UNIVERSITY OF NUEVA CACERES

COMPREHENSIVE ACCOUNTING
AUDITING THEORY

OVERVIEW OF ASSURANCE, AUDITING, and OTHER SERVICES

REFERENCES:
 PSA 120: Framework of Philippine Standards on Auditing
 PAS 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with Philippine
Standards on Auditing
 PSRE 2400: Engagement to Review Financial Statements
 PSAE 3400: The Examination of Prospective Financial Information
 PSRS 4400: Engagements on Agreed-Upon Procedures
 PSRS 4410 Compilation Engagements

Authority attaching to Philippine Standards issued by the Auditing and Assurance Standards Council (AASC)
Standards Application
1. Philippine Standards on Auditing (PSAs)  Audit of historical financial information
2. Philippine Standards on Review Engagements (PSREs)  Review of historical financial information
3. Philippine Standards on Assurance Engagements (PSAEs)  Assurance engagements dealing with subject matters
other than historical financial information.
1. Philippine Standards on Related Services (PSRSs)  Compilation engagements
 Engagements 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 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.
4. Philippine Practice Statements
 Issued to:
 Provide interpretive guidance and practical assistance to professional accountants in implementing
Philippine Standards; and
 Promote good practice.
 Professional accountants should be aware of and consider Practice Statements applicable to the engagement.
 A professional accountant who does not consider and apply guidance included in 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.
5. Philippine Framework for Assurance Engagements
 The Framework does not itself establish standards or provide procedural requirements for the performance of
assurance engagements.
6. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance engagement are
governed by:
 The Philippine Code of Ethics for Professional Accountants; and
 Philippine Standards on Quality Control (PSQCs)

ASSURANCE ENGAGEMENTS

1. ASSURANCE SERVICES are independent professional services that improve the quality of information for decision
makers. Assurance services are covered by Philippine Framework for Assurance Engagement (PFAE).
 Independence is required whenever a professional accountant performs assurance services.

2. ASSURANCE ENGAGEMENT means an engagement in which 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.
 Assurance refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use by
another party. To provide such assurance the auditor assesses the evidence collected as a result of procedures
conducted and expresses conclusion.
 Objective of Assurance Engagements - In general, assurance engagements performed by professional accountants
are intended to enhance the credibility of information about the outcome of the evaluation or measurement of a
subject matter against criteria, thereby improving the likelihood that the information will meet the needs of an
intended user. Assurance engagements enhance the degree of confidence of the intended user because the quality
of information for decision making is improved.
3. SUBJECT MATTER INFORMATION refers to the outcome of the evaluation or measurement of a subject matter. The
outcome of the evaluation of a subject matter is the information results from applying the criteria to the subject
matter. It is the subject matter information about which the practitioner gathers sufficient appropriate evidence to
provide reasonable basis before expressing a conclusion in an assurance report. For example:

 The recognition, measurement, presentation and disclosure represented in the financial statement (outcome)
results from applying financial reporting framework for recognition, measurement, presentation and
disclosure, such as PFRS (criteria) to an entity’s financial position, financial performance and cash flows
(subject matter).
 Assertion-based 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.
 Direct Reporting 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.

TWO TYPES OF ASSURANCE ENGAGEMENT

1. REASONABLE ASSURANCE ENGAGEMENT – engagements that provide high, but not absolute, level of assurance
 Objective - 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’s conclusion. Example, audit of
historical statements.

2. LIMITED ASSURANCE ENGAGEMENT –

 Objective - reduction in assurance engagement risk to a level that is acceptable in the circumstances of the
engagement, as a basis for negative form of expression of the practitioner’s conclusion. Thus, the risk is greater in
limited assurance than in a reasonable assurance engagement. Example, review of financial statements.

Limitations of Assurance Engagements:

1. Assurance Engagement risk - risk that the practitioner expresses an inappropriate conclusion when the subject matter
information if materially misstated.
 Components of assurance engagement risk:
 Risk of material misstatement – the risk that the subject matter is materially misstated.
 Inherent risk – the susceptibility of the subject matter information to a material misstatement, assuming that
there are no related controls.
 Control risk – the risk that a material misstatement that could occur will not be prevented, or detected and
corrected, on a timely basis by related internal controls.
 Detection risk – the risk that the practitioner will not detect a material misstatement that exists.

