OUR LADY OF THE PILLAR COLLEGE CAUAYAN

COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

MODULE 2:
FRAMEWORK OF ASSURANCE SERVICES

The Framework does not itself establish standards or provide procedural requirements for the performance of
assurance engagements.

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)

Types of Assurance Engagement

Type Objective Conclusion
Reasonable Reduction in assurance engagement risk to an
Positive form of expression of
Assurance acceptably low level in the circumstances of the
the practitioner’s conclusion
Engagement engagement
Reduction in assurance engagement risk to a low
level that is acceptable in the circumstances of
Limited Assurance
the engagement, but where that risk is greater Negative form of assurance of
Engagement
than for a reasonable assurance engagement, as the practitioner’s conclusion
the basis for a practitioner’s conclusion

Elements of an Assurance Engagement:

1. A three party relationship involving a practitioner (CPA), a responsible party, and intended users;

Practitioner Responsible Party Intended Users

The term practitioner as used in
professional standards, which
relates only to practitioners
performing audit or review
engagements with respect to
historical financial information.
The ethical requirement
regarding professional
competence can be satisfied by
the practitioner using work of
persons from other professional
disciplines, referred to as
experts. When this happens, the
practitioner should be satisfied
that those persons carrying out
engagement collectively possess
the requisite skills and
knowledge, and that the
practitioner has an adequate
level of involvement in the
engagement and understanding
of the work for which any
expert is used.
The responsible part is the
person (or persons) responsible
for the subject matter or the
subject matter information (the
assertion) in an assurance
engagement.
The responsible party may or
may not be the party who
engages the practitioner (the
engaging party). The
responsible party ordinarily
provides the practitioner with a
written representation that
evaluates or measures the
subject matter against the
identified criteria, whether or
not it is to be made available as
an assertion to the intended
users.
The intended users are the
person, persons or class of
persons for whom the
practitioner prepares the
assurance report. The
responsible party can be one of
the intended users, but not the
only one whenever practical, the
assurance report is addressed to
all the intended users, but some
cases there may be other
intended users.
The practitioner may not be able
to identify all those who will
read the assurance report,
particularly where there are
large numbers of people who
have access to it.

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

2. An appropriate subject matter;

 Subject matter have different characteristics, including the degree to which information about
them is qualitative versus quantitative, Objective versus subjective, historical versus prospective,
and relates to a point in time or covers a period. Such characteristics affect the precision with
which the subject matter can be evaluated or measured against criteria and the persuasiveness
of available evidence. In any case, the assurance report notes characteristics of particular
relevance to the intended users.

3. Suitable criteria
 Criteria are the benchmarks used to evaluate or measure the subject matter including, where
relevant, benchmarks for presentation and disclosure, criteria can be formal or less formal.

Assurance Engagement Applicable Criteria

Audit of financial statements
Assurance on internal control
Compliance audits
Philippine Financial Reporting Standards (PFRS)
Established internal control framework or individual control
objectives specifically designed for the engagement
Applicable law, regulation or contract

Characteristics of Suitable Criteria (CURNeR)

Characteristics Explanation
Relevant criteria contribute to conclusions that assist decision-
Relevance
making by the intended users.
Criteria are sufficiently complete when relevant factors that could
affect the conclusions in the context of the engagement
Completeness
circumstances are not omitted. Complete criteria include, where
relevant, benchmarks for presentation and disclosure.
Reliable criteria allow reasonable consistent evaluation or
measurement of the subject matter including, where relevant
Reliability presentation and disclosure, when use in similar circumstances by
similarly qualified practitioners.
Neutrality Neutral criteria contribute to conclusions that are free from bias.
Understandable criteria contribute to conclusions that are clear,
Understandability comprehensive, and not subject to significantly different
interpretations.

Established criteria and specifically developed criteria

o Established criteria are those embodied in laws or regulations, or issued by authorized
or recognized bodies of experts that follow a transparent due process.
o Specifically developed criteria are those designed for the purpose of the engagement.
Whether criteria are established or specifically developed affects the work that
practitioner carries out to assess their suitability for particular engagement.

