2018 EDITION Jekell Salosagcol Michael Tiu Roel Hermosilla PNG; IRR Te THEORY 1 Guide.dn Understanding ia " ‘hilippine Standards on Auditing®Auditing Theory A Guide in Understanding the Philippine Standards on Auditing Jekell G. Salosagcol, CPA Michael F. Tiu, CPA Roel Hermosilla, CPA, MBA, LLB CRC-ACE REVIEW SCHOOL 3” Flr. Villaroman Building P. Campa St. cor. Espans, Manila 90 735-89 (aop rey pedo Books PH a as ee Bro} Ue aeALLRIGHTS RESERVED 2018 No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means — electronic, or mechanical, including photocopying, — without the written permission of the publisher Any copy of this book not bearing the signature of one of the authors shall be considered as proceeding from an illegal source { a sansdidlearateonecn Published and Printed by: GIC ENTERPRISES & CO., INC. 2017 C. M. RectoPREFACE To the 2018 Edition We are committed to assist and provide guidance to accountancy students and CPA candidates in understanding ‘the constantly cvolving standards affecting the practice of accountancy. To achieve this objective, we have carefully organized the presentation of the subject matter to make it easy for the reade:s to grasp the essential concepts embodied in the Philippine Standards on Auditing, In recognition of the limited number of uaits made available for the study of auditing theory, every effort has been made to keep this book concise and to the point, while providing faithful tepresentation of auditing standards and principles. We increased the number of raultiple choice questions so that the readers will be able to assess their comprehension and absorption of the topics discussed. Majority of the end-of-the-chapter questions included in this edition were meticulously selected from past CPA Licensure examinations, which were modified to align them with the new standards. Extensive references are made to the AASC pronouncements, the Code of Ethics for Professional Accountants in the Philippines, the Philippine Accountancy Act of 2004 and other auditing books. These references have definitely brought an element of authority in this book not otherwise available. This book cannot teach the principles of auditing. However, we believe that it can help facilitate learning if the student accepts the responsibility to learn and expends the necessary time and effort.acknowledge the effort of ote staff at CRC-ACR helped in typing and lay outing the contents of for sharing our aspiration to complete this We gratefully Review School wh this book. Thank you newest edition. Our sincere gratitude is given to the many faculty members and reviewers for their overwhelming support, as well as, to the countless CPA teviewees who have expressed their positive reception to the preceding editions. Your valuable appreciation has certainly enhanced our inspiration and commitment to further advance the standard of accountancy education. Special thanks go to many people who have given their time, talent, inspiration, encouragement and assistance for the, completion of this humble piece of work. Without you, this work would not have been made possible. Above all, to God Almighty, we thank You for guiding us to this ‘vocation and giving us fulfillment in this professional mission. Jekell G. Salosageol Michael F Tia Roel E. Hermosilla pete FB: Digital Accounting Books PH PN Mile la eaer erCONTENTS Chapter 1 AUDIT- An Overview 1 Auditing defined Types of Audits Types of Auditors The Independent Financial Statement Audit Chapter 2 The Professional Standards 33 Generally Accepted Auditing Standards Philippine Standards on Auditing Quality Control System Chapter 3 The Auditor’s Responsibility 63 i Error Fraud Noncompliance with Laws and Regulations Chapter. 4 The Audit Process- Accepting an Engagement 13. , General Audit Approach : ‘Overview of the Audit Process Accepting an Engagement Engagement Letter Chapter 5 Audit Planning 151 Understanding the Client’s Business and Industry Materiality Audit Risk : Analytical Procedures Planning Documentation IFB: Digital Accounting Books PH “oH {eee ue Bro} ese pele kSChapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Consideration of Internal Control Nature of Internal Control Components of Internal Control Consideration of Internal Control Communication of Internal Control Weaknesses 207 Auditing in a Computerized Environment 257 “Characteristics of CIS Internal Control in a CIS environment Auditing Around the Computer Computer Assisted Audit Techniques (C\ ATy Performing Substantive Tests 299 Analytical Procedures Test of details Audit Evidence Working Papers Related Parties Using the Work of an Auditor’s Expert Considering the Work of Internal Auditors Auditing Accounting Estimates Audit Sampling 365 Sampling Risks Statistical and Non-statistical Sampling Basic Steps when Using Audit Sampling Sampling for Tests of Control Sampling for Substantive ‘Tests Completing the audit 423 Subsequent Events Litigations, Claims and Assessment Management Representation Lettet Going concer Weap-up ProceduresChapter 11 Chapter 12 Chapter 13 Audit Reports on Financial Statements 465, ‘The Unmodified Report Modification of the Report Reports on Consolidated Financial Statements Reposts on Comparatives Special Purpose Audit Engagements Assurance and Related Services 575 Review of Financial Statements Agreed-upon Procedures Engagement Compilation of Financial Statements Assurance Engagements The Code of Ethics and Republic Act 9298 G1 The Code of Ethics for Professional Accountants ‘The Philippine Accountancy Act of 2004Chapter 1 AUDIT- An Overview Dependable financial information is essential to our society. We often rely upon information provided by others in making economic decisions. The need of various users for more reliable financial information has created a demand for an independent audit of financial statements. _ The primary function