AUDIT 1

MIDTERM EXAMS

PART I TRUE OR FALSE 50 POINTS

Instruction: Write TRUE if the statement is correct and write FALSE if the
statement is wrong. Use CAPITAL LETTERS. (Two points each)

1. The purpose of internal audit is to evaluate the adequacy and

effectiveness od company’s internal controls.
2. The primary responsibility for the adequacy of disclosure in the
financial statements rests with the Auditor in charge of the field work.
3. The auditor’s responsibility for the financial statements is confined to
the expression of his/her opinion.
4. Independent auditing is a branch of accounting.
5. Reports on agreed-upon procedures are intended to be distributed to
any party whom the client wishes.
6. The report on agreed- upon procedures engagement should contain
identification of the purpose for which the agreed-upon procedures
were performed.
7. Independence is required in compilation and agreed-upon procedures.
8. When performing a compilation engagement, the practitioner if
required to obtain general knowledge of the business and operations of
the entity.
9. A management consulting engagement to provide IT advice to a client
is as example of an assurance engagement.
10. The objective of an assurance engagement is to assist the
company in preparing its financial statements.
11. There are four separate parties involved in an audit
engagement.
12. The framework defines and describes the elements and
objectives of an assurance engagement.
13. Criteria are the standards or benchmarks used to evaluate or
measure the subject matter of an assurance engagement.
14. Relevant criteria contribute to conclusions that assist decision-
making by the intended user.
15. In an assurance engagement, the person or class of persons
whom the professional accountant prepares the report for aa specific
use or purpose is the management.
16. Subject matter is the outcome of the evaluation or measurement
of a subject matter.
17. In direct reporting engagements the subject matter information
is in the form of an assertion by the responsible party that is made
available to the intended users.
 18. The objective of a reasonable assurance engagement is to
reduce the assurance engagement risk to an acceptably high level in
the circumstances of the engagement as the basis for a positive form
of expression of the practitioner’s conclusion.
19. In assertion based assurance engagements, the evaluation or
measurement of the subject matter against criteria is performed by
the responsible party.
20. Sufficiency is the measure of the quality of evidence. The
quantity of evidence needed is affected by the quality of such evidence
(the higher the quality, the less may be required).
21. Reducing assurance risk to zero is very rarely attainable or cost
beneficial and because the practitioner may not have the required
assurance knowledge and skills to gather and evaluate evidence.
22. The purpose of Financial Statement audit is to assure the future
viability of the entity by expressing an opinion in the entity’s financial
statements.
23. The auditor is required to comply with all PSA’s relevant to the
audit of an entity’s financial statements.
24. Management, and where appropriate, those charged with
governance, have responsibility for the preparation and presentation of
the financial statements in accordance with the applicable Philippine
Standards in Auditing.
25. A government audit is typically designed to determine whether
the auditee has complied with applicable laws and regulations.

PART II MULTIPLE CHOICE QUESTIONS 40 POINTS

Instruction: Write your answer in the space provided on the left side. Use
CAPITAL LETTERS. (Two points each)

1. This happens when managers generally have more information about

the financial position and operations of the entity compared to the
stockholders
a. Information asymmetry c. Agency problem
b. Stakeholder theory d. Value relevance theory

2. This type of audit involves a review of an organization’s procedures to

determine whether the organization has adhered to specific
procedures, rules or regulations set down by some higher authority.
a. Financial Statement Audit c. Compliance Audit
b. Operational Audit d. Internal Audit

3. Which of the following is an independent appraisal activity established

within an entity as a service to the entity?
 a. External Auditing c. Financial Auditing
b. Internal Auditing d. Compliance Auditing

4. A structured representation of financial information, including the

related notes, intended to communicate an entity’s economic
resources or obligations at a point in time or the changes therein for a
period of time in accordance with a financial reporting framework.
a. Annual Report c. Accounting Records
b. Engagement Documentation d. Financial Statements

