Practest test 1 – Auditing Theory

PRACTICE TEST 1 – AUDITING THEORY (An Introduction to

Assurance, Auditing, and Related Services)

115 MULTIPLE CHOICE QUESTIONS

30 TRUE OR FALSE

1. Which of the following statements best describes assurance

services?
 
A. Independent professional services that are intended to enhance the
credibility of information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical
financial statements based on the results of an audit.
C. The preparation of financial statements or the collection,
classification, and summarization of other financial information.
D. Services designed for the improvement

2. Which of the following is not an assurance service?

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

D.  Services performed by professional accountants that are not

assurance engagements, include the following.
 
1) Agreed upon procedures
2) Compilation of financial or other information.
3) Preparation of tax returns, where no conclusion is expressed and tax
consulting.
4)Management consulting
5) Other advisory services.

3. Which of the following professional services would be considered

an assurance engagement?
 
A. management consulting engagement to provide IT advice to a
client.
B. An engagement to report on compliance with statutory
requirements.
C. An income tax engagement to prepare tax returns.
D. A compilation of financial statements from a client’s accounting
records.

4. Which of the following best describes the objective of an assurance

engagement?
 
A. Improve the company’s outcomes
B. Compare the company’s information and policies with those of
other entities.
C. Enhance the credibility of information in order in order to improve
the likelihood that the information will meet the needs of an intended
user
D. Assist in preparing the company’s financial statements.

C. The objective of an assurance engagement is for a professional

accountant to evaluate or measure a subject matter that is the
responsibility of another party against identified suitable criteria, and
to express a conclusion that provides the intended user with a level of
assurance about the subject matter.
 
An assurance engagement is intended to enhance the credibility of
information about a subject matter by evaluating whether the subject
matter conforms in all material respects with suitable criteria, thereby
improving the likelihood that the information will meet the needs of
an intended user.

5. Assurance services differ from consulting services in that they

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

B. Assurance services differ from consulting services in that they:

Focus on enhancing the credibility of information rather than
providing advice.
Typically involves situations in which one party wants to monitor
another.
 
Consulting services are usually two-party arrangements that focus on
providing advice on how to use the information for better outcomes.

6. How many separate parties are involved in an assurance

engagement?
 
A. 2
B. 3
C. 4
D. 5

B. An assurance engagement involves three (3) separate parties:

A practitioner,
A responsible party, and
Intended users.

7. An assurance engagement should have which of the following

elements?
  a) Subject matter  b) Criteria
 
A.   Yes  no
B.  No  yes
C.   Yes  yes
D.  No  no
 

C. An assurance engagement should have the following elements:

A three-party relationship involving:
  A professional accountant;
  A responsible party; and
  Intended users
A subject matter
Suitable criteria
Sufficient appropriate evidence
An assurance reports

8. The Philippine Framework for Assurance Engagements

 
A. Contains basic principles, essential procedures, and related
guidance for the performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance
engagement, and identifies engagements to which PSAs, PSREs, and
PSAEs apply.
C. Provides a frame of reference for CPAs in public practice when
performing audits, reviews, and compilations of historical financial
information.
D. Establishes standards and provides procedural requirements for the
performance of assurance engagements. 
 

B. The framework defines and describes elements and objectives of an

assurance engagement and identifies engagements to which
Philippine Standards on Auditing (PSAs), Philippine Standards on
Review Engagements (PSREs), and Philippine Standards on Assurance
Engagements (PSAEs) apply.
 
The Framework does not itself establish standards or provide
procedural requirements for the performance of assurance
engagements. PSAs, PSREs, and PSAEs contain basic principles,
essential procedures and related guidance, consistent with the
concepts in the Framework, for the performance of assurance
engagements.
 

9. CPAs in public practice who perform assurance engagements are

governed by the following, except
 
A. Philippine Framework for Assurance Engagements
B. Code of Ethics for Professional Accountants in the Philippines
C. Philippine Standards on Related Services
D. Philippine Standards on Quality Control
C. The Philippine Standards on Related Services (PFRSs) are to be
applied to non-assurance engagements such as compilation and
agreed-upon procedures engagements.

10. In an assurance engagement, the responsible party and the

intended users
 
A. Should be from different entities.
B. Should be from the same entity.
C. May be from the same entity or different entities
D. Are both responsible for determining the nature, timing and extent
of the procedures to be performed.

C. According to the Philippine Framework for Assurance Engagements,

the responsible party and the intended users may be from different
entities or the same entity.
 
Answer D  is incorrect because the practitioner is responsible for the
determining the nature, timing and extent of procedures to be
performed.

11. The subject matter of an assurance engagement may include

 
a) Financial information  b) Internal Controls  c) Compliance with
Regulation
A. YES  YES  YES
B. No  NO  NO
C. YES  NO  YES
D. NO  YES  NO

A. According to the Philippine Framework for Assurance Engagements,

an assurance engagement’s subject matter may include the following:
 
Financial Performance or conditions, such as historical or prospective
financial position, financial performance, and cash flows.
Non-financial performance or conditions, for example, performance of
an entity.
Physical characteristics, for example, capacity of a facility.
Systems and processes, for example, an entity’s internal control or IT
system.
Behavior, such as corporate governance, compliance with regulation,
and human resource practices.

12. For assurance engagements regarding historical financial

information, reasonable assurance engagements are called
 
A. Audits
B. Reviews
C. Compilations
D. Examinations

A. For assurance engagements regarding historical financial

information, reasonable assurance engagements are called audits,
while limited assurance engagements are called views.

13. When performing an assurance service, professional accountants

use standards or benchmarks to evaluate or measure the subject
matter of an assurance engagement. These are referred to in the
Framework as
 
A. Criteria
B. Norms
C. Conditions
D. Gauges
A. Criteria are the standards or benchmarks used to evaluate or
measure the subject matter of an assurance engagement. These are
important because they establish and inform the intended user of the
basis against which the subject matter has been evaluated or
measured in forming the conclusion.

14. The criteria against which the subject matter of the assurance
engagement is to be evaluated or measured should possess which of
the following characteristics?
 
  a) Relevant           b) Concise  c) Neutral
A.   YES  NO  YES
B.   NO  YES  NO
C.   YES  NO  NO
D.  NO  YES  YES

A. According to the Philippine Framework for Assurance Engagements,

suitable criteria should have the following characteristics:
 
Relevance
Relevant criteria contribute to conclusions that assist decision-making
by the 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 presentation
and disclosure.
 