of an independent audit is to lend credibility to the financial statements Prepared by an entity. The auditor’s opinion enhances the value and usefulness of the financial statements, By attaching a tepott to the financial statements, the auditor provides increased assurance to users that the financial statements are reliable. @ Auditing Defined The Philippine Standards on Auditing (PSA) defines auditing by stating the objective of a financial statement audit, that is, to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reposting framework. This definition confines the audit to examination of the financial statements. Although the great majority of audit work today deals with audit of financial statements, qperational and compliance auditing are becoming more and more important. A more comprehensive definition of auditing is given by the American Accounting Association; ‘An audit is a gstematic process of objectively obtaining and evaluating evidence regarding assertions about economic achons 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 thoughts. 1. Auditing is a systematic process Auditing proceeds by means of an ordered and structured seties of steps 2, Anaudit involves obtaining and evaluating evidence about assertions regarding economic actions and events Acwrions are representations made by an 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 cotroborates or refutes the assertions. 3. Am 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. 4, 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 ao audit, the auditor determines the degree by which the | assertions conform to the established criteria. For example, when auditing financial statements, the auditor i judges the fair presentation of the financial statemen's 4 (assertions) by compating the statements with an identiGied financial reporting framework (criteria). IFB: Digital Accounting Books All rights belongs to respective authorsAuditors communicate the audit results to various interested users The communication 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. Figure 1.1- [lustrative Definition of Auditing Independent Auditor Following a systematic process v Objectively obtains and evaluates evidence Establishes the degree of correspondence between peceeees peeeeesees . . : 1 ’ . — . . + Assertions ‘ i Established + t ‘ ‘ Criteria Y . ’ . . ‘ a Cee ened Communicates the results to interested users IFB: Digital Accounting Books PH@ Types of Audits i three major type. imaty audit objectives, there are jOr types i can Faecal compliance and operational audits. gy Financial statement audit This is an audit conducted to determine whether the financial statements of an entity are fairly presented in accordance with an identified financial reportin, framework. This type of audit will be the focus of the discussion in this text. ty Compliance audit Compliance audit involves a review of an organization’s procedures to determine whether the organization has adhered to specific procedures, rules ot regulations. The performance of compliance audit is dependent upon the existence of verifiable data and recognized criteria established by an authoritative body. A common example of this type of audit is the examination conducted by BIR examiners to determine whether entities comply with tax rules and regulations. 3 Operational audit An operational audit is a study of a specific unit of an organization for the putpose of measuring its performance. The main objective of this type of audit is to assess entity’s performance, identify areas for imptovements and make recommendations to improve performance. This type of audit is also known as performance audit or management audit, Ik should be noted that, although there are different types of audit, all audits possess the same general characteristics. They all involve: 1. Systematic examination and evaluation of evidence which are undertaken to ascertain whether assertions comply with established criteria; and if2. Communication of the results of the examination, ysually in 4 written report, to the party by whom, or on whose behalf, the auditor was appointed. Unlike compliance and financial statement audits, where the criteria are usually defined, criteria used in operational audit to evaluate the effectiveness and efficiency of operations are not clearly established. Types of auditors Auditors can be classified according to theit affiliation with the entity being examined. 3 External auditors These are independent CPAs who offer their professional services to different clients on a contractual basis. External auditors are the ones who generally perform financial statement audits. Internal auditors Internal auditors are éntity’s own employees who investigate and appraise the effectiveness and efficiency of operations and internal controls, The main function of internal auditors is to assist the members of the organization in the effective discharge of their responsibilities. Internal auditors usually perform operational audits. Government auditors Thes¢ are government employees whose main concern is to determine whether persons or entities comply with government laws and regulations. Government auditors usually conduct compliance audits. FB: Dic'tal Accounting Books PH All rights Las Bre} esate easFigure 12 - Comparison among the different types of audie, Financial audit Assertions That the Gnancial made by the statements are auditee fairly preseated Established Financial criteria reporting framework. Content of An opinion report the financial ‘statements are fairy presented in conformity\ ‘Compliance audit ‘That the organization has complied with laws, regulations or contracts Laws, regulations iad contracts. Reports on the degree of compliance ‘with applicable laws, regulations and Operational audit ‘or suggestions on haw to improve IFB: Ligital Accounting Books PH