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

4. Sufficient appropriate evidence; and

 Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the
quality of evidence; that is, its relevance and its reliability. The quantity of such evidence needed
is affected by the risk of the subject matter information being materially misstated
 The practitioner plans and performs an assurance engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence about whether the subject matter
information is free of material misstatement. The practitioner considers materiality, assurance
engagement risk, and quantity and quality of available evidence when planning the nature,
timing and extent of evidence-gathering procedures.

Generalizations about the reliability of evidence

Generalizations about the reliability of various kinds of evidence can be made; however, such
subject to important exceptions. Even when evidence is obtained from sources external to the
entity, circumstances may exist that could affect the reliability of the information obtained. For
example, evidence if the source is not knowledgeable. While recognizing that exceptions may
exist, the following generalizations about the reliability of evidence may be useful:
1. Evidence is more reliable when it is obtained from independent sources outside the entity.
2. Evidence that is generated internally is more reliable when the related controls are
effective.
3. Evidence obtained directly by the practitioner (for example, observation of the application
of a control) is more reliable than evidence obtained indirectly or by inference (for
example, inquiry about the application of a control).
4. Evidence is more reliable when it exists in documentary form, whether paper, electronic,
or other media (for example, a contemporaneously written record of a meeting is more
reliable than a subsequent oral representation of what was discussed).
5. Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles.

Considerations in gathering evidences:

1. Cost-Benefit principle - The practitioner considers the relationship between the cost of
obtaining evidence and the usefulness of the information obtained. However, the matter
of difficulty or expense involved is not in itself a valid basis for omitting an evidence-
gathering procedure for which there is no alternative.
2. Materiality - Materiality is relevant when the practitioner determines the nature, timing
and extent of evidence –gathering procedures, and when assessing whether the subject
matter information is free of misstatement.
3. Assurance engagement risk - is the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information materially misstated. It is considered
when determining the nature, timing and extent of evidence- gathering procedures.

5. A written assurance report in the form appropriate to a reasonable assurance engagement or a

limited assurance engagement.
 The practitioner provide a written report containing a conclusion that conveys the assurance
obtained about the subject matter information.

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

Not all conclusions are unqualified conclusions. There are situations which may lead the practitioner
to express a different type of conclusion

Nature of the Matter Material but not pervasive Material and Pervasive
Unable to obtain sufficient appropriate
Qualified Opinion Disclaimer of Opinion
evidence (Scope Limitation)
Subject matter or assertion is materially
Qualified Opinion Adverse Opinion
misstated
Criteria are unsuitable or inappropriate,
Qualified Opinion Adverse Opinion
thus misleading users of information

Audit
 A more comprehensive definition of auditing is given by the American Accounting Association:
“An audit is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between
these assertions and established criteria and communicating the results to interested users”

This definition conveys the following:

a. Auditing is a systematic process

Auditing proceeds by means of an ordered and structured of steps.

b. An audit involves obtaining and evaluating evidence about assertions regarding economic
action and events
Assertions are representations made by and auditee about economic actions and events.
The auditor's objective is to determine whether these assertions are valid. To satisfy this
objective the auditor performs- audit procedures and gathers evidence that corroborates or
refuse the assertions

c. An audit is conducted objectively

The auditor should conduct the audit without bias. Impartial attitude must be maintained by
the auditor when evaluating evidence and formulating his conclusion.

d. Auditors ascertain the degree of correspondence between assertions and established

criteria
Established criteria are needed to judge the validity of the assertions these criteria are
important because they establish and inform the users of the basis against which the
assertions have been evaluated or measured. In an audit, the auditor determines the degree
by which the assertions conform to the established criteria

e. Auditors communicate the audit results to various interested users

The communications of audit findings is the ultimate objective of any audit. For the audit to
be useful, the results must be communicated to interested users on a timely basis.

