ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination AT- 01

AUDITING (Auditing Theory) J. IRENEO  E. ARAÑAS  F. TUGAS  C. ALLAUIGAN

FUNDAMENTALS OF AUDITING & ASSURANCE SERVICES

Philippine Framework for Assurance Engagements defines and describes the elements and
objectives of an assurance engagements and the various work performed by practitioners under the
AASC’s engagement standards except those under the PSRE.
AASC Engagement Standards
-PSA (Audit), PSRE (review), PSAE (assurance), PSRS (related services) and their related
practice statements including PSQC 1.
Philippine Standards on Philippine Auditing Practice Audit of historical financial
Auditing (PSAs) Statements (PAPSs) information

Philippine Standards on Philippine Review Engagement Review of historical financial

Review Engagements Practice Statements (PREPSs) information
(PSREs)

Philippine Standards on Philippine Assurance Engagement Assurance engagements

Assurance Engagements Practice Statements (PAEPSs) dealing with subject matters
(PSAEs) other than historical financial
information
Philippine Standards on Philippine Related Services Compilation
Related Services (PSRSs) Practice Statements (PRSPSs) Agreed-upon procedures
Other related services
engagement
Philippine Standards on Quality Control (PSQCs)

In addition to this Framework, AASC’s pronouncements, practitioners who perform assurance

engagements are governed by The Code of Ethics for Professional Accountants in the Philippines.

Definition and objective:

Assurance engagement is one in which a practitioner expresses a conclusion designed to enhance
the degree of confidence of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria.
Types of Assurance Engagement:
a. reasonable assurance engagement
b. limited assurance engagement
Scope of the Framework:
The scope of the framework excludes engagements covered by Philippine Standards for Related
Services, preparation of tax returns where no conclusion conveying assurance is expressed and
consulting (or advisory) engagements.
Engagement acceptance:
A practitioner accepts an assurance engagement only where the practitioner’s preliminary
knowledge of the engagement circumstances indicates that:
(a) relevant ethical requirements will be satisfied, and
(b) the elements of assurance engagements are present
(c ) the preconditions to audit exist
* A practitioner may not change that engagement to a non-assurance engagement, or from
a reasonable assurance engagement to a limited assurance engagement without reasonable
justification
Elements of an assurance engagement:
(a) A three-party relationship
Assurance engagements involve a practitioner, a responsible party and intended users.
(b) An appropriate subject matter;
(i) Identifiable, and capable of consistent evaluation or measurement against the identified
criteria; and
(ii) Such that the information about it can be subjected to evidence-gathering procedures

Page 1 of 5 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FUNDAMENTALS OF AUDITING & ASSURANCE SERVICES AT-01
(c) Suitable criteria;
Suitable CRITERIA
✓ Complete
Criteria need to be available
✓ Relevant
to the intended users.
✓ Reliable
✓ Neutral
✓ Understandable
(d) Sufficient appropriate evidence;
Assurance Engagement Risk- the risk that the practitioner expresses an inappropriate conclusion
a. Risk of material misstatements
-Inherent Risk
-Control Risk
b. Detection Risk
To reduce the engagement risk to:
A. Professional Skepticism
The practitioner plans and performs an assurance engagement with an attitude of
professional skepticism (make a critical assessment, with a questioning mind).
B. Sufficient & Appropriate Evidence
The practitioner shall obtain sufficient & appropriate evidence as the basis for expressing
conclusion.
▪ Sufficiency is the measure of the quantity of evidence.
▪ Appropriateness is the measure of the quality (relevance & reliability) of evidence.
The quality and quality of evidence may be affected by factors such as the characteristics
of the subject matter & subject matter information and by the circumstances of the
engagement.
Generalizations about audit evidence:
EVIDENCE
• is more reliable when it is obtained from independent sources outside the entity.
• generated internally is more reliable when the related controls are effective.
• obtained directly by the practitioner is more reliable than evidence obtained indirectly
or by inference.
• is more reliable when it exists in documentary form, whether paper, electronic, or
other media.
• provided by original documents is more reliable than evidence provided by photocopies
or facsimiles.
C. The practitioner shall consider materiality and Nature, Timing and Extent (NTE) of
Evidence-Gathering Procedures
The exact NTE of evidence-gathering procedures varies per engagement.
a. Reasonable assurance engagement
- Infinite variations in evidence gathering procedures are possible
b. Limited Assurance engagement
- obtained primarily through analytical procedures and inquiries
(e) A written assurance report in
The practitioner provides a written report containing a conclusion that conveys the assurance
obtained about the subject matter information
a. reasonable assurance engagement-positive form
b. limited assurance engagement-negative form
In relation to evidence and assurance reports:
Nature of Audit Review Agreed Upon Compilation
Service Procedures
Level of High assurance Moderate No assurance No assurance
Assurance (but not absolute) Assurance
Report Positive assurance Negative Factual findings Identification of
Provided on assertion(s) assurance on of procedures information
assertion(s) (Restricted) compiled
Evidence – Theoretical ARPS, inquiry As agreed upon -
gathering unlimited (by the parties to
procedures the engagement)
Skill Auditing Auditing Auditing Accounting
set/Expertise