5. The primary responsibility for the prevention and detection of fraud

and error rests with
a. The company’s management
b. The external auditor, the company’s management and those
charged with governance
c. The company’s management and those charged with governance
d. Those charged with governance

6. Primary responsibility for the assertions in financial statements rests

with the:
a. Audit partner assigned to the engagement
b. Senior auditor in charge of the field work
c. Staff auditor who drafts the statements
d. Clients management

7. The main way(s) to reduce the information risk is to have

a. The users verify the information
b. The users share the information risk with management
c. Financial statements audited
d. All of the above

8. Which of the following is incorrect regarding the general principles of

an audit?
a. The auditor should comply with the Code of Ethics for professional
ethics for CPA’s
b. The auditor should conduct an audit in accordance with PSAs
c. The auditor should plan and perform an audit with an attitude of
professional skepticism
d. The auditor would ordinarily expect to find evidence to support
management representations and assume they are necessarily
correct
9. This term refers to the application of relevant training, knowledge and
experience, within the context provided by auditing, accounting and
ethical standards, in making informed decisions about the courses of
 action that are appropriate in the circumstances of the audit
engagement
a. Professionalism c. Professional Judgement
b. Conservatism d. Materiality

10. The auditor’s opinion

a. Certifies the correctness of the financial statement
b. Is an assurance as to the future viability of the entity
c. Enhances the credibility of the financial statements
d. Is an assurance as to the efficiency with which the management
has conducted the affairs of the entity, but not effectiveness

11. What is the level of assurance and form of conclusion in a review

engagement?
a. Reasonable, Positive c. Positive, Reasonable
b. Limited, Negative d. Negative, Limited

12. Absolute assurance in auditing is not attainable as a result of

such factors as all of the following except:
a. Need for judgement c. Use of testing
b. Lack of expertise d. Inherent Limitations in internal control

13. Which of the following best describes operational audit?

a. It requires constant review by internal auditors of the
administrative controls as they relate to operations of the company.
b. It concentrates on implementing financial and accounting control in
a newly organized company
c. It attempts and is deigned to verify the fair presentation of a
company’s results of operations.
d. It concentrates on seeking out aspects of operations in which waste
would be reduced by the introduction of controls.

14. Which of the following 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 fairness of historical
financial statements based on the results of an audit.
c. The preparation of financial statements or the collection,
classification, and summarization of other financial information.
d. Services designed for the improvement of operations, resulting in
better outcomes.

15. The following are components of assurance engagement risk,

except
 a. Inherent risk c. Detection risk
b. Control risk d. Business risk

16. What type of assurance engagement is involved when the

practitioner expresses a positive form of conclusion?
a. Limited assurance engagements
b. Positive assurance engagements
c. Reasonable assurance engagements
d. Absolute assurance engagements

17. Which statement 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
c. The reliability of evidence is influenced not by its nature but by its
source
d. Obtaining more evidence may compensate for its poor quality

18. The auditor’s satisfaction as to the reliability of an assertion

being made by one party for use by another party is called
a. Opinion b. Assurance c. Examination d. Verification

19. Which of the following is not generally considered a procedure

followed by a practitioner in obtaining a reasonable basis for the
expression of a review conclusion?
a. Obtain written representations from management
b. Apply analytical procedures
c. Make inquiries of management
d. Assess fraud risk

20. A financial statement audit aids in communication of economic

data because the audit
a. Assures the readers of financial statements that any fraudulent
activity has been corrected
b. Guarantees that financial data are fairly presented
c. Lends credibility to the financial statements
d. Confirms the accuracy of management’s financial representations.

PART III ESSAY 10 POINTS

Instruction: Write your answer on the space provided. Give a brief
discussion on the following questions. ( 5 POINTS each)
A. In your own understanding, what do you think is the reason why the
intended users wanted the Financial Statement to be audited by an
independent external party?

B. Differentiate Assurance, Attest and Audit.