 
Reliability
Reliability 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 are free from bias.
 
Understandability
Understandable criteria contribute to conclusions that are clear,
comprehensive, and not subject to significantly different
interpretations.

15. Relevant criteria contribute to conclusions that are

 
A. Free from bias
B. Clear and comprehensive
C. Subject to different interpretations
D. Useful for decision making

16. Criteria that are embodied in laws or regulations, or issued by

authorized or recognized bodies of experts that follow a transparent
due process are called
 
A. Suitable criteria
B. Established Criteria
C. Specifically developed criteria
D. General Criteria

B. The Framework states that criteria can either be established or

specifically developed. Established criteria are those that are
embodied in laws or regulations, or issued by authorized or
recognized bodies. Specifically developed criteria are those
designed for the purpose of the engagement.

17. In an assurance engagement, the person or persons, either as

individuals or representatives of an entity, responsible for the subject
matter is the
 
A. Intended user
B. Responsible Party
C. Professional accountant
D. Client

B. The responsible party is the one responsible for the subject matter

of an assurance engagement. For example, an entity’s management is
responsible for the preparation and presentation of financial
statements or the establishment and implementation of internal
control.

The responsible party may or may not be the party who engages the
professional accountant.

18. In an assurance engagement, the person or class of persons for

whom the professional accountant prepares the report for a specific
use or purpose is the
 
A. Intended user
B. Responsible party
C. Management
D. Client

 
A. The intended user is the person or class of persons for whom the
professional accountant prepares the report for a specific use or
purpose.

19. In an assurance engagement, the outcome of the evaluation or

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

A. The term “subject matter information” is used in the Framework for

Assurance Engagements to mean the outcome of the evaluation or
measurement of a subject matter.
 
According to the Framework, it is the subject matter information about
which the practitioner gathers sufficient appropriate evidence to
provide a reasonable basis for expressing a conclusion in an assurance
report.

20. In some assurance engagements, the evaluation or measurement

of the subject matter is performed by the responsible party, and the
subject matter information is in the form of an assertion by the
responsible party that is made available to intended users. These
engagements are called
 
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements

B
21. The following are characteristics of “direct reporting” assurance
engagements, except
 
A. The subject matter information is in the form of an assertion by the
responsible party that is made available to the intended users.
B. The subject matter information is provided to the intended users in
the assurance report.
C. 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.
D. The representation of the responsible party that has performed the
evaluation or measurement of the subject matter is not available to
the intended users.

22. What type of assurance engagement is involved when the

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

C. According to the Framework, the objective of a reasonable

assurance engagement 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.
23. What type of assurance engagement is involved when the
practitioner expresses a negative form of conclusion?
 
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement

D. According to the Framework, the objective of a limited assurance

engagement is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where
the risk is greater that for a reasonable engagement, as the basis for
a negative form of expression of the practitioner’s conclusion.

24. A practitioner’s assurance report contains the following conclusion:

 
“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 ABC criteria.”
What type of assurance engagement was performed?
 
A. Limited assurance engagement
B. Reasonable assurance engagement
C. Negative assurance engagement
D. Positive assurance engagement

25. In assertion-based assurance engagements, the evaluation or

measurement of the subject matter against criteria is performed by
the
 
A. Intended users
B. Responsible party
C. Practitioner
D. AASC

B. In assertion-based assurance engagements, the evaluation or

measurement of the subject matter against criteria is performed by
the responsible party and the subject matter information (outcome)
is in the form of an assertion by the responsible party that is made
available to the intended users.

 
26. The following statements relate to the three parties involved in an
assurance engagement. Which is incorrect?
 
A. The responsible party and the intended users should be from
different entities.
B. A practitioner should decline a proposed assurance engagement
when the subject matter requires specialized skills and knowledge
beyond those ordinarily possessed by the practitioner.
C. A responsible party is the person who is responsible for the subject
matter or the subject matter information.
D. The responsible party, not the intended users, determines the
nature of the procedures to be performed.

C. According to the Framework, the responsible party is the person (or

persons) who:
  In a direct reporting engagement, is responsible for the subject
matter; or
  In an assertion-based engagement, is responsible for the subject
matter information (the assertion), and may be responsible for the
subject matter.
27. A proposed assurance engagement can be accepted when the
practitioner’s preliminary knowledge about the engagement
circumstances indicates that relevant ethical requirements will be
satisfied and
 
I. The subject matter of the engagement is appropriate.
II. The criteria to be used are suitable and are available to the intended
users.
III. The practitioner has access to sufficient appropriate evidence to
support the conclusion.
IV. The conclusion is to be contained in a written report.
V. There is a rational purpose for the engagement.
 
A. I, II, and III only
B. I, II, IV, and V only
C. I, II, III, and IV only
D. I, II, III, IV, and V

D. A proposed assurance engagement can be accepted when the

practitioner’s preliminary knowledge of the engagement
circumstances indicates that relevant ethical requirements such as
independence and professional competence will be met and the
engagement exhibits all of the characteristics described in the
statements I to V.

28. A practitioner should accept an assurance engagement only if

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

29. Which of the following statements is true concerning evidence in

an assurance engagement?
 
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its
reliability and persuasiveness.
C. The reliability of evidence is influenced not by its nature but by its
source.
D. Obtaining more evidence may compensate for its poor quality.

A. Sufficiency is the measure of the 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 is the measure of the quality of evidence, that is,
its relevance and its reliability. The reliability of evidence is
influenced by its source and by its nature.

30. Assurance engagement risk is the risk

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

31. The following are components of assurance engagement

risk, except
 
A. Inherent risk
B. Control risk
C. Detection risk
D. Business risk

D. Assurance engagement risk has the following components:

 
The risk that the subject matter information is materially misstated.
This consist of:
Inherent risk – the susceptibility of the subject matter information to
a material misstatement, assuming that there are no related controls;
and
Control risk – the risk that a 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.