PNM ale] nt ace Bre} ese Elec@ The Independent Financial Statement Audit The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework or acceptable financial reporting standards. tg Responsibility for the financial statements The management is responsible for preparing and presenting the financial statements in accordance with the financial reporting framework The auditor’s responsibility is to form and express an opinion on these financial statements based on his audit. An audit of financial statements does not relieve management of its responsibilities. Hence, it is management’s responsibility to adopt and implement adequate accounting and internal control systems that will help ensure, among others, the Preparation of reliable financial statements. £3 Assurance provided by the auditor The auditor’s opinion on the financial statements is not a guarantee that the financial statements are dependable. An audit conducted in accordance with Philippine Standards on Auditing (PSAs) is designed to provide only reasonable assurance (not absolute assurance) that the financial statements taken as a whole are free from: material misstatements. In every audit, there are always inherent limitations that affect the auditor’s ability to detect material misstatements. These limitations result from such factors as: 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. Whenever a sample is taken, there is always a possibility thar the auditor’s conclusion, based on the sample, may be B: Digital Accounting Books PH ll Irights es to easel ts4. different from the conclusion that would have been ccached if the auditor examines the entire population, Error in application of judgment /Non- sampling risk “The work undertaken by the auditor to form an opinion is permeated by judgment. Human weaknesses can cause auditors to commit mistakes in the application of audit procedures and evaluation of evidence. Reliance on management's representation Some evidence supporting the financial statements must be obtained by obtaining oral or written representations from management. For example, it ig difficult for the auditor to determine the proper valuation of accounts receivable without management’s honest assessment. If the management lacks integrity, management may provide the auditor with false representations causing the auditor to rely on unreliable evidence. 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. Nature of evidence Evidence obtained by the auditor does not consist of “hard facts” which prove or disprove the accuracy of the financial statements. Instead, it comprises pieces of information and impressions which are gradually accumulated during the course of an audit and which, when taken together, persuade the auditor about the fairness of the financial statements Thus, audit evidence is generally persuasive rather than conclusive in nature. Eerie isc cna egetFigure 1.3- Role of Management and Independent Auditor Prepares Financial Statements Unaudited Evaluates Financial Financial Statements Statements Audited Audit Report Financial on Financial Statements ? Statements Users of Financial StatementsBy General principles governing the audit of financial atutements The procedures required 16 conduct an audit in accordance with PSAs should be determined by the auditor having vepard to the requirements of PSAs, relevant professional bodies, lepislations, repulations, and where appropriate, the terms of the engagement and the reporting reqnirements, PS.\ provides the following guidelines when auditing financial staements: 1, The anditor should comply with the “Code of Professional Ethics for Certified Public Accountints” promulpated by the Board of Accountaney (BOA). In order (o setain public confidence in the credibility of the auditors’ work, auditors must adhere to standards of ethical conduct that embody and demonstrate integrity, objectivity, and concern for the public rather than self-interest. iv ‘The auditor should conduct an audit in accordance with Philippine Standards on Auditing. ‘These standards contain the basic principles and essential procedures which the auditor should follow. The standards also include explanatory and other materials which, rather than being prescriptive (that is mandatory), is designed to assist auditors in interpreting and applying the auditing standards. 3. The auditor should plan and perform the audit with an attitude of professional skepticism recognizing that circumstances may exist which may cause the financial statements to be materially misstated. An attitude of professional skepticism means +the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or bring into questions the reliability of documents or management representations. FB: Digital Accounting Books PHIn planning and performing an audit, the auditor neither assumes that the management is honest nor assumes unquestioned honesty. Thus, representations from management are not a substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. i Need for an independent financial statement audit The need for an independent audit of financial statements stems from the following interrelated sources: 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. Managers are frequently placed in positions where they can benefit by providing outside parties with overly optimistic or even false financial information. Outside parties, however, want unbiased, realistic financial statements. Recognizing this inherent conflict of intetest, users of financial statements have become skeptical of unaudited financial statements. 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 ate reliable, a qualified person is hired by users to verify the reliability of thea 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. Consequently, an independent auditor is needed to assist thern in verifying the reliability of the financial information. 