2. Reasonable Assurance is a concept relating to accumulating evidence necessary for the practitioner to conclude in relation
to the subject matter information taken as a whole.

3. Reasonable assurance is less than absolute. Reducing assurance engagement risk to zero is very rarely attainable or cost
beneficial as a result of the factors such as the following:
 The use of selective testing
 The inherent limitations of internal control
 The fact that much evidence available to the practitioner is persuasive rather than conclusive.
 The use of judgement in gathering & evaluating evidence and forming conclusions based on that evidence.
 In some cases, the characteristics of the subject matter when evaluated or measured against the identified criteria.

Engagement Acceptance

1. A practitioner accepts an assurance engagement only where the practitioner’s preliminary knowledge of engagement
indicates that:
 Relevant ethical requirements, such as independence and professional competence will be satisfied; and
 The engagement exhibits all of the following characteristics:
 The subject matter is appropriate;
 The criteria to be used are suitable and are available to the intended users;
 The practitioner has access to sufficient appropriate evidence to support the practitioner’s conclusion;
 The practitioner’s conclusion, in the form appropriate or either reasonable assurance engagement or a limited
assurance engagement, is to be contained in a written report; and
 The practitioner is satisfied that there is rational purpose for the engagement.
2. When a potential engagement cannot be accepted as an assurance engagement because it does not exhibit all the
aforementioned characteristics, the engaging party may be able to identify a different engagement that will meet the
needs of intended users. For example:
 If the original criteria is not suitable, an assurance engagement may still be performed if:
 The engaging party can identify an aspect of original subject matter for which those criteria are suitable, and
the practitioner could performed an assurance engagement with respect to the aspect as a subject matter in its
own right. In such cases, the assurance report makes it clear that it does not relate to the original subject
matter in its entirely; or
 Alternative criteria suitable for the original subject matter can be selected or developed.
 The engaging party may request an engagement that is not assurance engagement, such as consulting or agreed-
upon procedures engagement.
3. Having accepted an assurance engagement, a practitioner may not change that engagement to non-assurance
engagement, or from a reasonable assurance engagement to a limited assurance engagement without reasonable
justification.
4. A change in circumstances that affects the intended user’s requirements, or misunderstanding concerning the nature
of the engagement, ordinarily will justify a request for a change in the engagement. If such a change is made, the
practitioner does not disregard evidence that was obtained prior to the change.

ELEMENTS OF ASSURANCE ENGAGEMENT

1. Three party relationship involving:

 A practitioner (a professional accountant);
 A responsible party (the person or persons, either as individuals or representative of an entity, responsible for the
subject matter)
 An intended user (is the person or class of persons for whom the professional accountant prepares the report for a
specific use or purpose).

2. Appropriate subject matter;

 Subject matter - information to be evaluated or measured against the criteria. Subject matter information means
the outcome of the evaluation or measurement of a subject matter.
 Requirements for subject matter to be considered appropriate:
 Identifiable
 Capable of consistent evaluation and measurement against suitable criteria
 In the form that can be subjected to procedures for gathering evidence to support that evaluation or
measurement.
 Forms of subject matter of an assurance engagement:
 Financial performance or conditions (for example, historical or prospective financial position, financial
performance and cash flows) for which the subject matter information may be the recognition, measurement,
presentation and disclosure represented in the financial statements.
 Non-financial performance or conditions (for example, performance indicators of an entity) for which the
subject matter information may be key indicators of efficiency and effectiveness.
 Physical characteristics (for example, capacity of a facility) for which the subject matter information may be a
specifications document.
 Systems and processes (for example, entity’s internal control or IT system) for which the subject matter
information may be an assertion about effectiveness.
 Behavior (for example, corporate governance, compliance with regulation, human resource practices) for which
the subject matter information may be a statement of compliance or a statement of effectiveness.

3. Suitable criteria
 Criteria are the standards or benchmark used to evaluate or measure the subject matter of an assurance
engagement.
 Characteristics of suitable criteria
 Relevance - relevant criteria contribute to conclusions that assist decision-making by intended users.
 Completeness - criteria are sufficiently complete when relevant factors that could affect the conclusions in the
context of the engagement are not omitted. Complete criteria include, where relevant, benchmarks for
presentations and disclosure.
 Reliability - reliable 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.
 Neutrality - Neutral criteria contribute to conclusions that free from bias.
 Understandability - Understandable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
 Two types of criteria:
 Established criteria are those embodied in laws and regulations, or issued by authorized or recognized bodies of
experts that follow a transparent due process.
  Specifically developed criteria are those designed for the purpose of the engagement. Whether the criteria is
established or specifically developed affects the work that the practitioner carries out to assess their suitability for a
particular engagement.