32. An unqualified conclusion is not appropriate for either reasonable

or limited assurance engagement when
 
A. Circumstances prevent the practitioner from obtaining evidence
required to reduce assurance engagement risk to the appropriate
level.
B. The responsible party or the engaging party imposes a restriction
that prevents the practitioner from obtaining evidence required to
reduce assurance engagement risk to the appropriate level.
C. Both A and B.
D. Neither A nor B.

C. According to the Framework, an unqualified conclusion is not

appropriate for either type of assurance engagement in the case of a
material limitation on the scope of the practitioner’s work, whether
imposed by the engagement circumstances or the engaging party or
the responsible party.

33. The following statements relate to the performance of an

assurance engagement other than an audit or review of historical
financial information covered by PSAs and PSREs. Which is incorrect?
 
A. Those persons who are to perform the engagement should
collectively possess the necessary professional competence.
B. The practitioner is precluded from using the work of persons from
other professional disciplines.
C. The practitioner should consider materiality and assurance
engagement risk when planning and performing an assurance
engagement.
D. The assurance report should be in writing and should contain a
clear expression of the practitioner’s conclusion about the subject
matter information.

B. The subject matter and related criteria of some assurance

engagements may include aspects requiring specialized knowledge
and skills in the accumulation and evaluation of evidence. The
standards allow a practitioner to engage persons from other
professional disciplines, referred to as experts.

34. Reducing assurance engagement risk to zero is very rarely

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

35. After accepting an assurance engagement, a practitioner is not

allowed to change the engagement to a non-assurance engagement,
or from a reasonable assurance engagement to a limited assurance
engagement, except when there is reasonable justification for the
change. Which of the following ordinarily justify a request for a change
in the engagement?
 
I. A change in circumstances that affects the intended users’
requirements.
II. A misunderstanding concerning the nature of the engagement.
 
A. I only
B. II only
C. Both I and II
D. Neither I nor II.

C
36. Which of the following standards are to be applied, as appropriate,
in the audit of historical financial information?
 
A. PSREs
B. PSAEs
C. PSRSs
D. PSAs
 

37. Which of the following standards are to be applied to compilation

engagements, engagements to apply agree-upon procedures to
information, and other related services engagements as specified by
the AASC?
 
A. PSRSs
B. PSAs
C. PSAEs
D. PSREs

A. The Philippine Standards on Related Services (PSRSs) are to be

applied to compilation engagements, engagements to apply agreed-
upon procedures to information, and other related services
engagement as specified by the AASC.

38. The Philippine Standards on Review Engagements (PSREs) are to

be applied in
 
A. The audit of historical financial information.
B. Assurance engagements dealing with subject matters other than
historical financial information.
C. The review of historical financial information.
D. The review of both historical and prospective financial information.
 

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

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

B. PSRE 2400 (Engagement to Review Financial Statements) and PSRE

2410 (Review of Interim Financial Information Performed by the
Independent Auditor of the Entity) were amended by the AASC in
February 2008. The objective of the amendments made is to clarify to
which engagements each of the standards is to be applied.
 
The effect of the amendments is summarized as follows:
PSRE 2400 applies to reviews of historical financial information by a
practitioner other than the entity’s auditor.
PSRE 2410 applies to reviews of historical financial information by the
entity’s auditor.
Reviews of other historical information fall under PSAE 3000 (Revised),
Assurance Engagements other than Audits or Reviews of Historical
Financial Information.
40. The Philippine Standards on Assurance Engagements (PSAEs) are
to be applied in
 
A. Assurance engagements dealing with subject matters other than
historical financial information.
B. Compilation engagements and agreements to apply agreed-upon
procedures to information.
C. The audit or review of historical financial information.
D. Assurance engagements dealing with historical financial
information.
 

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

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

D. PSAs, PSREs, PSAEs, and PSRSs are collectively referred to as the

AASC’s Engagement Standards. PSQCs are to be applied for all
services under these Engagement Standards.

42. These statements are issued by the AASC to provide interpretive

guidance and practical assistance to auditors in the implementation of
PSAs and to promote good practice.
 
A. PREPSs
B. PAPSs
C. PAEPSs
D. PRSPSs

•B. The AASC issues Practice Statements to provide interpretive

guidance and practical assistance to practitioners in implementing the
Engagement Standards and to promote good practice. The following
are the AASC engagement standards and the related Practice
Statements.  

  Engagement Standards Practice Statements

Philippine Standards on Philippine Auditing Practice

1
Auditing (PSAs)  Statements (PAPSs)

Philippine Standards on Philippine Review

2 Review Engagements Engagement Practice
(PSREs) Statements (PREPSs)

Philippine Standards on Philippine Assurance

3 Assurance Engagements Engagement Practice
(PAEPSs) Statements (PAEPSs)

Philippine Standards on Philippine Related Services

4
Related Services (PSRSs) Practice Statements (PRSPSs)

43. The auditor’s satisfaction as to the reliability of an assertion being

made by one party for use by another party is called
 
A. Opinion
B. Assurance
C. Examination
D. Verification

B. The term “assurance” means the practitioner’s satisfaction as to the

reliability of an assertion being made by one party for use by another
party. The level of assurance that may be provided depends on the
procedures performed and the evidence collected by the practitioner.

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

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

B. In an audit engagement, the auditor provides a high, but not

absolute  level of assurance that the financial statements are free of
material misstatement. This is expressed positively un the audit report
as reasonable assurance.

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

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

46. For the purpose expressing negative assurance in the review

report, the practitioner should obtain sufficient appropriate evidence
primarily through
 
A. Inquiry and confirmation
B. Analytical procedures and substantive tests of details of transactions
and account balances
C. Confirmation and tests of controls
D. Inquiry and analytical procedures

 
47. In reviewing a company’s financial statements, a practitioner is
required to
 
A. Send bank confirmations
B. Obtain knowledge of the client’s industry.
C. Obtain a signed engagement letter from the client.
D. Observe client’s physical inventory.

48. In a review engagement, the practitioner performs

 which of the following?

Obtaining an understanding of Tests of Tests of

 
Internal Control controls transactions

a. Yes Yes No

b
Yes No Yes
.

c. No Yes Yes

d
No No No
.

