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Auditing Theory- 01
CPA Review

 PREFACE TO THE PHILIPPINE STANDARDS ON QUALITY CONTROL, AUDITING,

REVIEW, OTHER ASSURANCE AND RELATED SERVICES
 PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
 FRAMEWORK OF THE PHILIPPINE STANDARDS ON AUDITING (PSA 120)
 OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN
AUDIT IN ACCORDANCE WOTH PHILIPPINE STANDARDS ON AUDITING ( PSA 200)

The Authority Attaching to the Philippine Standards Issued by the AASC

Standards Applicatiom
1. Philippine Standards on Auditing  Audit of historical financial
(PSAs) information
2. Philippine Standards on Review  Review of historical financial
Engagements (PSREs) information
3. Philippine Standards on Assurance  Assurance engagements dealing
Engagements (PSAEs) with subject matter other than
historical financial information
4. Philippine Standards on Related  Compilation engagements
Services (PSRSs)  Engagement to apply agreed- upon
procedures to information
 Other related services
engagements as specified by the
AASC

1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s
Engagement Standards.
2. Philippine Standards on Quality Control (PSQC) are to be applied for all
services falling under the AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public Sector.

The Authority Attaching to Practice Statements Issued by the AASC

1. Philippine Practice Statements are issued to:

 Provide interpretative guidance and practical assistance to
professional accountants in implementing Philippine Standards ;
and
 Promote good practice
2. Professional accountants should be aware of and consider Practice
Statements applicable to the engagement.
3. A professional accountant who does not consider and apply the guidance
included in a relevant Practice Statement should be prepared to explain
how the basic principles and essential procedures in the AASC’s
Engagement Standard(s) addressed by the Practice Statement have been
complied with.

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AASC Bulletin and AASC Alerts

 A regular publication issued by the AASC to provide guidance to auditors

in the application of PSAs
 Not part of PSAs and do not change the requirements of relevant PSAs.

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

1. The framework does not itself establish standards or provide procedural

requirements for the performance of assurance engagements.
2. In addition to the framework and PSAs, PSREs, and PSAEs, practitioners
who perform assurance engagements are governed by:
 The Philippine Code of Ethics for Professional Accountants; and
 Philippine Standards on Quality Control (PSQCs)

ASSURANCE ENGAGEMENTS

1. “Assurance engagement” means an engagement in which a practitioner

expresses a conclusion designed to enhance the degree of confidence of
the intended users other than the responsible party about the outcome of
the evaluation or measurement of a subject matter against criteria.
2. “Subject matter information” refers to the outcome of the evaluation or
measurement of a subject matter.
3. In some assurance engagements, the evaluation or measurement of the
subject matter is performed by the responsible party, and the subject
matter information is in the form of an assertion by the responsible
party that is made available to intended users (assertion-based
engagements).
4. In other assurance engagements, 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 that is not available to the intended users.
The subject matter information is provided to the intended users in the
assurance report (direct reporting engagements).

Two types of Assurance Engagement

1. Reasonable assurance engagement- the objective is a reduction in

assurance engagement risk to an acceptably low level in the
circumstances of the engagement as the basis for a positive form of
expression of the practitioner’ conclusion.
2. Limited assurance engagement- the objective is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of
the engagement, but where the risk is greater than for a reasonable
assurance engagement, as a basis for a negative form of expression of
the practitioner’s conclusion.

Scope of the Framework

The following are non-assurance engagements and therefore are not covered by
the framework

1. Engagements covered by PSRSs such as agreed-upon procedures engagements

and compilations of financial or other information.

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2. The preparation of tax returns where no conclusion conveying assurance

is expressed.
3. Consulting (or advisory) engagements, such as management and tax
consulting.

Elements of an Assurance Engagement

1. A three-party relationship involving:

 a practitioner
 a responsible party; and
 intended users
2. An appropriate subject matter,
3. Suitable Criteria
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable
assurance engagement or a limited assurance engagement.

OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN

ACCCORDANCE WITH PSAs

1. In conducting an audit of financial statements, the auditor’s OVERALL

OBJECTIVES are:
a) To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial
reporting framework; and
b) To report on the financial statements, and communicate as required
by the PSAs, in accordance with the auditor’s findings.
2. 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.
3. A review does not ordinarily involve an assessment of accounting and
internal control systems, tests of records and of responses to inquiries
by obtaining corroborating evidence through inspection, observation,
confirmation and computation, which are procedures ordinarily performed
during an audit.
4. The level of assurance in a review report is lea than that given in an
audit report.

ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING FINANCIAL INFORMATION

1. In an engagement to perform agreed-upon procedures, an auditor is

engaged 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.
2. The recipients of the report must form their own conclusion from the
report of the auditor.
3. The report is restricted to those parties that have agreed to the
procedures to be performed since others, unaware of the reasons for the
procedures, may misinterpret the results.

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ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

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

expertise as opposed to auditing expertise to collect, classify, and
summarize financial information.
2. It ordinarily entails reducing detailed data to manageable and
understandable form without a requirement to test the assertions
underlying that information.
3. The procedure performed are not designed and do not enable the
accountant to express any assurance on the financial information.
4. Users of compiled financial information derive some benefits as a result
of the accountant’s involvement because the service has been performed
with due professional skill and care.