 These criteria are important as they establish and inform the intended user of the basis of which the subject
matter has been evaluated or measured in forming the conclusion.
 Criteria need to be available to the intended users to allow them to understand how subject matter has been
evaluated or measured.

4. Sufficient appropriate evidence - The CPA 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.
 Professional skepticism – an attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of evidence.
 Evidence – refers to the information obtained by the practitioner in arriving at the conclusions on which the
conclusion is based.
 Sufficiency - measure of quantity of evidence. The quantity of evidence needed is affected by the quality of such
evidence (the higher the quality, the less may be required). However, merely obtaining more evidence may not
compensate for its poor quality.
 Appropriateness - measure of quality of evidence, that is, its relevance and reliability. The reliability of evidence is
influenced by its source

5. Written Assurance Report - the professional accountant expresses a conclusion that provides a level of assurance as
to whether the subject matter conforms in all material respects with the identified suitable criteria.

Audits, Attestation and Assurance

1. Attestation services – an engagement in which a practitioner is engaged to issued, or does issue, a written
communication that expresses a conclusion about reliability of a written assertion that is the responsibility of another
party. An expression of opinion by the auditor to third parties concerning the correctness of assertions contained in
the financial statements or other reports which objective criteria can be identified or measured.
2. Auditing 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 results to intended users.
3. Assurance engagement encompass attest engagement. Both assurance and attest engagements encompass audits.
The difference in the scope of service being provided.

Relationships among Auditing, Attestation, and Assurance Services

1. Similarity: These services are often used interchangeably because they encompass the same decision-process
2. Main difference/distinction: Scope of services
 “Assurance services” is broader in scope and in concept than either auditing or attestation. It encompasses both
audit and attestation services.
 “Attestation services” is broader than audit because attest function is beyond historical FS. Attestation services cover
even non-GAAP FS
 “Auditing”, particularly FS audit, is a type of assurance and attestation service that involves examination of historical
FS prepared in accordance with GAAP.

Assurance Engagements

1. Audit of Financial Statements

 OBJECTIVE:
 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
 To report on the financial statements, and communicate as required by the PSAs, in accordance with the
auditor’s findings.
 The auditor SHALL:
 Comply with all PSAs relevant to the audit.
 Comply with relevant ethical requirements, including those pertaining to independence relating to financial
statement audit engagements.
 Plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause
the financial statements to be materially misstated.
 Exercise professional judgment in planning and performing an audit of financial statements.
 Obtain sufficient appropriate audit evidence to reduce risk to an acceptably low level.
2. Review of Financial Statements
 OBJECTIVE
 enable practitioner 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 practitioner’s attention that causes the practitioner to
believe that the financial statements are not prepared, in all material respects, in accordance with an identified
financial reporting framework (negative assurance).
 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 of another party.
 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.
 The level of assurance provided in a review report is less than that given in an audit report.

Non-Assurance Engagements
- Non-assurance engagements are those that do not result in the practitioner’s expression of a conclusion that provides a
level of assurance, whether negative assurance or other form of assurance. The practitioner does not convey to the
intended users any assurance as to the reliability of an assertion.

1. Agreed-Upon Procedures Regarding Financial Information

 In agreement to perform agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit in
nature to which the auditor and the entity and any appropriate third parties have agreed to report on FACTUAL
FINDINGS.
 The recipients of the report must form their own conclusion from the report of the auditor.
 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.
2. Compilation of Financial or Other Information Engagements
 In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing
expertise to collect, classify, and summarize financial information.
 It ordinarily entails reducing detailed data to manageable and understandable form without a requirement to test
the assertions underlying that information.
 The procedures performed are not designed and do not enable the accountant to express any assurance on the
financial information.
 Users of a compiled financial information derive some benefit as a result of the accountant’s involvement because
the service has been performed with due professional skill and care.
3. Management Advisory Services
 Refers to the function of providing professional advisory (consulting) services, the primary purpose of which is to
improve client’s use of its capability and resources to achieve the objective of the organization.
4. Tax Compliance
 Includes preparation of tax returns for individuals, corporations, estates and trusts, and other entities.
5. Tax Planning
 Includes the determination of the tax consequences of planned or potential transactions, followed by making
suggestions on the most desirable course of action to legally minimize the tax liability while achieving the client’s
objective.