49. A practitioner’s review of an entity’s financial statements does not

provide assurance that he/she will become aware of all significant
matters that would be disclosed in an audit. However, if the
practitioner has become aware that information coming to his/her
attention may materially misstated, the practitioner should
 
A. Carry out additional or more extensive procedures as are necessary
to achieve limited assurance.
B. Withdraw immediately from the engagement.
C. Perform a complete audit and issue a modified auditor’s report.
D. Downgrade the engagement to a compilation and issue the
appropriate report.

A. According to PSRE 2400, if the practitioner has reason to believe

that the information subject to review may materially misstated,
he/she should carry out additional or more extensive procedures as
are necessary to be able to express negative assurance or to confirm
that a modified report is required.

50. The following statements relate to a review of financial statements.

Which is incorrect?
 
A. The objective of a review of financial statements is to enable a
practitioner to state whether anything has come to the practitioner’s
attention that causes the practitioner to believe that the financial
statements are not prepared in accordance with an identified financial
reporting framework.

B. A review comprises inquiry and analytical procedure which are

designed to review the reliability of an assertion that is the
responsibility of one party for use by another party.

C. A review ordinarily involves an assessment of accounting and

internal control systems.
D. The level of assurance provided in a review report is less than that
given in an audit report.

C. While a review involves the application of audit skills and

techniques and the gathering of evidence, it 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.

51. The following statements relate to a review of interim financial

information performed by the entity’s independent auditor. Which is
incorrect?
 
A. Similar to a financial statement audit, a review of interim financial
information is designed to obtained a reasonable assurance that the
interim financial information is free from material misstatement.
B. A review of interim financial information does not provide a basis
for expressing an opinion whether the financial information is
presented fairly in all material respects, in accordance with an
applicable financial reporting framework.
C. In a review of interim financial information, the auditor should have
an understanding of the entity and its environment, including its
internal control
D. A review of interim financial information may bring significant
matters affecting the interim financial information to the auditor’s
attention, but it does not provide all of the evidence that would be
required in an audit.
A. In contrast to an audit, a review of interim financial information is
not designed to obtain reasonable assurance that the interim financial
information is free from material misstatement.
 
The objective of an engagement to review an entity’s interim financial
information is to enable the auditor to express a conclusion whether,
on the basis of the review, anything has come to the auditor’s
attention that causes the auditor to believe that the interim financial
information us not prepared, in all material respects, in accordance
with an applicable financial reporting framework.

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

accounting expertise as opposed to auditing expertise to collect,
classify, and summarize financial information. What type of assurance
is provided by the accountant when he/she performs this
engagement?
 
A. Positive assurance
B. Negative assurance
C. No assurance
D. Limited assurance

C. A compilation engagement ordinarily entails reducing detailed data

to a manageable and understandable form without a requirement to
test the assertions underlying that information.
 
The procedures employed are not designed and do not enable the
accountant to express any assurance on the financial information.
 
However, the accountant’s involvement provides some benefit to users
of compiled financial information because the work has been
performed with due professional skill and care.
53. 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.

B. The procedures employed in a compilation engagement are not

designed and do not enable the accountant to express any assurance
on the financial information.

54. 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 general knowledge of the business and operations of the
entity.
D. According to PSRS 4410 (Engagement to Compile Financial
Information), “The accountant should obtain a general knowledge of
the business and operations of the entity and should be familiar with
the accounting principles and practices of the industry in which the
entity operates and with the form and content of the financial
information that is appropriate in the circumstances.”
 
The standard further provides that, “The accountant ordinarily obtains
knowledge of these matters through experience with the entity or
inquiry of the entity’s personnel.”
 
PSRS 4410, par. 13, provides that the accountant ordinarily required to:
 
Make any inquiries of management to assess the reliability and
completeness of the information provided;
Assess internal controls;
Verify any matters; or
Verify any explanations.

55. Each page of the financial information compiled by the accountant

should include the following reference, except
 
A. “Unaudited”
B. “Compiled with Audit or Review”
C. “Refer to Compilation Report”
D. “Compiled, Negative Assurance Expressed”

D. According to PSRS 4410 (Engagements to Compile Financial

Information), the financial information compiled by the accountant
should contain a reference such as:
  Unaudited;
  Compiled without Audit or Review; or
  Refer to Compilation Report
on each page of the financial information or on the front of the
complete set of financial statementAs.

56. An accountant who performs a compilation engagement

 
A. Should read the compiled information and consider whether it
appears to be appropriate in form and free from obvious material
misstatements.
B. Should use his/her auditing expertise in testing the assertions
underlying the compiled financial information.
C. Include his/her report a listing of the specific procedures performed.
D. Need not obtain an acknowledgement from management of its
responsibility for the appropriate presentation of financial information.

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

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

D. In an agreed-upon procedures engagement, the auditor simply

provides a report of the factual findings and expresses no
assurance in his/her report. Users of the report make an assessment
of the procedures and findings reported by the auditor and draw their
own conclusions from the auditor’s work.
58. 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 and 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.

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

is engaged to carry out those procedures of an audit nature to which
the auditor and the entity and any appropriate third parties have
agreed and to report on factual findings
 
The report contains no assurance and 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. Users
of the report must form their own conclusions from the auditor’s work.

59. A report may be based upon applying agreed-upon procedures to

specified elements, accounts, or items of a financial statement. The
users of the report should participate in establishing the procedures to
be performed. If the auditor cannot discuss the procedures will all the
parties who will receive the report, he/she may
 
I. Discuss the procedures to be applied with appropriate
representatives of the parties involved.
 
II. Review relevant correspondence from the parties involved.
 
III. Distribute a draft of the type of report that will be issued to the
parties involved.
 
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

D. PSRS 4400 (Engagements on Agreed-upon Procedures) states, “In

certain circumstances, for example, when the procedures have been
agreed to between the regulator, industry representatives and
representatives of the accounting profession, the auditor may not be
able to discuss the procedures will all the parties who will receive the
report. In such cases, the auditor may consider, for example,
discussing the procedures to be applied with appropriate
representatives of the parties involved, reviewing relevant
correspondence from such parties or sending them a draft of the type
of report that will be issued.”

60. An auditor may accept an engagement to perform specified

procedures on the specific subject matter of specific elements,
accounts, or items of a financial statement if
 
A. The report does not list the procedures performed.
B. The financial statements are prepared in accordance with a special
purpose framework.
C. Use of the report is restricted.
D. The auditor is also the entity’s continuing auditor.

