from different entities.
A practitioner should decline a proposed assurance engagement when the subject matter requires
specialized skills and knowledge beyond those ordinarily possessed by the practitioner.
A responsible party is the person who is responsible for the subject matter or the subject matter
information.
The responsible party, not the intended users determines the nature of the procedures to be performed.

The following are components of assurance engagement risk EXCEPT

2 points

Inherent risk
Control risk
Detection risk
Business risk
Reducing assurance engagement risk to zero is very rarely attainable or cost
beneficial as a result of the following factors, EXCEPT
2 points

The use of selective testing.

The fact that much of the evidence available to the practitioner is persuasive rather than conclusive.
The practitioner may not have the required assurance knowledge and skills to gather and evaluate evidence .
The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence.

The auditor’s satisfaction as to the reliability of an assertion being made by one party
for use by another party is called
2 points

Opinion
Assurance
Examination
Verification

What level of assurance is provided by the auditor in an audit engagement?

2 points

Absolute
High
Moderate
No assurance

The following statements related to a review of financial statements. Which is

INCORRECT?
2 points

The objective of a review of financial statements is to enable a practitioner to state whether anything has
come to the practitioner’s attention that causes the practitioner to believe that the financial statements are
not prepared in accordance with an identified financial reporting framework.
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.
A review ordinarily involves an assessment of accounting and internal control systems.
The level of assurance provided in a review report is less than that given in audit report.

Which of the following statements concerning compilation engagement is

INCORRECT?
2 points

In a compilation engagement, the accountant is engaged to use accounting expertise, as opposed to auditing
expertise to collect, classify and summarize financial information.
The procedures employed in a compilation engagement enable the accountant to express a moderate level
of assurance on the compiled financial information.
Users of the compiled financial information derive some benefit as a result of the accountant’s involvement
because the service has been performed with due professional skill and care.
A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable
form without a requirement to test the assertions underlying that information.

What assurance is provided by the auditor in an agreed-upon procedure engagement?

2 points

Reasonable
Absolute
Moderate
No assurance

Reports on agreed-upon procedures are intended to be distributed

2 points

To only the involved parties, who are aware of the reasons for the procedures.
Only to the stockholders of the entity.
To any party to whom the client wishes.
Only to the entity’s management.

An engagement to perform agreed-upon procedures may involve the auditor in

performing certain procedures concerning (1) individual items of financial data, (2) a
single financial statement and (3) A complete set of financial statements.
2 points

1 and 2 only.
2 and 3 only.
1 and 3 only.
1, 2 and 3.

The report on an agreed-upon procedures engagement should contain

2 points

Identification of the purpose of which the agreed-upon procedures were performed.

An expression of positive assurance based on the specific procedures performed.
A statement that the auditor is independent of the entity.
A general description of the procedures performed.

Which of the following engagements does NOT require compliance with independence
requirements?
2 points

Compilation of financial information

Review of financial statements
Examination of prospective financial information
Audit of financial statements

The purpose of an audit of financial statements is to

2 points
Relieve management or those charged with governance of the responsibility for the preparation and
presentation of the financial statements.
Obtain an absolute level of assurance that the financial statements as a whole are free from material
misstatement.
Enhance the degree of confidence of intended users in the financial statements.
Assure the future viability of the entity by expressing an opinion on the entity’s financial statements.

The overall objectives of the auditor in conducting an audit of financial statement are
(A) To obtain a reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether caused by fraud or error, (B) To
report on the financial statements, (C) To obtain conclusive evidence rather than
persuasive evidence and (D) to detect all misstatements, whether due to fraud or
error.
2 points

A and B only.
B and D only.
A, B and C only.
A, B, C and D.

An audit in accordance with PSAs is performed on the premise that management, and
where appropriate, those in charge with governance, have responsibilities that are
fundamental to the conduct of the audit. Which of the following is NOT one of those
responsibilities?
2 points

To comply with all relevant PSAs in the preparation and presentation of the entity’s financial statements.
To provide the auditor with all information, such as records and documentation, and other matters that are
relevant to the preparation and presentation of the financial statements.
To provide unrestricted access to those within the entity from whom the auditor determines it necessary to
obtain audit evidence.
To design, implement and maintain internal control relevant to the preparation and presentation of financial
statement that are free from material misstatement, whether caused by fraud or error.

Independent auditing can be best described as

2 points

A branch of accounting.
A professional activity that measures and communicates financial and business data.
A discipline which attests to the results of accounting and other functional operations and data.
A regulatory function that prevents the issuance of improper financial information.