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

Illustrative Definition of Auditing

Independent Auditor

Following a systematic Process

Objectively obtains and evaluates evidence

Establish the degree of correspondence between

Established
Assertion Criteria

Communicates the result to interested users

Types of Audits
1. Financial statement audit
 This is an audit conducted to determine whether the financial statements of an entity are fairly
presented in accordance an identified financial reporting framework.

2. Compliance audit
 Compliance audit involves a review of an organization's procedures to determine whether the
organization has adhered to specific procedures, rules or regulations. The performance of compliance
audit is dependent upon the existence of verifiable data and recognized criteria established by an
authoritative body.

3. Operational audit
 An operational audit is a study of a specific unit of an organization for the purpose of measuring its
performance. The main objective of this type of audit is to assess entity's Performance, identify areas
for improvements and make recommendations to improve performance.

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

4. Internal Audit
 Internal Auditing is an independent, objective assurance and consulting activity designed to add value
and improve an entity’s operations. It helps an entity accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control and governance process.

5. Forensic Audit
 Refers to the examination of evidence regarding an assertion to determine its conformance to
established criteria carried out in a manner suitable to the court.

Types of auditors
Auditors can be classified according to their affiliation with the entity being examined.

1. External auditors
 These are independent CPAs who offer their professional services to different clients on a contractual
basis.

2. Internal auditors
 Internal auditors are who investigate and a praise the effectiveness and efficiency of operations and
controls.

3. Government auditors
 These are government employees whose main concern is to determine whether persons or entities
comply with government laws and regulations.

Role Management and Independent Auditor

Management Independent Auditor

Prepares
Financial
Statements

Unaudited Evaluates
Financial Financial
Statements Statements

Audited Audit Report on

Financial Financial
Statements Statements

Users of Financial Statements

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

Inherent limitations of an Audit (SERIN)

1. The use of testing / Sampling risk
 For practical reasons, auditors do not examine all evidence available. Many audit conclusions are made
by examining only sample of evidence.
2. Error in application of judgement / Non-sampling risk
 The work undertaken by the auditor to form an opinion is permeated by judgment.

3. Reliance on management's representation

 Some evidence supporting the financial statements must be obtained by obtaining oral or written
representations from management.

4. Inherent limitations of the client's accounting and internal control systems.

 Although the auditor performs procedures to detect material misstatements when auditing financial
statements, such procedures may not be effective in detecting misstatements resulting from collusion
among employees or management's circumvention of internal control.

5. Nature of evidence
 Evidence obtained by the auditor does not consist of "hard facts" which prove or disprove the
accuracy of the financial statements.

Need for an independent financial statement audit

1. Conflict of interest between management and users of financial statements.
 In a sense, financial statements may be viewed as the report by management as to how the entity
performed under their direction and supervision.

2. Expertise
 The complexity of accounting and auditing requires expertise in verifying the quality of the financial
information. Since most of the users of financial information are not equipped with the necessary
skills and competence to determine whether the financial statements are reliable, a qualified person is
hired by users to verify the reliability of the financial statements on their behalf.

3. Remoteness
 Users of financial information are usually prevented from directly assessing the reliability of the
information. Most of the users do not have access to the entity's records to personally verify the
quality of the financial information.

4. Financial consequences
 Misleading financial information could have substantial economic consequences for a decision maker.
It is therefore important that financial statements be audited first before they are used for making
important decisions

Theoretical framework of Auditing

The audit function operates within a theoretical framework. Below are selected postulates, assumptions or
ideas that support many auditing concepts and standards.

1. Audit functions operates on the assumption that all financial data are verifiable.
2. The auditor should always maintain independence with respect to the financial statements under audit
3. There should be no long-term conflict between the auditor and the client management.