C. PSRS 4400 states that the auditor report is restricted to those

parties that have agreed to the procedures to performed since others,
unaware of the reasons for the procedures, may misinterpret the
results.
 
Answer A  is incorrect because the report should include a listing of
the specific procedures performed.
 
Answer B  is incorrect because the financial statements need not be
prepared in accordance with a special purpose framework.
 
Answer D  is incorrect because the auditor need not be the entity’s
continuing auditor.

61. Reports on agreed-upon procedures are intended to be

distributed
 
A. To only the involved parties, who are aware of the reasons for the
procedures.
B. Only to the stockholders of the entity.
C. To any party to whom the client wishes.
D. Only to the entity’s management.

 
62. An engagement to perform agreed-upon procedures may involve
the auditor in performing certain procedures concerning
 
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.
 
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

63. The report on an agreed-upon procedures engagement should

contain
 
A. Identification of the purpose for which the agreed-upon procedures
were performed.
B. An expression of positive assurance based on the specific
procedures performed.
C. A statement that the auditor is independent of the entity.
D. A general description of the procedures performed.

A. According to PSRS 4400, the report on an agreed-upon procedures

engagement needs to describe the purpose and the agreed-upon
procedures of the engagement in sufficient detail to enable the users
of the report to understand the nature and extent of the work
performed.
 
Answer B  is incorrect because the report should include a statement
that the procedures performed do not constitute either an audit or a
review and, as such, no assurance is expressed.
 
Answer C  is incorrect because the report should contain a statement
that the auditor is not independent of the entity if such is the case.
 
Answer D  is incorrect because the report should include a listing of
the specific procedures performed.
64. Which of the following engagements does not require compliance
with independence requirements?
 
A. Compilation of financial information.
B. Review of financial statements.
C. Examination of prospective financial information.
D. Audit of financial statements.

A. Independence is not a requirement for compilation and agreed-

upon procedures engagements. However, where the accountant or
auditor is not independent, a statement to that effect would be made
in the report.

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

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

66. A practitioner associated with financial information when

 
I. The practitioner attaches a report to that financial information.
II. The practitioner contents to the use of his/her name in a
professional connection.
 
A. I only
B. II only
C. Either I or II
D. Neither I nor II

C. A practitioner is associated with financial information when the

practitioner attaches a report to that information or consent to the use
of his/her name in a professional connection. If the practitioner is not
associated in this manner, third parties can assume no responsibility of
the practitioner.

67. The purpose of an audit of financial statements is to

 
A. Relieve management or those charged with governance of the
responsibility for the preparation and presentation of the financial
statements.
B. Obtain an absolute level of assurance that the financial statements
as a whole are free from material misstatement.
C. Enhance the degree of confidence of intended users in the financial
statements.
D. Assure the future viability of the entity by expressing an opinion on
the entity’s financial statements.

C. An audit is conducted primarily to enhance the degree of

confidence of intended users in the financial statements. This purpose
is achieved by the auditor’s expression of an opinion on whether the
financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
Answer A  is incorrect because the financial statements subject to the
audit are those of the entity, prepared and presented by its
management, with oversight from those charged with governance.
 
Answer B  is incorrect because the PSAs require the auditor to
obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether caused by fraud
or error. Reasonable assurance is a high level of assurance, but not an
absolute level of assurance.
 
Answer D  is incorrect because the auditor’s opinion on the financial
statements does not assure the future viability of the entity.

68. The auditor is required to comply all PSAs relevant to the audit of
an entity’s financial statements. A PSA is relevant to the audit when
 
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
 
A. I only
B. II only
C. Either I or II
D. Both I and II

D. A PSA is relevant when it is effect and the circumstances addressed

by the PSA exist.

 
69. 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
B. II and IV only
C. I, II, and III only
D. I, II, III, and IV.

A. The overall objectives of the auditor in conducting an audit of

financial statements are:
 
To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
caused by fraud or error, to enable 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.

70. The auditor is required to obtain reasonable assurance about

whether the financial statements are free from material misstatement,
whether due to fraud or error. In all cases when reasonable assurance
cannot be obtained, the auditor’s report should contain a/an
 
A. Unmodified opinion
B. Qualified or adverse opinion
C. Qualified or disclaimer of opinion
D. Disclaimer of opinion

C. The standard provides that in all cases when reasonable assurance

cannot be obtained and a qualified opinion is insufficient in the
circumstances for purposes of reporting to the intended users of the
financial statements, the auditor should disclaim an opinion or
withdraw from the engagement, where withdrawal is legally permitted.
71. An audit in accordance with PSAs is performed on the premise that
management and, where appropriate, those charged with governance
have responsibilities that are fundamental to the conduct of the audit.
Which of the following is not one of those responsibilities?
 
A. To comply with all relevant PSAs in the preparation and
presentation of the entity’s financial statements.
B. To provide the auditor with all information, such as records and
documentation, and other matters that are relevant to the preparation
and presentation of the financial statements.
C. To provide unrestricted access to those within the entity from whom
the auditor determines it necessary to obtain audit evidence.
D. To design, implement and maintain internal control relevant to the
preparation and presentation of financial statements that are free from
material misstatement, whether caused by fraud or error.

A. Management, and where appropriate, those charged with

governance, have responsibility for the preparation and presentation
of the financial statements in accordance with the applicable financial
reporting framework.  The auditor has the responsibility to conduct the
audit of financial statements in accordance with relevant PSAs.

72. The auditor is required to maintain professional skepticism

throughout the audit. Which of the following statements concerning
professional skepticism is false?
 
A. A belief that management and those charged with governance are
honest and have integrity relieves the auditor of the need to maintain
professional skepticism.
B. Maintaining professional skepticism throughout the audit reduces
the risk of using inappropriate assumptions in determining the nature,
timing, and extent of the audit procedures and evaluating the results
thereof.
C. Professional skepticism is necessary to the critical assessment of
audit evidence.
D. Professional skepticism is an attitude that includes questioning
contradictory audit evidence obtained.

A. The auditor is required to plan and perform the audit with

professional skepticism. As defined in the standard, professional
skepticism is 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 audit evidence.
 
According to the standard, maintaining professional skepticism
reduces the risk of:
Overlooking unusual circumstances.
Over generalizing when drawing conclusions from audit observations.
Using inappropriate assumptions in determining the nature, timing,
and extent of the audit procedures and evaluating the results thereof.
 