Which of the following best describes the reason why an independent auditor reports
on financial statements?
2 points

A poorly designed internal control system may be in existence.

Different interests may exist between the company preparing the statements, and the persons using the
statements.
A misstatement of account balances may exist and it is more likely to be detected by independent auditors.
A management fraud may exist and it is more likely to be detected by independent auditors.

Which of the following groups could be involved in an operational audit? (A) CPA
firms, (B) Internal auditors, (C) government auditors
2 points

A, B, and C
A only.
C only.
A and B only.

Which of the following is a typical objective of an operational audit?

2 points

To determine whether an entity’s internal control system is adequately operating as designed.

To determine whether an entity’s operational information is in accordance with PFRS.
To determine whether an entity’s financial statements present fairly the results of operations.
To determine whether an entity’s specific operating unit are functioning efficiently and effectively .

What is the proper organizational role of internal auditing?

2 points

To serve as an independent, objective assurance and consulting activity that adds value to operations .
To assist the external auditor in order to reduce external audit fees.
To perform studies to assist in the attainment of more efficient operations.
To serve as the investigative arm of the audit committee of the board of directors.

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 to provide
2 points

A measure of management performance in meeting organizational goals.

The results of internal examinations of financial and accounting matters to a company’s top-level
management.
Aid to the independent auditor, who is conducting the examination of the financial statements.
A means of assurance that internal accounting controls are functioning as planned.

Which of the following statements regarding consulting services is FALSE?

2 points

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 consulting services to their
clients.
Which of the following statements best describes assurance services?
1 point

Services designed to express an opinion on the fairness of historical financial statements based
on the results of an audit.
The preparation of financial statements of the collection, classification, and summarization of
other financial information.
Services designed for the improvement of operations, resulting in better outcomes.
Independent professional services that are intended to enhance the credibility of information to
meet the needs of an intended user.

Which of the following is NOT an assurance service?

1 point

Examination of prospective financial information

Audit of historical financial statements
Review of financial statements
Compilation of financial information

An assurance engagement should have (1) a subject matter and (2) suitable criteria.
1 point

1 only
2 only
Both 1 and 2
Neither 1 nor 2

In an assurance engagement, the responsible party and the intended users

1 point

Should be from different entities.

Should be from the same entity.
May be from the same entity or different entities.
Are both responsible for determining the nature, timing and extent of the procedures to be
performed.

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
1 point

Suitable criteria.
Established criteria.
Specifically developed criteria.
General criteria.

In an assurance engagement, the person or class of person for whom the professional
accountant prepares the report for a specific use of purpose is the
1 point
Intended user.
Responsible party
Management
Client.

In some assurance engagements, the evaluation of measurement of 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
1 point

Direct reporting engagements

Assertion-based engagements
Non-assurance engagement
Recurring engagements

What type of assurance engagement is involved when the practitioner expresses a

negative form of conclusion?
1 point

Reasonable assurance engagement

Negative assurance engagement
Assertion-based assurance engagement
Limited assurance engagement

A practitioner should accept an assurance engagement only if

1 point

The subject matter is in the form of financial information.

The criteria to be used are not available to the intended users.
The practitioner’s conclusion is to be contained in a written report.
The subject matter is the responsibility of either the intended users or the practitioners.

Which of the following statements is true concerning evidence in an assurance

engagement?
1 point

Sufficiency is the measure of the quantity of evidence.

Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
The reliability of evidence is influenced not by its nature but by its source.
Obtaining more evidence may compensate for its poor quality.

Assurance engagement risk is the risk

1 point

That the practitioner expresses an inappropriate conclusion when the subject matter information
is materially misstated.
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.
Of expressing an inappropriate conclusion when the subject matter information is either materially
misstated or not materially misstated.

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 a request for a
change in the engagement? (1) A change in circumstances that affects the intended
users’ requirements. (2) A misunderstanding concerning the nature of the
engagement.
1 point

1 only
2 only
Both 1 and 2.
Neither 1 nor 2.

What level of assurance is provided by the practitioner in a review engagement?

1 point

No assurance
High
Reasonable
Moderate

For the purpose of expressing negative assurance in the review report, the practitioner
should obtain sufficient appropriate evidence primarily through
1 point

Inquiry and confirmation.

Analytical procedures and substantive testing of details of transactions and account balances.
Confirmation and tests of controls.
Inquiry and analytical procedures.

In reviewing a company’s financial statements, a practitioner is required to

1 point

Send bank confirmations.

Obtain knowledge of the client’s industry.
Obtain a signed engagement letter from the client.
Observe client’s physical inventory.