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Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

4. Effective internal control system reduces the possibility of errors and fraud affecting the financial
statements.
5. Consistent application of generally accepted accounting principles (GAAP) or Philippine Financial
Reporting Standards (PFRS) results in fair presentation of financial statements.
6. What was held true in the past will continue to hold true in the future in the absence of known conditions
to the contrary
7. An audit benefits the public

Inappropriate use of the practitioner’s name

 A practitioner is associated with a subject matter when the practitioner reports on information about
that subject matter or consents to the use of the practitioner’s name in a professional connection with
that subject matter. If the practitioner is not associated in this manner, third parties can assume no
responsibility of the practitioner.

Accepting an Engagement
An important element of a firm’s quality control policies and procedures is a system for deciding whether to
accept or reject an audit engagement. In making this decision, the firm should consider:

a. Competence
o One of the primary considerations before accepting an audit engagement is to determine
whether the auditor has the necessary skills and competence to handle the engagement.

b. Independence
o Essential to the credibility of the auditor’s report is the concept of independence.

c. Ability to serve the client properly

o Closely related to competence is the auditor’s ability to serve the client properly. An
engagement should not be accepted if there are no enough qualified personnel to perform
the audit. PSA 220 suggest that audit work should be assigned to personnel who have the
appropriate capabilities, competence and time to perform the audit engagement in
accordance with professional standards.

d. Integrity of Management
o PSA 220 requires the firm to conduct a background investigation of the prospective client in
order to minimize the likelihood of association with clients whose management lacks integrity.
o This task would involve:
1. Making Inquires of appropriate parties in the business community such as prospective
client’s banker, legal counsel, or underwritter to obtain information about the reputation
of the clients.
2. Communicating with the predecessor audit - Communication with predecessor auditor is
not only a matter of courtesy to the predecessor auditor. This communication allows the
incoming auditor to obtain information about the client that will be useful in determining
whether the engagement will be accepted.

The incoming auditor should inquire into matters that may affect the decision to accept
the engagement. This includes questions regarding.
 The predecessor auditor’s understanding as to the reasons for the change
auditors.
 Any disagreement between the predecessor auditor and the client.

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 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

 Any facts that might have a bearing on the integrity of the prospective client’s
management.

Retention of Existing Clients

The auditors evaluation of clients is not a one time consideration.

In general, conditions which would have caused an accounting firm to reject a prospective client may also
result or lead to a decision of terminating an audit engagement.

Engagement Letter
After Accepting the audit engagement, an engagement letter should be prepared, This letter sets forth:

a. The objective of the audit of financial statements which is to express an opinion on the financial
statements.
b. The management’s responsibility for the fair presentation of the financial statements.
c. The scope of the audit.
d. The forms or any reports or other communication that the auditor expects of the audit.
e. The fact that because of the limitations of the audit, there is an unavoidable risk that material
misstatements may remain undiscovered.
f. The responsibility of the client to allow the auditor to have unrestricted access to whatever records,
documentation and other information requested in connection with the audit.

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Framework of Assurance Services
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

Sample Engagement Letter

To the Board of Directors of OLPCC.

You have requested the we audit the balance sheet of ACE Company as of December 31, 2020 and the related
statements of income and cash flows for the year then ended. We are pleased to confirm our acceptance and our
understanding of this engagement by means of this letter. Our audit will be made with the objective of our expressing
an opinion on the financial statements.

We will conduct our audit in accordance with Philippine Standards on Auditing, Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on the test basis, evidence supporting the amounts and disclosure, in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statements presentation.

Because of the test nature and other inherent limitations of an audit together with the inherent limitations of any
accounting and internal control system, there is an unavoidable risk that event some material misstatements may
remain undiscovered.

In addition to our report on the financial statements, we expect to provide you wish a separate letter concerning any
material weakness in accounting and internal control system which come to our notice.

We remind you that the responsibility for the preparation of financial statements including adequate disclosure is that of
the management of the company. This includes the maintenance of adequate accounting records and internal controls,
the selection and application of accounting policies, and the safeguarding of the assets of the company. As part of out
audit process, we will request form management written confirmation concerning representation made to us in
connection with the audit.