4. Financial consequences Misleading financial information could have substantial economic consequences for a decision makez. 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 ate selected postulates, assumptions or ideas that support many auditing concepts and standards. 1. Audit function operates on the assumption that all financial data are verifiable, All balances reported in the financial statements must have supporting documents or evidence to prove their validity. If no evidence exists in relation to the financial statements on which an auditor is toexpress an opinion, then there can be no audit to perform. 2. The auditor should always maintain independence with respect to the financial statements under audit Independence is essential for ensuring the credibility of the auditor’s report. The teport of the auditor will be of little or no value to the readers of the financial statements if the readers are aware that the auditor is not independent with respect to the client. FB Digital Accounting Books All rights belongs to respective authorsThere should be no long-term conflict between the auditor and the client management. Short-term conflicts may exist regarding the application of auditing proceddres and accounting principles, but in the end, both the auditor and the management must be interested in the fair Presentation of the financial statements. Effective internal control system reduces the possibility of errors and fraud affecting the financial statements, The condition of the entity’s internal control system directly affects the reliability of the financial statements. The stronger the internal control is, the more assurance it provides about the reliability of the accounting data and financial statements. Consistent application of generally accepted accounting principles (GAAP) or Philippine Financial Reporting Standards (PFRS) results in fair presentation of financial statements, We often use different criteria to verify the validity of an assertion. In the case of an independent audit of financial statements, the criteria are usually the PFRS. What was held true in the past will continue to bold true in the future in the absence of known conditions to the contrary. Experience and knowledge accumulated from auditing. a client in prior years can be used to determine the appropriate audit Procedures that need to be performed. An audit benefits the public Financial statements are ordinarily prepated and Presented in order to meet the common information needs of a wide range of users. These users who rely on the financial statements as their major source of information are the primary beneficiary of the financial statement audit. FB: Digital Accounting BooksMultiple Choice Questions Audit in General 1. Recording, classifying, and summarizing gconomic events in g logical manner for the purpose of providing financial information for decision making is commonly called: a. finance b. auditing c. accounting d. economics 2. An audit involves ascertaining the degree of correspondence * between assertions and established criteria. In the case of financial statement audit, which of the following is not a valid criterion? a. Philippine Standards on Auditing b. International Accounting Standards ¢. Authoritative financial reporting framework d. Accounting standards generally accepted in the Philippines 3. The subject matter of the financial audit is the a. Financial statements b. Economic data c. Assertions d. Operating data 4. Whenever a CPA professional is engaged to perform an audit of financial statements according to Philippine Standard on +Auditing, he is required to comply with those standards in order a. Eliminate audit risk b. Meet the minimum requirement when providing audit services -¢. To reduce the auditor's responsibility ‘d. Eliminate the professional judgment in resolving audit Issues. FB: Digital Accounting Books All rights belongs to respective authors‘The critetia for evaluating quantitative information vary. For example, in the case of an independent audit of financial statements by CPA firms, the criteria are usually the a. Philippine Standards on Audi b. Philippine Financial Reporting Standards ce. National Internal Revenue Code d. Regulations of the Securities and Exchange Commission In “auditing” financial accounting data, the primary concern is with: a. determining whether recorded information properly teflects the economic events that occurred during the accounting period. b. determining if fraud has occurred, determining if taxable income has been calculated correctly. d. analyzing the financial information to be sure that it complies with government requirements. o An audit of financial statements is conducted to determine if the a. Organization is operating efficiently and effectively b. Auditee is following specific procedures or rules set down by some higher authority ¢. Overall financial statements are stated in accordance with the applcable financial reporting framework. d. Client's internal control is functioning as intended. In determining the primary responsibility of the external auditor for an audit of a company’s financial statements, the auditor ‘owes primary allegiance to: 2. Stockholders, creditors and the investing public. b. The management of the audit client because the auditor is hired and paid by management. &. The Auditing and Assurance Standards Council, because it determines auditing standards and auditot’s responsibility. d. The audit committee of the audit client because that committee is responsible for coordinating and reviewing all audit activities within the company.10. 