SUMMARY

Nature of Audit Review Agreed-upon Compilation

Service Procedures
Level of High, but Moderate No assurance No assurance
Assurance not absolute assurance
Provided assurance
Report Positive Negative Factual findings Identification
provided assurance on assurance on of procedures of information
assertion(s) assertion(s) compiled
(Audit (Review (Compilation
Report) Report) Report)

MULTIPLE CHOICE QUESTIONS

1. Which of the following statements 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.

2. Which of the following is not assurance service?

A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information

3. Assurance services differ from consulting services in that they

I. Focus on providing advice.
II. Involve monitoring of one party by another.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

4. How many separate parties are involved in an assurance engagement?

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A. 2
B. 3
C. 4
D. 5

5. An assurance engagement should have which of the following elements?

Subject matter Criteria
A. Yes No
B. No Yes
C. Yes Yes
D. No No

6. The subject matter of an assurance engagement may include

Financial Internal Compliance
Information Controls with Regulation
A. Yes Yes Yes
B. No No No
C. Yes No Yes
D. No Yes No

7. Suitable criteria are required for reasonably consistent evaluation or

measurement of the subject matter of an assurance engagement. Which of
the following statements concerning the characteristics of suitable
criteria is correct?
A. Reliable criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different
interpretations.
B. Relevant criteria allow reasonably consistent evaluation or
measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to
conclusions that are, clear, comprehensive, and not subject to
different interpretations.

8. 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
A. Suitable Criteria
B. Established criteria
C. Specifically developed criteria
D. General criteria

9. In an assurance engagement, the outcome of the evaluation or measurement

of a subject matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion

10. In some assurance engagements, the evaluation or measurement of

the subject matter is performed by the responsible party, and 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

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A. Direct reporting engagements

B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements

11. What type of assurance engagement is involved when the

practitioner expresses a positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement
D. Absolute assurance engagement

12. What type of assurance engagement is involved when the

practitioner expresses a negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement

13. Which of the following statements 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 s,
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.

14. Assurance engagement risk is the risk

A. That the practitioner expresses an appropriate conclusion when the
subject matter information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter
information is not materially misstated.
C. Through loss from litigation, adverse publicity, or other events
arising in connection with a subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter
information is either materially misstated or not materially
misstated.

15. Reducing assurance engagement risk to zero is very rarely

attainable or cost beneficial as a result of te following factors,
except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is
persuasive rather than conclusive.
C. The practitioner may not have the required assurance knowledge and
skills to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming
conclusions based on that evidence

16. The Philippine Framework for Assurance Engagements

A. Contains basic principles, essential procedures, and related guidance
for the performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance
engagement, and identifies engagements to which PSAs, PSREs, and
PSAEs apply.

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C. Provides a frame of reference for CPAs in public practice when

performing audits, reviews, and compilations of historical financial
information.
D. Establishes standards and provides procedural requirements for the
performance of assurance engagements.

17. 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?
I. A change in circumstances that affects the intended users’
requirements.
II. A misunderstanding concerning the nature of the engagement.

A. I only C. Both I and II

B. II only D. Neither I nor II

18. Which of the following standards are to be applied, as

appropriate, in the audit of historical financial information?
A. PSREs C. PSRSs
B. PSAEs D. PSAs

19. PSRE 2400 (Engagements to Review Financial Statements), as amended

by the AASC in February 2008, applies to
A. Reviews of any historical financial information of an audit
client.
B. Reviews of any historical financial information by a practitioner
other than the entity’s auditor.
C. Reviews of historical financial or other information by a
practitioner other than the entity’s auditor.
D. Reviews of historical financial or other information of an audit
client.

20. The Philippine Standards on Assurance Engagements (PSAEs) are to

be applied in
A. Assurance engagements dealing with subject matters other than
historical financial information.
B. Compilation engagements and agreements to apply agreed-upon
procedures to information.
C. The audit or review of historical financial information.
D. Assurance engagements dealing with historical financial
information.

21. The Philippine Standards on Quality Control (PSQCs) are to be

applied to
A. Assurance engagements only.
B. Review engagements only.
C. Compilation and review engagements only.
D. All services that fall under the AASC’s engagement standards.

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22. 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. PREPSs C. PAEPs
B. PAPSs D. PRSPSs

23. What level of assurance is provided by the auditor in an audit

engagement?
A. Absolute C. Moderate
B. High, but not absolute D. No assurance

24. What level of assurance is provided by the practitioner in a

review engagement?
A. No assurance C. Reasonable
B. High, but not absolute D. Moderate

25. When performing a compilation engagement, the accountant is

required to
A. Assess internal controls.
B. Make inquiries of management to assess the reliability and
completeness of the information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the
entity.