Although the auditor cannot be expected to disregard past experience
of the honesty and integrity of the entity’s management and those
charged with governance, a belief that they are honest and have
integrity does not relieve the auditor to maintain professional
skepticism in conducting the audit.

73. Professional judgment

 
A. Should be exercised in planning and performing an audit of
financial statements but need not be documented.
B. Can be used as the justification for the decisions made by the
auditor that are not supported by the facts and circumstances of the
engagement.
C. Is necessary in the evaluation of management’s judgment in
applying the entity’s applicable financial reporting framework.
D. Is not used in making decisions about materiality and audit risk.

C. According to the standard, professional judgment is necessary to

the proper conduct of an audit. The auditor exercises professional
judgment in making decisions about:
Materiality and audit risk.
The nature, timing, and extent of audit procedures to be performed in
gathering audit evidence.
Evaluating whether sufficient appropriate audit evidence has been
obtained.
Evaluating management’s judgment in applying the entity’s applicable
financial reporting framework.
Conclusions to be drawn based on the audit evidence gathered.
 
The auditor is required to document the exercise of professional
judgment. The documentation should enable an experienced auditor,,
having no previous connection with the audit, to understand the
significant professional judgments made in reaching conclusions on
significant matters that arise during the audit.
 
Professional judgment is not to be used as the justification for
decisions that are not otherwise supported by the facts and
circumstances of the engagement or sufficient appropriate audit
evidence.

74. The primary reason for a financial statement audit by an

independent CPA is to
 
A. Provide increased assurance to users as to the fairness of the
financial statements.
B. Guarantee that there are no misstatements in the financial
statements and ensure that any fraud will be discovered.
C. Satisfactory governmental regulatory requirements.
D. Relieve management of responsibility for the financial statements.

A. The objective of a financial statement audit is to express an opinion

as to whether an entity’s financial statements present fairly, in all
material respects, its financial position, performance, and cash flows in
accordance with an applicable financial reporting framework.

 
75. Independent auditing can best be described as
 
A. A branch of accounting.
B. A professional activity that measures and communicates financial
and business data.
C. A discipline which attests to the results of accounting and other
functional operations and data.
D. A regulatory function that prevents the issuance of improper
financial information.

C. The objective of an independent audit is to attest to (express an

opinion on) accounting information.

76. Which of the following statements is incorrect concerning an

auditor’s responsibilities regarding financial statements?
 
A. An auditor’s responsibilities for audited financial statements are
confined to the expression of the auditor’s opinion.
B. The fair presentation of audited financial statements in accordance
with an applicable financial reporting framework is an implicit part of
the auditor’s responsibilities.
C. Making suggestions that area adopted about the form and content
of an entity’s financial statements impairs an auditor’s independence.
D. The auditor’s report should provide an assurance as to the future
viability of the entity.

A. The auditor’s responsibility for the financial statements is confined

to the expression of his/her opinion on them.

77. 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.

C. In a financial statement audit, the auditor expresses an opinion on

the fairness of the audited financial statements. The auditor’s opinion
helps establish the credibility of the financial statements.

78. Which of the following best describes the reason why an

independent auditor reports on financial statements?
 
A. Poorly designed internal control system may be in existence.
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 management fraud may exist and it is more likely to be detected
by independent auditors.
B. In making decisions, external financial statement users are
interested in financial statements that present as closely as possible
the true financial position, performance, and cash flows of the
company.
 
Management, knowing that its stewardship function is to be evaluated
on the basis of the financial statements, may have incentives to resort
to fraudulent financial reporting. Thus, a possible conflict of interest
may be assumed between management and users of financial
statements.
 
The auditor’s role is to lend credibility to the audited financial
statements by expressing an opinion on the fairness of presentation of
the financial position, performance, and cash flows of the company.

79. Which of the following can be significantly affected by a financial

statement audit?
 
A. Business risk
B. Information risk
C. Inherent risk
D. The risk-free interest rate

80. The primary responsibility for the adequacy of disclosure in the

financial statements rests with the
 
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Securities and Exchange Commission.
D. Auditor in charge of the field work.
B. Management is responsible for the fairness of the representations
made through financial statements. The auditor’s responsibility is
confined to the expressions of opinion on the fairness of management
representations.

81. Which of the following elements does not relate to audit quality?
 
A. Audit competence
B. Audit fees
C. Independence
D. Due diligence

B. Audit quality is an overall concept that encompasses adherence to

independence, auditor competence, due diligence, and quality control
processes.

82. The following statements relate to internal auditing? Which

is incorrect?
 
A. Internal auditing is carried out within an entity by employees of the
entity by personnel contracted for the purpose.
B. Internal auditing has become a function that evaluates and
improves an organization’s risk management, control and governance
processes to add value to the organization.
C. The internal auditor’s judgments are subordinated to those of
management.
D. Internal auditing has evolved into a highly professional activity that
extends beyond the appraisal of the efficiency and effectiveness

83. Which of the following statements is an incorrect description of

the role of internal auditors?
 
A. Internal auditors should review the means of minimizing risks and
assist management processes.
B. Internal auditors should assess risks within the business operations
and those from outside the business.
C. Internal auditors should appraise the economy and efficiency with
which resources are employed.
D. Internal auditors should have authority and responsibilities for the
activities they audit.

84. Which of the following statements is not true in respect of the

internal auditor?
 
A. The scope of audits performed by the internal auditor is primarily in
respect of financial report audits.
B. An internal auditor does not require a license to practice.
C. Internal auditors are usually employed by companies and
government units.
D. Primary responsibility of the internal auditor is to the board of
directors.

85. Which of the following statements is not true in respect of the

internal auditor?
 
The scope of audits performed by the internal auditor is primarily in
respect of financial report audits.
An internal auditor does not require a license to practice.
Internal auditors are usually employed by companies and government
units.
Primary responsibility of the internal auditor is to the board of
directors.
 
 
Which of the following groups called be involved in an operational
audit?
 