We look forward to full cooperation with your staff and we trust that they will make available to us whatever records,
documentation and other information are requested in connection with our audit. Our fees, which will be billed as work
progresses, are based on the time required by the individuals assigned to the engagement plus out – of – pocket
expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill
required.

This letter will be effective for future years unless it is terminated, amended or superseded.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the
arrangements for our audit of the financial statements.

SRM & Co. CPAs

Acknowledge on behalf of OLPCC by

(Signed)

___________________________
Name and Title
Date

Importance of the Engagement Letter

 It is the interest of both the auditor and the client that the auditor sends engagement letter in order
to avoid misunderstandings with respect to the engagement and to document and confirm the
auditor’s acceptance of the appointment

Recurring Audits (MRSCP)

The following factors may cause the auditor to send a new engagement letter.
o Any indication that the client misunderstand the objective and scope of the audit.
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Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

o Any revised or special terms of the engagement.

o Significant change in the nature or size of the client’s business
o A recent change of senior management, board of directors or ownership
o Legal requirements and other government agencies’ pronouncements

Audits of components
 The auditor should consider the following factors in making a decision of whether to send a separate
letter to the component:
o Who appoints the auditor of the component
o Whether a separate audit report is to be issued on the component
o Legal Requirements
o The extent of any work performed by other auditor
o Degree of ownership by parent
o Degree of independence of the component’s management.

Review
 The objective of review of financial statements is to enable an auditor to state whether, on the basis
of procedures which do not provide all the evidence that would be required in an audit, anything has
come to the auditor’s attention that causes the auditor to believe that the financial statements are
not prepared, in all material respects, in accordance with an identified financial reporting framework.

WRAP-UP EXERCISES:
1. Which of the following is not a condition that potentially increases the entity’s business risk?
a. The entity’s competitors have introduced major changes to their production processes, whereas
the client has not.
b. The entity has made major changes to the lines of reporting within the organization.
c. The entity’s information system is not adequate to handle its volume of sales transactions
d. The external auditor does not possess a sufficient understanding of the entity and its environment
to conduct an effective audit.

2. Which of the following is not an element of an assurance engagement?

a. Subject matter c. Evidence
b. Engagement process d. Suitable Criteria

3. Which of the following characteristics is not considered necessary in determining whether the criteria
are suitable?
a. Relevance c. Reliability
b. Neutrality d. Sufficiency

4. Which of the following types of audits would be intended to determine whether a governmental entity
is following sound procurement practices?
a. Financial statement audit
b. Operational audit
c. Program audit
d. Compliance audit

5. Which of the following best describes a review service?

a. A review engagement focuses on providing advice in a three party contract
b. A review engagement focuses on providing assurance on the internal controls of public company

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 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

c. A review engagement focuses on providing limited assurance on financial statements of a private

company
d. A review engagement focuses on providing reasonable assurance on the assertions contained in
the financial statements of a public company.

6. When performing a review of financial statements, the CPA is required to?

a. Apply analytical procedures and make inquiries from third parties by sending confirmation letters
b. Assess the effectiveness of the client’s accounting and internal control systems.
c. Obtain corroborative evidence to support management’s responses to inquiries
d. Obtain understanding of the client’s business and industry.

7. The trait that distinguishes auditors form accountants is the

a. Auditor’s ability to interpret accounting standards
b. Auditor’s education beyond the bachelor’s degree
c. Auditor’s ability to interpret PFRS
d. Auditor’s accumulation and interpretation of evidence related to a company’s financial statements

8. In practice the professional accountants cannot provide absolute assurance because of the following
except
a. The internal control has its inherent limitations
b. The professional accountants employ testing process
c. The lack of expertise of the professional accountants in doing a systematic engagement process
d. The use of judgment in gathering evidence and drawing conclusions based on that evidence

9. Which of the following is not one of the limitations of an audit?

a. The use of testing
b. Limitations imposed by client
c. Human error
d. Nature of evidence that the auditor obtains