Page 2 of 5 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FUNDAMENTALS OF AUDITING & ASSURANCE SERVICES AT-01

1. The framework for assurance engagements identifies engagement to which the following standards
apply, except,
A. Philippine Standards on Auditing (PSAs)
B. Philippine Standards on Review Engagements (PSREs)
C. Philippine Standards on Assurance Engagements (PSAEs)
D. Philippine Standards on Related Services (PSRSs)
2. Which is correct concerning the framework for assurance engagements?
A. It provides a frame of reference against which audit engagements are evaluated
B. It establishes specific guidelines and procedural requirements for the performance of assurance
engagements
C. It provides a frame of reference for accountants in public practice when performing assurance
engagements
D. It is intended for reference of public accountants only
3. Evaluate the following statements:
I. Assurance services help information users make decisions based on more credible information.
II. Assurance services can enhance the usefulness of information.
A. Both are true
B. True, false
C. Both are false
D. False, true
4. Evaluate the following statements:
I. Philippine Standards on Related Services is applicable to non-assurance services.
II. Non-assurance services lack one or more element(s) of an assurance engagement.
A. Both are true
B. True, false
C. Both are false
D. False, true
5. Evaluate the following statements:
I. Audit engagements are non-assurance services.
II. Review engagements are non-assurance services.
A. Both are true
B. True, false
C. Both are false
D. False, true
6. Which is an engagement in which a practitioner expresses a conclusion designed to enhance the
degree of confidence of the intended users other than the responsible party about the outcome of
the evaluation or measurement of a subject matter against criteria?
A. Assurance engagement
B. Audit engagement
C. Attestation engagement
D. Management consulting engagement
7. Evaluate the following statements:
I. The preparation of tax returns where no conclusion conveying assurance is expressed is non-
assurance services.
II. Consulting engagements are assurance services.
A. Both are true
B. True, false
C. Both are false
D. False, true
8. Identify which is an element of an assurance engagement:
I. Sufficient and appropriate evidence
II. Professional fees
A. Both
B. Neither
C. I only
D. II only