26. What assurance is provided by the auditor in an agreed-upon

procedures engagement?
A. Reasonable
B. Absolute
C. Moderate
D. No assurance

27. The review of a company’s financial statements by a CPA firm

A. Is substantially less in scope of procedures than an audit.
B. Requires detailed analysis of the major accounts.
C. Is of similar scope as an audit and adds similar credibility to
the statements.
D. Culminates in issuance of a report expressing the CPA’s opinion as
to the fairness of the statements.

28. An engagement to perform agreed-upon procedures may involve the

auditor in performing certain procedures concerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.

A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

29. A summary of findings rather than assurance is most likely t be

included in a/an
A. Agreed-upon procedures report
B. Compilation report
C. Examination report

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D. Review report

30. Inquiries and analytical procedures ordinarily form the basis for
which type of engagement?
A. Agreed-upon procedures
B. Audit
C. Examination
D. Review

31. Independence is not a requirement for which of the following

engagements?
Compilation Review Agreed-upon procedures
A. No Yes No
B. No No No
C. Yes No Yes
D. Yes Yes Yes

32. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’s conclusion is to be contained in a written
report.
D. The subject matter is the responsibility of either the intended
users or the practitioner.

33. A practitioner is associated with financial information when

I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a
professional connection.

A. I only
B. II only
C. Either I or II
D. Neither I or II

34. The auditor is required to comply with all PSAs relevant to the
audit of an entity’s financial statements. A PSA is relevant to the
audit when
I. The PSA is in effect
II. The circumstances addressed by the PSA exist

A. I only
B. II only
C. Either I or II
D. Both I and II

35. The overall objectives of the auditor I conducting an audit of

financial statements are
I. To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence
IV. To detect all misstatements, whether due to fraud or error.

A. I and II only

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B. II and IV only
C. I, II, and II only
D. I, II, III, and IV

36. The auditor is required to maintain professional skepticism

throughout the audit. Which of the following statements concerning
professional skepticism is false/
A. A belief that management and those charged with governance are
honest and have integrity relieves the auditor of the need to
maintain professional skepticism.
B. 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.
C. Professional skepticism is necessary to the critical assessment of
audit evidence.
D. Professional skepticism is an attitude that includes questioning
contradictory audit evidence obtained.

37. Which of the following best describes the reason why independent
auditors report on financial statements?
A. A management fraud may exist and it is more likely to be detected
by independent auditors.
B. Different interests may exist between the company preparing the
statements and the persons using the statements.
C. A misstatement of account balances may exist and is generally
corrected as the result of the independent auditors’ work.
D. Poorly designed internal control may be in existence.

38. Which of the following professionals has primary responsibility

for the performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

39. What is the proper organizational role of internal auditing?

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

40. 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
A. A measure of management performance in meeting organizational
goals
B. The results of internal examinations of financial and accounting
matters to a company’s top-level management.
C. Aid to the independent auditor, who is conducting the examination
of the financial statements.

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D. A means of assurance that internal accounting controls are

functioning as planned.

41. Governmental auditing often extends beyond examinations leading to

the expression of opinion on the fairness of financial presentation and
includes audits of efficiency, economy, effectiveness, and also
A. Accuracy
B. Evaluation
C. Compliance
D. Internal Control

42. Which of the following terms best describes the audit of a

taxpayer’s return by a BIR auditor?
A. Operational Audit
B. Internal Audit
C. Compliance Audit
D. Government Audit

43. Which of the following statements concerning consulting services

is false?
A. The performance of consulting services for audit clients does not
in and of itself, impairs the auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function
of attesting to the assertions of other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services,
also provide consulting services to their clients.

44. Operational auditing is primarily oriented toward

A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management’s financial records.
C. The verification that a company’s financial statements are fairly
presented.
D. Past protection provided by existing internal control.

45. Which of the following is the most appropriate action to be taken

by a CPA who has been asked to perform a consulting services engagement
concerning the analysis of a potential merger if he/she has a little
experience with the industry involved?
A. Accept the engagement but he/she should conduct research or
consult with others to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient
knowledge.
C. Accept the engagement and issue a report that contains his/her
opinion on the achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with
Philippine Standards on Auditing (PSAs).

46. An objective of a performance audit is to determine whether an

entity’s
A. Operational information is in accordance with government auditing
standards.
B. Specific operating units are functioning economically and
efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.

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47. Internal auditors should review the means of physically

safeguarding assets from losses arising from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.

48. The internal auditing department’s responsibility for deterring

fraud is to
A. Establish an effective internal control system
B. Maintain internal control
C. Examine and evaluate the system of internal control
D. Exercise operating authority over fraud prevention activities.

49. Internal auditors review the adequacy of the company’s internal

control system primarily to
A. Help determine the nature, timing, and extent of tests necessary
to achieve audit objectives.
B. Determine whether the internal control system provides reasonable
assurance that the company’s objectives and goals are met
efficiently and economically.
C. Ensure that material weaknesses in the system of internal control
are corrected.
D. Determine whether the internal control system ensures that
financial statements are fairly presented.

50. Which of the following services, if any, may practitioner who is

not independent provide?
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statements audits.
D. Agreed-upon procedures but not compilations.

-END-

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