10. The primary reason for an audit by an external audit firm is

a. To satisfy governmental regulatory requirements
b. To guarantee that there are no misstatements in the financial statements
c. To provide increased assurance to users as to the fairness of the financial statements
d. To ensure that any fraud will be discovered

11. Which of the following is not among the conditions that give rise to a demand by external users for
independent audits of financial statements
a. Remoteness of users
b. Complexity of making economic decisions
c. Potential conflict of interest between users and preparers of the statements
d. Consequence for making decisions

12. Auditing is based on the assumption that financial data are verifiable. Data are verifiable when two or
more qualified individuals,
a. Working together, can prove beyond doubt the accuracy of the data
b. Working independently, each reach essentially similar conclusions
c. Working independently, can prove beyond reasonable doubt the truthfulness of the data
d. Working together, can agree upon the accuracy of the data

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Discussion Notes of: Sherwin R. Magmanlac, CB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

13. Auditing standards differ from auditing procedures in that procedures relate to:
a. Measures of performance
b. Audit principles
c. Acts to be performed
d. Audit judgements

14. The operational audit is designed to:

a. Assess the efficiency and effectiveness of management’s operating procedures.
b. Assess the presentation of management’s financial statements in accordance with generally
accepted accounting principles.
c. Determine whether management has complied with applicable laws and regulations.
d. Determine whether the audit committee of the board of directors is effectively discharging its
responsibility to oversee management’s operations

15. The procedure deemed necessary in the circumstances to achieve the objective of a financial
statement audit shall be determined by the
a. Client management
b. Independent auditor
c. Internal auditor
d. Those charged with governance

16. Which one is an example of management expectations from the independent auditors?
a. An active participant in management decision making
b. An internal source of expertise of financial and other matters.
c. An expert providing a written communication as the product of the engagement
d. Individuals who perform day-to-day accounting functions on behalf of the company

17. Which of the following is not one of the reasons why auditors provide only reasonable assurance on
the financial statements?
a. The auditor commonly examines a sample, rather than the entire population
b. Accounting presentations contain complex estimates which involve uncertainty
c. Fraudulently prepared financial statements are often difficult to detect
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases

18. The purpose of an engagement letter is to:

a. Document the CPA firm’s responsibility to external users of the audited financial statements
b. Document the terms of the engagement
c. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
d. Emphasize management’s responsibility for approving the audit program

19. Which of the following matters generally included in an auditor’s engagement letter?
a. Management’s responsibility for the entity’s compliance with laws and regulations
b. The factors to be considered in setting preliminary judgements about materiality
c. Managements explicit liability for illegal acts committed by its employees
d. The auditor’s responsibility to search for significant internal control deficiencies

20. In audit communication between the predecessor and incoming auditor should be
a. Authorized in an engagement letter

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 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING & ASSURANCE PRINCIPLES

b. Acknowledged in a representation letter

c. Either written or oral
d. Written and included in the working papers

21. If an auditor believes that an understanding with the client has not been established he or she should
ordinarily
a. Perform the audit with increased professional skepticism
b. Decline to accept or perform the audit
c. Assess the control risk at the maximum level and perform a primarily substantive audit
d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud

22. Which of the following statements is incorrect?

a. Assurance services report on the quality of information
b. Assurance engagements encompass attestation engagements
c. All engagements performed by professional accountants are assurance engagements
d. Non-assurance engagements include agreed-upon procedures, compilation of financial or other
information and tax consulting.

23. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements

24. Is the risk that the practitioner expresses an inappropriate conclusion when the subject matter
information is materially misstated
a. Audit risk
b. Assurance engagement risk
c. Information risk
d. Client risk

25. In order to achieve the objectives of the accountancy profession, professional accountants have to
observe a number of prerequisites or fundamental principles, which includes the following except
a. Objectivity
b. Professional competence and due care
c. Technical standards
d. Confidentiality

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Discussion Notes of: Sherwin R. Magmanlac, CB, CPA