Page 3 of 5 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FUNDAMENTALS OF AUDITING & ASSURANCE SERVICES AT-01
9. Classify the following parties relevant to an assurance engagement:
• Management of an audit client
• Auditor
A. Both are responsible parties
B. Both are intended users
C. Responsible party, practitioner
D. Intended user, practitioner
10. Classify the following potential subject matters in an assurance engagement:
• Cash flows of an entity
• Effectiveness of an online payment system
A. Both are financial
B. Both are systems and processes
C. Financial, systems and processes
D. Systems and processes, financial
11. Classify the following statements:
• Zero customer complaints and product recall.
• Performance of an entity
A. Both are subject matters (SM)
B. Both are subject matter information (SMI)
C. SM, SMI
D. SMI, SM
12. Classify the following statements:
• Adherence to SEC regulations
• Report on an entity’s observance of the SEC regulations
A. Both are subject matters (SM)
B. Both are subject matter information (SMI)
C. SM, SMI
D. SMI, SM
13. Evaluate the following statements:
• Evidential matters are benchmarks used to evaluate or measure the subject matter including,
where relevant, benchmarks for presentation and disclosure.
• Criteria refer to the information obtained by the practitioner in arriving at the conclusions on
which the conclusion is based.
A. Both are true
B. True, false
C. Both are false
D. False, true
14. A criterion that is relevant
A. Contributes to conclusions that assist decision-making by the intended users.
B. Is sufficiently complete when relevant factors that could affect the conclusions in the context
of the engagement circumstances are not omitted. Complete criteria include, where relevant,
benchmarks for presentation and disclosure
C. Allows reasonably consistent evaluation or measurement of the subject matter including, where
relevant, presentation and disclosure, when used in similar circumstances by similarly qualified
practitioners
D. Contributes to conclusions that are clear, comprehensive, and not subject to significantly
different interpretations
15. Evaluate the possibility of obtaining the following levels of assurance:
I. Absolute II. Reasonable III. Limited
A. All are possible
B. All are impossible
C. Only I is possible
D. Only I is impossible
16. Evaluate the following reasons why a perfect level of assurance is not possible:
• The use of selective testing
• Much of the evidence available to the practitioner is conclusive rather than persuasive.
A. Both are true
B. True, false
C. Both are false
D. False, true

Page 4 of 5 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FUNDAMENTALS OF AUDITING & ASSURANCE SERVICES AT-01
17. Classify the following statements as to the level of assurance:
I. The aim is a reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as the basis for a positive form of expression of the
practitioner’s conclusion.
II. The aim is a reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement, but where that risk is greater than for a reasonable
assurance engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.
A. Limited, Absolute
B. Reasonable, Limited
C. Limited, Reasonable
D. Absolute, Limited
18. Classify the following statements as to the form of the conclusion related to the assurance given:
I. In our opinion internal control is effective, in all material respects, based on XYZ criteria.
II. Based on our work described in this report, nothing has come to our attention that causes us
to believe that internal control is not effective, in all material respects, based on XYZ criteria.
A. Negative, Positive
B. Reasonable, Limited
C. Limited, Reasonable
D. Positive, Negative
19. Which of the following procedures ordinarily performed during an audit are also performed in a
review engagement?
A. Assessment of accounting and internal control systems.
B. As if doing something (AIDS)
C. Tests of records and responses to inquiries.
D. Inquiry and analytical procedures.
20. This is the risk that the practitioner expresses an inappropriate conclusion when the subject matter
information is materially misstated.
A. Audit risk
B. Detection risk
C. Assurance engagement risk
D. Practitioner’s risk
21. Which of the following is true about non-assurance services?
A. Audit engagements are non-assurance services
B. Review engagements are non-assurance services
C. Non-assurance services lack one or more element(s) of an assurance engagement
D. All of the above are true about non-assurance services
22. In an engagement to perform agreed-upon procedures, an auditor is engaged to
A. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize
financial information.
B. Provide a moderate level of assurance that the information is free of material misstatement.
C. Carry out those procedures of an audit to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.
D. Provide a high, but not absolute level of assurance that the information is free of material
misstatement.
23. Which of the following statements is true?
A. Having accepted an assurance engagement, a practitioner may not change that engagement
to a non-assurance engagement anytime the client requests for such change.
B. Under no circumstance can a practitioner who has accepted an assurance engagement may
change that engagement to a non-assurance engagement, or from a reasonable assurance
engagement to a limited assurance engagement even with reasonable justification.
C. Having accepted an assurance engagement, a practitioner may not change that engagement
to a non-assurance engagement without reasonable justification.
D. Having accepted an assurance engagement, a practitioner may change that engagement to a
non-assurance engagement without reasonable justification and disregards evidence obtained
prior to the change.

- END -

Page 5 of 5 0915-2303213  www.resacpareview.com