13. An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the case of an audit of financial statements, which of the following vould be a valid criterion? a, _ International Standards on Auditing b. Philippine Standards on Auditing, c. Generally accepted accounting principles d. Quality Control Standards Most of the independent auditor’s work in formulating an ‘opinion on financial statements consists of a. Obtaining and examining evidence b. Examining cash transactions c. Comparing recorded accountability with assets d. Studying and evaluating internal control _ Which of the following is more difficult to evaluate objectively? a. Efficiency and effectiveness of operations b. Compliance with applicable government regulations c. Presentation of financial statetnents in accordance with the applicable financial reporting criteria d. All the given etiteria are equally difficult to evaluate objectively . An audit that involves obtaining and evaluating evidence about the efficiency and effectiveness of an entity's operating activities in relation to specified objectives is a(n): a. External audit b. Compliance audit c. Operational audit d, Financial statement audit In financial statement audits, the audit process should be conducted in accordance with The audit program Philippine Standards on Auditing Philippine Accounting Standards Philippine Financial Reporting Standards moore14. Internal auditors are expected to add value to the orpanization through improved operational effectiveness, In addition, their responsibilities include all the following except: 15. 16. 17. a. b. reviewing the reliability and integrity of information. ensuring compliance with the company’s accounting policies, verifying accounting information for external users. ensuring compliance with applicable governmental regulations, ‘Which of the following types of audit uses laws and regulations as its criteria? ‘ay b, © d. Operational audit Financial statement audit Compliance audit Performance audit Which of the following best describes an operational audit? a. b. Tt attempts of verifying the fair presentation of a company’s results of operations, It concentrates on implementing financial and accounting, control in a newly organized company. Tt concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls. It requires 2 constant review of the administrative controls by internal auditors as they relate to operations of the company: A typical objective of an operational audit is to determine whether an entity’s ae b. Internal control structure is adequately operating as designed Operational information is in accordance with generally accepted. accounting principles. Specific operating units are functioning efficiently and effectively . Financial statements present fairly the results of operations IFB: Digital Accounting Books PH18. 20. 21. 22. One objective of an operational audit is to: a. determine whether the financial statements fairly presen, the entity’s operations. ; b. evaluate the feasibility of attaining the entity’s operations] objectives. make recommendations for impraving performance report on the entity's relative success in attaining profit maximization. an . An audit designed to provide reasonable assurance of detecting violations of a specific provisions of contracts or grant agreements would be called a(n): a. performance audit management audit operational audit compliance audit noo ‘The auditor communicates the results of his or her work through the medium of the a. Engagement letter. b. Audit report. c. Management letter. d. Financial statements. ‘When performing an operational audit, the internal audit team must first determine that: : a. a financial audit has been performed by an independent auditor. b. a financial audit has been performed by an internal auditor. ¢. a review was performed by either an independent or an internal auditor. d. specific criteria are developed to define effectiveness. Which of the following types of auditing is performed most commonly by CPA’s on a contractual basis? a. Internal auditing 4 b. Income tax auditing c. Government auditing 4. External auditing23. An examination of part of an orpanization’y procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit? a. Operational audit, b. Compliance audit. ¢. Financial statement audit d. Production audit. 24. Which of the following is not one of the major differences between financial and operational auditing? a, The financial audit is oriented to the past, but an operational audit concerns performance for the future. b. The financial audit report has widespread distribution, but the operational audit report has limited distribution. ¢. Financial audits deal with the information on the financial statements, but operational audits are concerned with the information in the ledgers and journals, d. - Financial audits are limited to matters that directly affect the fairness of the financial statement presentation, but operational audits cover any aspect of efficiency and effectiveness. 25. Independent external auditing can best be described as a a. professional activity that measures and communicates financial accounting data. b. subset of accounting. ¢. professional activity that attests to the fair presentation of financial staternents. d. regulatory activity that prevents the issuance of misleading financial information. 26. Which one of the following is NOT a major difference between operational and financial auditing? a. purpose of the audit b. distribution of the report ¢. testing the effectiveness of internal controls d. audits of non-financial areas IFE. Digital Accounting Books PH27 28. 29. 30. 