  CPA Firms  Internal Auditors  Government Auditors
A.   Yes  Yes  Yes
B.   Yes  No  Yes
C.   No  No  Yes
D.   Yes  Yes  No

86. Which is not one of the three phases in an operational audit?

 
A. Evidence evaluation and accumulation
B. Planning
C. Reporting and follow-up
D. Training and supervising employees

87. In performing an operational audit, the auditor primarily relies on

which of the following procedures?
 
A. Physical inspection
B. Analytical procedures
C. Inquiry and observation
D. Tracing and vouching
C

88. The term “efficiency” in performance auditing refers to

 
A. Using resources to maximize output for a given input, or to
minimize input for any given quantity and quality of output.
B. The achievement of intended results of operations, programs or
activities.
C. The achievement of objectives within a specified time frame.
D. The acquisition of resources at appropriate times and within a
specified time frame.

89. Before an effectiveness audit can be performed, there must be

 
A. Specific criteria developed to define effectiveness.
B. A compliance audit performed by a government auditor.
C. A review performed by either an independent or internal auditor.
D. A financial statement audit by an independent auditor.

90. Which of the following activities would generally account for a

significant proportion of an internal auditor’s time?
 
A. Checking the company is complying with all of its rules and
regulations of operation.
B. Verifying all invoices before payment is made.
C. Ensuring the company is operating within a budget.
D. Evaluating the effectiveness and efficiency of all phases of an
entity’s operations.

 
91. Which of the following is a typical objective of an operational
audit?
 
A. To determine whether an entity’s internal control system is
adequately operating as designed.
B. To determine whether an entity’s operational information is in
accordance with PFRS.
C. To determine whether an entity’s financial statements present fairly
the results of operations.
D. To determine whether an entity’s specific operating units are
functioning efficiently and effectively.

92. The primary orientation of operational auditing is towards

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

93. The purpose of an internal audit is

 
I. To evaluate the adequacy and effectiveness of company’s internal
controls.
II. To determine the extent to which assigned responsibilities are
actually carried out.
III. To collect evidence on whether the company is continuing as a
going concern.
 
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

94. What is the proper organization role of internal auditing?

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

A. Internal auditing is defined as “an independent, objective assurance

and consulting activity designed to add value and improve an
organization’s operations. In helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness or risk management, control, and
governance processes.”
 
Answer B  is incorrect because while it is true that internal audit work
reduces external audit fees, it is not a reason for having an internal
audit department.
 
Answer C is incorrect because the primary role of internal auditing is
not limited to assessing the efficiency of operations.
 
Answer D  is incorrect because internal auditors serve not only the
audit committee of the board but also the entity’s management.

95. Which of the following best describes the scope of internal

auditing as it has developed to date?
 
A. Internal auditing involves appraising the economy and efficiency
with which resources are employed.
B. Internal auditing has evolved to verifying the existence of assets and
reviewing the means of safeguarding assets.
C. Internal auditing has evolved to more of an operational orientation
from a strictly financial orientation.
D. Internal auditing involves evaluating compliance with policies, plans,
procedures, laws, and regulations.

C. Internal auditing includes the audit of:

 
  Financial operating information;
  Compliance with policies, plans, procedures, laws, regulations, and
contracts;
  The means of safeguarding assets and verifying their existence;
  The economy and efficiency with which resources are employed; and
  Operations or programs to ascertain whether results are consistent
with established objectives and goals and whether they are being
carried out as prescribed.
 
Answer A, B,  and D  are incomplete descriptions of the scope of
internal auditing.

 
96. Which of the is considered a primary reason for creating an
internal audit department?
 
A. To evaluate and improve the effectiveness of control processes.
B. To ensure the accuracy, reliability, and timeliness of financial and
operating data used in management’s decision making.
C. To relieve management of the responsibility for establishing
effective controls.
D. To safeguard resources entrusted to the organization.

A. Internal auditing is defined as “independent, objective assurance

and consulting activity designed to add value and improve an
organization’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control, and
governance processes.”
 
Answer B  is incorrect because internal auditors do not ensure the
accuracy, reliability, and timeliness of information used in decision
making. They report on the status of operations.
 
Answer C  is incorrect because management is responsible for
establishing and maintaining internal controls.
 
Answer D  is incorrect because prescribed control—not management
—safeguard the organization’s resources.
97. The internal auditing profession has advanced primarily as a result
of
 
A. Increased interest by Bachelor of Science in Accountancy (BSA)
graduates and experienced auditors.
B. Job qualification specifications that include added emphasis on
background knowledge and skills.
C. The limitation of financial statement audit scope.
D. Increased complexity and sophistication of business operations.

D. Internal auditing is an appraisal control that measures and

evaluates other controls. The increased complexity and sophistication
of business operations have required management to rely on this
appraisal control.
 
Answer A  is incorrect because increased interest by BSA graduates
and experienced auditors contributes to the advancement of the
internal audit profession, but it is not the primary reason for such
advancement.
 
Answer B  is incorrect because improved job qualification
specifications of internal auditors result from increased complexity and
sophistication of business operations.
 
Answer C  is incorrect because the limitation of external audit scope
does not contribute to the advancement of the internal audit
profession.

98. Which of the following actions would be an appropriate response

by companies to improve the public’s perception of their financial
reporting?
 
A. Increased adoption of audit committees.
B. Keeping external and internal auditing work separated to maintain
independence.
C. Requiring internal auditors to report all significant findings of fraud
and illegal activity to the company president.
D. None of the above.

A. The audit committee is composed of outside directors who are

independent of management. The primary purpose is to assure that
the directors are exercising due care and external and internal auditors
are independent of management.
 
The following are some of the audit committee’s functions:
 
Select the external auditors.
Review the external auditor’s overall audit plan.
Evaluate the results of external and internal audits.
Review the internal auditing work schedule, budget, etc.
Meet regularly with the internal auditing director.
 
The above functions should increase public confidence on the fair
presentation of the company’s financial statements.

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

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

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

control system primarily to ascertain whether the system provides
reasonable assurance that the company’s objectives and goals will be
achieved efficiently and economically. Efficient performance implies
the use of minimal resources to meet the company’s objectives and
goals. Economic performance is the accomplishment of objectives and
goals at a cost commensurate with the task.
 
Answer A  is incorrect because external auditors determine and use the
acceptable level of detection risk to determine the nature, timing, and
extent of substantive tests.
 
Answer C  is incorrect because internal auditors do not have authority
to ensure that material weakness in the internal control system are
correct.
 