SUMMARY

Nature of Service Audit Review Agreed-upon Compilation

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

FINANCIAL REPORTING FRAMEWORK (IDENTIFIED FINANCIAL REPORTING FRAMEWORK)

- The financial statements need to be prepared in accordance with one, or a combination of:
1. Accounting standards generally accepted in he Philippines;
2. International Accounting Standards; and
3. Another authoritative and comprehensive financial reporting framework, which has been designed for use in financial
reporting and is identified in the financial statements.

DIFFERENT TYPES OF AUDIT

1. FINANCIAL STATEMENTS AUDIT
AUDITING is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between those assertions and established criteria and
communicating the results to the interested users.

Systematic process Audits are organized and structured activities

Objectively Free from bias
Obtaining & Evaluating Evidence Allows the auditor to determine the support for the representations
provided by the client’s management.
Assertions about Economic Actions & Describes the subject matter of the audit
Events
Degree of Correspondence & Established The closeness of assertion to the criteria promulgated by the AASC
Criteria
Communicating Results to Interested Written report (AUDIT REPORT) about whether the FS is fairly presented
Users in all material respects in accordance with identified financial reporting
framework for all interested users.

 Objectives and General Principles Governing an Audit of FS (PSA 200)

 Objective - is to enable the auditor to express an opinion whether the financial statement are prepared, in all
material respects, in accordance with an identified financial reporting framework.
 The audit opinion
 Enhances the credibility of the FS
 Is not an assurance as to the future viability of the entity and the efficiency or effectiveness with which
management has conducted the affairs of the entity.
 The auditor should comply with the Code of Ethics for CPAs. ETHICAL PRINCIPLES governing the auditor’s
professional responsibilities are:
a. Independence, d. Professional competence and due care,
b. Integrity, e. Confidentiality,
c. Objectivity, f. Professional behavior,
 The auditor should
 Conduct the audit in accordance with PSAs.
 Plan and perform the audit with an attitude of PROFESSIONAL SKEPTICISM
 Scope of an Audit refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of the audit.
 Responsibility for the Financial Statements
 AUDITOR – responsible for forming and expressing an opinion on the financial statements
 MANAGEMENT – responsible for the preparation and fair presentation of the financial statements.

2. GOVERNMENT AUDITING
- Analytical and systematic examination and verification of financial transactions, operations, accounts, and reports of any
government agency for the purpose of determining their accuracy, integrity, and authenticity, and satisfying the
requirements of law, rules, and regulations.

 Commission on Audit (COA)

 The constitution, PD 1445 (The Government Auditing Code of the Philippines), and other laws clearly prescribe
the broad auditorial function of COA.
 The COA has the power, authority and duty to examine, audit and settle all the accounts pertaining to the
revenues and receipts, expenditures of funds and uses of property, owned or held in trust by, or pertaining to
the government.
 It has the exclusive authority to define the scope of its audit and establish the required examination techniques
and methods.
 The COA also promulgates accounting and auditing rules and regulations which include the prevention and
disallowance of irregular unnecessary, extravagant, or unconscionable expenditures, or uses of government
funds and properties.
 The COA conducts a comprehensive audit that includes financial and performance audits.

 Types of Government Audit

 Financial Audit – includes financial statement audit and financial related audits.
 Performance Audits include economy, efficiency, and program audits
 Economy and efficiency audits determine
- Whether the entity acquires, protects, and uses its resources (personnel, property and spaces) at
minimum operating costs and systematic manner.
- The causes of inefficiencies and uneconomical practices.
- Whether the entity has complied with laws and regulations concerning matters of economy and
efficiency.
  Program or effectiveness audits determine
- The extent to which the desired results or benefits of the programs or activities established by the
legislative or other authorizing body is achieved.
- Whether the entity has complied with laws and regulations applicable to the program.

3. INTERNAL AUDITING
- An independent appraisal function established within an organization to examine and evaluate its activities as a service
to the organization. The objective of internal auditing is to assist members of the organization in the effective discharge of

Auditing Theory | 11
their obligations. To this end, internal auditing furnishes them with analyses, appraisals, recommendations, counsel, and
information concerning the activities reviewed.