3h. ‘The overall objective of internal auditing is to a. Attest to the efficiency with which resources are employeq b. Ascertain that controls art costs justified c. Provide assurance that financial data have been accurately recorded. fy d. Assist members of the organization in the effective discharge of their responsibilities. Internal auditors report to: a. the audit committee of the board of directors. b. management. «. external auditors. d. the government regulators. ‘Which of the following is not a similarity between external and internal auditors? a. Both must be independent of the company. b. Both must be competent. ¢. Both follow a similar methodology in performing their audits. d. Both consider risk and materiality deciding the extent of their tests and evaluating results. Internal auditing is an independent appraisal function established within an organization to examine and evaluate its activities. To that end, internal auditing provides assistance to a. External auditors b. Stockholders © Management and the board of dixectors d. Government Which of the following groups could not be involved in an operational audit? a. External auditors b. Internal auditors ¢. Government auditors d. All of the above could be involved.32. Which of the following statements is not a distinction between independent auditors and internal auditors? a, Independent auditors represent third party users external to the auditee entity, whereas internal auditors report directly to management b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity, «Internal auditors are employees of the auditee, whereas independent auditors are independent contractors. 4. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and performance auditing, Financial Statement Audit 33. Which of the following has the primary responsibility for the fairness of the representations made in the financial statements? a, Client’s management b. Audit committee ¢. Independent auditor d. Board of Accountancy 34, An audit of the financial statements of JMV Corporation is being conducted by an external auditor, The external auditor is expected to a. Express an opinion as to the fairness of. JMV’s financial statements. b. Express an opinion as to the attractiveness of JMV for investment purposes, Certify the correctness of JMV’s financial statements, d. Examine all evidence supporting JMV’s financial statements. e IFB: Digital Accounting Books PH All rights belongs to respective authors Please consider b ne © Fe Ob35. Which of the following statements about independent financia} statement audit is correct? ; a. The audit of financial statements relieves manapemeny for the financial statements. of its responsibilities “ b. An audit is designed to provide limited assurance thar the financial statements taken as a whole are free from material misstatement. ¢. Theprocedures required c with PSAs should be determined by the client who engaged the services of the auditor. d. The auditor's opinion is not an assurance as to the future viability of the entity as well as the effectiveness and efficiency with which management has condueted the affairs of the entity. to conductan audit in accordance 36. The primary purpose of an independent financial statement audit is to a. _ provide a basis for assessing management's performance. b. comply with government regulatory requirements c. assure management that the financial statements are unbiased and free from material exzor. d. provide users with an unbiased opinion about the fairness of information reported in the financial statements. 37. Financial statements normally prepared in accordance with ‘one, or a combination of: Philippine Philippine Other authoritative or Philippine Standards Accounting omprebensive financial Financial on Standards reporting framework: Reporting pee Standards : yes yes yes b no yes e = © no yes si dyes as yes no ce38. 39. 40. 41. 42. By providing high level of assurance on audit reports on financial statements, the auditor a. Guarantees the fair presentation of the financial statements b. Confirms the accuracy of the financial statements. c. Enhances the credibility of the financial statements. d. Assures the readers that fraudulentactivities of employees have been detected. ‘The reason an independent auditor gathers evidence is to a. form an opinion on the financial statements. b. detect fraud. c. evaluate management’s performance. d. evaluate the entity’s internal contol. The trait that distinguishes auditors from accountants is the: a. auditor's ability to: interpret accounting standards. b. auditor's education beyond the Bachelor’s degree. ¢. auditor's ability to interpret PFRS. d. auditor’s accumulation and interpretation of evidence related to the company’s financial statements. ‘The level of assurance provided by aa auditor on an audit teport is: a. low b. high ¢. moderate d. none Theoretically, it is possible to provide an infinite range of assurance from a very low level of assutance to an absolute level of assurance. 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. 4. The use of judgment in gathering evidence and drawing conclusions based on that evidence. IFB: Nigital Accounting Books All rights belongs to43. Which of the following is not one of the limitations of ay audit? a. The use of testing ; b. Limitations imposed by client c. Human error / ; d. Nature of evidence that the auditor obtains 44, Which of the following statements does not properly describe a limitation of an audit? Many audit conclusions are made on the basis of examining a sample of evidence —_ b. Some evidence supporting peso representation in the financial statements must be obtained by oral or written representation of management. 5 c. Fatigue can cause auditors to overlook pertinent evidence. d. Many financial statement assertions cannot be audited. as 45. Which of the following is one of the limitations of an audit? a. The possibility that management may prevent the auditor from performing the necessary audit procedures. b, The likelihood that the auditor may not be able to detect material misstatements in the finaacial statements because the auditor is engaged only after year-end. c. The fact that most audit evidence is persuasive rather than conclusive in nature. d. The risk that the auditor may not possess the training and proficiency required by the engagement. 