The following statements relate to a review of interim financial information performed

by the entity’s independent auditor. Which is INCORRECT?
1 point
Similar to a financial statement audit, a review of interim financial information is designed to
obtain reasonable assurance that the interim financial information is free from a material
misstatement.
A review of interim financial information does not provide a basis for expressing an opinion
whether the financial information is presented fairly, in all material respects, in accordance with
an applicable financial reporting framework.
In a review of interim financial information, the auditor should have an understanding of the entity
and its environment, including its internal control.
A review of interim financial information may bring significant matters affecting the interim
financial information to the auditor’s attention, but it does not provide all of the evidence that
would be required in an audit.

In a compilation engagement, the accountant is engaged to use accounting expertise

as opposed to auditing expertise to collect, classify, and summarize financial
information. What type of assurance is provided by the accountant when he/she
performs this engagement?
1 point

Positive assurance
Negative assurance
No assurance
Limited assurance

When performing a compilation engagement, the accountant is required to

1 point

Assess internal control.

Make inquiries of management to assess the reliability and completeness of the information
provided.
Verify matters and explanations.
Obtain a general knowledge of the business and operations of the entity.

An accountant who performs a compilation agreement

1 point

Should read the compiled information and consider whether it appears to be appropriate in form
and free from obvious material misstatements.
Should use his/her auditing expertise in testing the assertions underlying the compiled financial
information.
Include in his/her report a listing of the specific procedures performed.
Need not obtain an acknowledgement from management of its responsibility for the appropriate
presentation of the financial information.

In an agreement to perform agreed-upon procedures, an auditor is engaged to

1 point

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.
Use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information.
Provide a moderate level of assurance that the information is free of material misstatement.
Provide a high, but not absolute, level of assurance that the information is free of material
misstatement.

Which of the following services, if any, may a practitioner who is not independent
provide?
1 point

Compilations but not reviews

Reviews but not compilations
Reviews but not financial statement audits
Agreed upon procedures but not compilations

The auditor is required to maintain professional skepticism throughout the audit.

Which of the following statements concerning professional skepticism is false?
1 point

A belief that management and those charged with governance are honest and have the integrity
relieves the auditor of the need to maintain professional skepticism.
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 results thereof.
Professional skepticism is necessary to the critical assessment of audit evidence.
Professional skepticism is an attitude that includes questioning contradictory audit evidence
obtained.

Professional judgment is required of an auditor. It

1 point

Should be exercised in planning and performing an audit of financial statements but need not to
be documented.
Can be used as the justification for the decisions made by the auditor that are not supported by
the facts and circumstances of the engagement.
Is necessary in the evaluation of management’s judgments in applying the entity’ applicable
financial reporting framework.
Is not used in making decisions about materiality and audit risk

Which of the following statements is correct concerning an auditor’s responsibilities

regarding financial statements?
1 point

An auditor’s responsibilities for audited financial statements are confined to the expression of the
auditor’s opinion.
The fair presentation of audited financial statements in accordance with an applicable financial
reporting framework is an implicit part of the auditor’s responsibilities.
Making suggestions that are adopted about the form and content of an entity’s financial
statements impairs an auditor’s independence.
The auditor’s report should provide an assurance as to the future viability of the entity.

Which of the following can be significantly affected by a financial statement audit?

1 point

Business risk.
Information risk
Inherent risk
Operations risk

The primary responsibility for the adequacy of disclosure in the financial statements
rests with the
1 point

Partner assigned to the audit engagement.

Management of the company.
Securities and Exchange Commission
Auditor in charge of the field work.

Which of the following statements is NOT true in respect of the internal auditor?
1 point

The scope of audits performed by the internal auditor is primarily in respect to financial report
audits
An internal auditor does not require a license to practice.
Internal auditors are usually employed by companies and government units.
Primary responsibility of the internal auditor is to the board of directors

In performing an operational audit, the auditor primarily relies on which of the following
procedures?
1 point

Physical inspection
Analytical procedures
Inquiry and observation
Tracing and vouching

Which of the following activities would generally account for a significant proportion of
an internal auditor’s time?
1 point

Checking that the company is complying with all its rules and regulations of operation.
Verifying all invoices before payment is made.
Ensuring the company is operating within the budget.
Evaluating the effectiveness and efficiency of all phases of an entity’s operations.

The primary orientation of operational auditing is towards

1 point

Future improvements to accomplish the goals of management.

The accuracy of the data reflected in management’s financial records.
The verification that a company’s financial report is fairly represented.
Past protection provided by existing internal control.