4. OPERATIONAL AUDITING
- A systematic review of an organization’s activities in relation to specified objectives for the purposes of assessing the
performance, identifying opportunities for improvement, and developing recommendations for improvement or future
actions.

Essentially, operational audits are audits of efficiency, economy, and effectiveness.

Internal auditors consider operational auditing integral to internal auditing; external auditors consider it as a type of
management consulting service offered by public accounting firm.

 The objectives of operational audits are the following:

 Appraisal of controls
 Compliance
 Protection or safeguarding of assets
 Verification
 Appraisal of performance
 Recommendation for operating improvements

5. COMPLIANCE AUDITING
- The objective is to determine whether a person or organization has adheres to laws and regulations. (e.g. Examinations
of Tax Return by BIR Agents, Audits by the COA and SEC examiners, and Audits of Banks by BSP examiners).

6. ENVIRONMENTAL AUDIT
- Covers environmental issues, which may have an impact on the financial statements.

7. FORENSIC AUDIT
- This refers to the examination of evidence regarding an assertion to determine its correspondence to established criteria
carried out in a manner suitable to the court. An example would be a Forensic audit of sales records to determine the
quantum of rent owing under lease agreement, which is the subject of litigation. Forensic auditing is the specialist area of
financial auditing that focuses on unearthing the truth and/or providing evidence in legal/financial disputes and/or
irregularities (including fraud), as well as providing preventative advice on the subject. Forensic auditing is an area of
expertise rather than a profession.

TYPES OF AUDITORS

1. EXTERNAL (independent) AUDITOR – public accountants, either individual or firms, who perform audit, tax, consulting
and other types of services for external clients.

2. INTERNAL AUDITOR – perform services for a single organization for which they are employed on full-time basis,
typically reporting to the board of directors who are the primary users of their work. The Institute of Internal Auditors may
certify internal auditors as CERTIFIED INTERNAL AUDITOR.

3. GOVERNMENT AUDITORS – are full-time employees of the government tasked to determine compliance with laws,
statutes, policies and procedures. Examples are BIR and COA.

4. FORENSIC AUDITORS – financial auditing specialists who focus on unearthing the truth and/or providing evidence in
legal/financial disputes and/or irregularities (including fraud), as well as providing preventative advice on the subject.

-END-
 OVERVIEW OF ASSURANCE, AUDITING, and OTHER SERVICES

1. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service c. Scope of services
b. Training required to perform the service d. CPA’s approach to the service

2. The primary goal of the CPA in performing the attest function is to

a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures

3. An attestation engagement
a. Has as its primary source of standards the assurance standards
b. Includes a report on subject matter, or on an assertion about subject matter
c. Includes search and verification procedures for all major accounts
d. Is ordinarily an examination, review or compilation engagement

4. 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

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

Subject matter Criteria Subject matter Criteria
a. Yes No c. Yes Yes
b. No Yes d. No No

6. The primary reason for a financial statement 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

7. An audit of the financial statements is being conducted by an external auditor. The external auditor is expected to:
a. Express an opinion as to the fairness of the financial statements
b. Express an opinion as to the fairness for investment purposes
c. Certify the correctness of the financial statements
d. Examine all evidence supporting the financial statements

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

9. The overall objectives of the auditor in 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 c. I, II and III only
b. II and IV only d. I, II, III and IV

10. 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
d. A poorly designed internal control system may be in existence

11. 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
c. Overall financial statements are stated in accordance with the applicable financial reporting framework
d. Client’s internal control is functioning as intended

12. The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations,
and changes in financial position is applied within the framework of
a. Generally accepted accounting principles c. Internal control
b. Generally accepted auditing standards d. Information systems control

13. The criteria 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. PFRS or PFRS for SMEs c. National Internal Revenue Code
b. Philippine Standards on Auditing (PSA) d. Regulations of the Securities and Exchange Commission

14. Broadly defined, the subject matter of any audit consists of

a. Financial statements c. Financial Statement Assertions
b. Economic data d. Operating data