46. The independent audit is important to readers of financial statement because it a. » Determines the future stewardship of the management of the company whose financial statements are audited. b. Measures and communicates financial and business data involved in financial statements, c. Involves the objective examination of and reporting on management prepared statements, d. Reports on the accuracy of all information in the financial statements. IFB: Digital Accounting Books All rights belongs to47. The primary season for an audit by an external audit firm is 48. 49. 50 a. b, ce d. To satisfy governmental regulatory requirements. To guarantee that there are no misstatements in the financial statements. To provide increased assurance to users as to the fairness of the financial statements. To ensure that any fraud will be discovered. Which of the following is not one of the general principles governing the audit of financial statements? b. The auditor should plan and perform the audit with an attitude of professional skepticism. The auditor should obtain sufficient appropriate evidence Primarily through inquiry and analytical procedures to be able to draw reasonable conclusions. The auditor should conduct the audit in accordance with PSA. The auditor should comply with the Philippine Code of Professional Ethics, Financial statement users often receive unteliable financial information from companies. Which of the following is not a common reason for this? Boop Complex exchange transactions. Voluminous data. Bias in the preparation of financial statements. Each of these choices is a common reason for unreliable financial information. Which one of the following is not among the conditions that give tise to a demand by extemal users for independent audits of financial statements? a. b. & d. remoteness of users complexity of making economic decisions potential conflict of interest between users and Preparers of the statements consequence for making decisions IFB: Digital Accounting BooksSi. 52. 53. ot “a. Which of the following would not represent one of the Primary problems that would lead the users to demand for independer, audits of a company’s financial statements? a. The downsizing of business and financial markets, b. Management bias in preparing financial statements c. The complexity of transactions affecting financial statements. d. The temoteness of the user to directly obtain financia) information from the company. The need for independent audits of financial statements cay be attributed to all of the following conditions except: . femoteness b. consequence c. complexity of subject matter d. validity Which of the following best describes the reason why an independent auditor reports 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 auditor's work. 4. A poorly designed internal control system may be in existence. Which of the following statements does not describe a condition that creates a demand for auditing? a. Conflict between an information preparer and a uset caf tesult in biased information. b. . Information can have substantial for a decision-maker. ©. Expertise is often req and verification d. Users can directly assess the quality of informatio FB: Digital Accounting Books PN Mire] ree ol -1(6) economic consequences juited for information preparation55. There are four conditions that give rise to the need for independent audits of financial statements. One of these conditions is consequence. In this context, consequence means that the: a. users of the statements may not fully understand the consequences of their actions. b. auditor must anticipate all possible consequences of the report issued. c. impact of using different accounting methods may not be fully understood by the users of the statements. d. financial statements are used for important decisions. 56. Which of the following statements does not properly describe an element of theoretical framework of auditing? a. _ The data to be audited can be verified b. Short-term conflicts may exist between managers who prepare the data and auditors who examine the data. ¢. Auditors act on behalf of the management d. An audit benefits the public 57. Auditing is based on the assumption that financial data are verifiable. Data are verifiable when wo ot 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 daw. d. working together, can agree upon the accuracy of the data. IFB: Digital Accounting Books. All rights belongs to respective authors58. The best statement of the responsibility of the auditor yan), respect to audited financial statement 35: 59. 60. The auditor's responsibility on fair presentation of financial statements is limited only up to the date of the audit report. The anditor’s responsibility is confined to the expresunn of opinion on the financial statements audited, The responsibility over the financial statements rests with the management and the auditor assurnes responsibility with respect to the notes of financial statements. The auditor is responsible only to his unmodified opinion but not for any other types of opinion. Which of the following is incorrect about responsibility for financial statements?. ww b. c. d. Management is responsible for fair presentation of the financial statements. Auditor is responsible for expressing an opinion on the financial staternents Audit of financial statements does not reduce management's responsibility Fair presentation of financial statements is an implicit part of the auditor's responsibility. Which of the following one of the assumptions when auditing financial statements? b. The data in the financial statements are verifiable. Compliance to PFRS results in fair presentation of financial statements. Effective internal control system contributes little to the reliability of financial information. The auditor should be independent. IFB: Digital Accounting Books