15. Which of the following best describes what is meant by generally accepted auditing standards?
a. Acts to be performed by the auditors
b. Measures of the quality of the auditors' performance
c. Procedures to be used to gather evidence to support financial statements
d. Audit objectives generally determined on audit engagements
16. The procedures deemed necessary in the circumstances to achieve the objective of the audit shall be determined by
the
a. Client management c. Internal auditor
b. Independent auditor d. Those charged with governance

17. Which of the following professionals has primary responsibility for the performance of an audit?
a. The managing partner of the firm c. The manager assigned to the engagement
b. The senior assigned to the engagement d. The partner in charge of the engagement

18. Which of the following has the primary responsibility for the fairness of the representations made in the financial
statements?
a. Client’s management c. Independent auditor
b. Audit committee d. Board of Accountancy

19. 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

20. 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

21. 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.

22. Inquiries and analytical procedures ordinarily form the basis for which type of engagement?
a. Agreed-upon procedures c. Examination
b. Audit d. Review

23. 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

24. Which of the following describes how the objective of a review of financial statements differs from the objective of a
compilation engagement?
a. The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a
compilation tests for reasonableness
b. The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly
presented, but a compilation provides no such assurance
c. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance
d. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly
presented, but a compilation provides limited assurance
25. In an engagement to perform agreed-upon procedures, an auditor is engaged to
a. Carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties
have agreed to report on factual findings
b. Use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information
c. Provide a moderate level of assurance that the information is free of material misstatement
d. Provide a high, but not absolute, level of assurance that the information is free of material misstatement

26. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements
provided that
a. Use of the report is restricted to the specified parties
b. The prospective financial statements are also examined and audited
c. Responsibility for the adequacy of the procedures performed is taken by the accountant
d. Negative assurance is expressed on the prospective financial statements taken as a whole

27. Mr. Accounting, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data
supplied by X Co. regarding X's written assertion about its compliance with contractual requirements to pay royalties. Mr.
Accounting’s report on these agreed-upon procedures should contain a (an)
a. Disclaimer of opinion about the fair presentation of X's financial statements
b. List of the procedures performed (or reference thereto) and Mr. Accounting’s findings
c. Opinion about the effectiveness of X’s internal control activities concerning royalty payments
d. Acknowledgment that the sufficiency of the procedures is solely Mr. Accounting’s responsibility

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 c. I and III only
b. II and III only d. I, II and III

29. What assurance is provided by the auditor in an agreed-upon procedures engagement?

a. Reasonable c. Moderate
b. Absolute d. No assurance

30. A summary of findings rather than assurance is most likely to be included in a(n)
a. Agreed-upon procedures report c. Examination report
b. Compilation report d. Review report

31. When compiling the financial statements of a client, an accountant should

a. Review agreements with financial institutions for restrictions on cash balances
b. Understand the accounting principles and practices of the entity's industry
c. Inquire of key personnel concerning related parties and subsequent events
d. Perform ratio analyses of the financial data of comparable prior periods

32. 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

33. Which of the following statements concerning compilation engagement is incorrect?

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

34. Which of the following procedures is ordinarily performed by an accountant in a compilation engagement?
a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting
principles
b. Obtaining written representations from management indicating that the compiled financial statements will not be used
to obtain credit
c. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors
d. Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial
statement components
35. 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, impair 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 involves external reporting
d. Most CPAs, including those who provide audit and tax services, also provide consulting services to their clients

36. An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as
a. Due professional care c. Reasonable assurance
b. Professional skepticism d. Supervision

37. Professional skepticism requires that an auditor assume that management is

a. Honest, in the absence of fraud risk factors c. Neither honest nor dishonest
b. Dishonest until completion of audit tests d. Offering a reasonable assurance of honesty

38. 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 financial statements because
the auditor is engaged only after the client’s 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

39. Which of the following is not one of the limitations of an audit

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

40. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter c. Audit report
b. Management letter d. Financial statements

41. Which of the following types of services is generally provided only by CPA firms?
a. Tax audits c. Compliance audits
b. Financial statement audits d. Operational audits

42. Operational auditing is primarily oriented toward

a. Future operational 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

43. A typical objective of an operational audit is for the auditor to

a. Determine whether the financial statements fairly present the entity's operations
b. Evaluate the feasibility of attaining the entity's operational objectives
c. Make recommendations for improving performance
d. Report on the entity's relative success in attaining profit maximization

44. 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 c. Compliance
b. Evaluation d. Internal control