Answer D  is incorrect because the scope of internal auditing includes,
but is not limited to, determining the fairness of financial statements.

 
100. The internal auditing department’s responsibility for determining
fraud is to
 
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.
C. Internal auditors assist in the prevention of fraud by examining and
evaluating the system of internal control.
 
Answer A  and B  are incorrect because management, not the internal
auditor, has the responsibility to establish and maintain an effective
internal control system
 
Answer D  is incorrect because internal auditors are not allowed to
assumed operating responsibilities.

101. In conducting an appraisal of the economy and efficiency with

which company resources are used, an internal auditor’s responsibility
is to
 
A. Verify the accuracy of asset valuation.
B. Review the reliability of operating information.
C. Verify the existence of assets.
D. Determine whether operating standards have been established.

D. The company’s management is responsible for setting operating

standards. The internal auditor’s responsibilities are to determine that:
Management has established such standards.
The standards are being met.
Deviations from established standards are being identified and
corrected.
Corrective action has been taken.
 
Answers A  and B  are incorrect because they relate to the reliability
and integrity of information.
 
Answer C  is incorrect because verifying the existence of assets relates
to the safeguarding of assets.
102. Internal auditors should review the means of physically
safeguarding assets from losses arising from
 
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.

A. Internal auditors are required to review the means employed by the

company to safeguard its assets from various types of losses such as
those resulting from fire, theft, unscrupulous or illegal activities, and
exposure to the elements.
 
Answers B  and D  are incorrect because they relate to efficiency of
operations.
 
Answer C  is incorrect because it relates to the reliability of
information, not physical safeguards.

 
103. Operational audits generally have been conducted by internal
and COA auditors, but may be performed by certified public
accountants. A primary purpose of an operational audit is to provide
 
A. A measure of management performance in meeting organizational
goals.
B. The results of internal examinations of financial and accounting
matters to a company’s top-level management.
C. Aid to the independent auditor, who is conducting the examination
of the financial statements.
D. A means of assurance that internal accounting controls are
functioning as planned.
A. Operational auditing involves a systematic review and evaluation of
an entity’s activities in relation to the efficient use of its resources and
the effectiveness in accomplishing its objectives. The objectives of
operational auditing are to assess performance, identify areas for
improvement, and develop recommendations.

104. Governmental auditing often extends beyond examinations

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

B. A governmental audit is typically designed to determine whether

the auditee has complied with applicable laws and regulations.

105. A governmental audit may extend beyond and audit leading to

the expression of an opinion on the fairness of financial statement to
include
 
  Program Results  Compliance  Economy and Efficiency
A.   Yes  Yes  Yes
B.   Yes  Yes  No 
C.   Yes  No  Yes 
D.   No  Yes  Yes

A. The types of audits conducted by the Commission on Audit (COA)

are financial audit and performance audit. Performance audits include
economy, efficiency, and program audits. Included in the scope of
financial and performance audits is determining whether the entity has
complied with applicable laws and regulations.

 
106. An objective of a performance audit is to determine whether an
entity’s
 
A. Operational information is in accordance with government auditing
standards.
B. Specific operating units are functioning economically and efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.

B. Performance audits include economy, efficiency, and program

audits. Economy and efficiency audits determine whether the entity’s
resources are utilized efficiently.
 
Program or effectiveness audits determine whether the entity has
been effective in achieving the desired results or benefits of the
program or activity.

107. Which of the following statements is a standard applicable to

financial statements audits in accordance with Government Auditing
Standards?
 
A. An auditor should determine the extent to which the entity’s
programs achieve the desired level of results.
B. An auditor should assess whether the entity has reportable
measures of economy and efficiency that are valid and reliable.
C. An auditor should report on the scope of the auditor’s testing of
internal control.
D. An auditor should briefly describe in the auditor’s report the
method of statistical sampling used in performing tests of controls
and substantive tests.

C. Government auditors are required to prepare a written report on

the entity’s internal control and assessment of control risk made as
part of a financial statement audit. The auditor’s report should include
the following:
 
The scope of the auditor’s work in obtaining an understanding of the
entity’s internal control and in his/her assessment of control risk.
 
The entity’s significant controls including those that are established to
ensure compliance with laws and regulations that have a material
impact on the financial statements.
 
The conditions, including the identification of material weaknesses
identified as a result of the auditor’s work.

108. Reporting on internal control under Government Auditing

Standards differ from reporting under generally accepted auditing
standards in that Government Auditing Standards require a
 
A. Statement of positive assurance that internal control activities
designed to detect material errors and fraud were tested.
B. Written report describing the entity’s internal control activities
specifically designed to prevent fraud, abuse, and illegal acts.
C. Statement of negative assurance that the internal control activities
not tested have an immaterial effect on the entity’s financial
statements.
D. Written report describing each reportable condition observed,
including identification of those considered material weaknesses.
D. The Government Auditing Standards require auditors to prepare a
written report on the entity’s internal control. This report should
include the conditions, including the identification of material
weaknesses, discovered as a result of the auditor’s work. However, the
report should not give any form of assurance on the design and
effectiveness of the entity’s internal control.

109. What is the responsibility of an auditor who is engaged to audit

the financial statements of a government entity?
 
A. Assess control risk with respect to each component of internal
control.
B. Assume responsibility for assuring that the entity complies with
applicable laws and regulations.
C. Obtain an understanding of the possible financial statement effects
of laws and regulations having direct and material effects on amounts
reported.
D. Design the audit to provide reasonable assurance that the
statements are free of material misstatements resulting from illegal
acts having direct or indirect effects.

C. Government auditors are required to obtain an understanding of

the possible financial statement effects of laws and regulations having
direct and material effects on amounts reported. Also, they are
required to make an assessment whether management has identified
such laws that might have such effects.
 
Answer A  is incorrect because auditors assess control risk in terms of
financial statement assertions.
 
Answer B  is incorrect because management is responsible for assuring
that the entity complies with applicable laws and regulations.
 
Answer D  is incorrect because auditors are primarily concerned with
those that have direct and material effects of financial statement
amounts.

110. The objective of governmental effectives or program auditing is

to determine if the desired results of a program are being achieved.
What is the first steps in conducting such an audit?
 
A. Identify the legislative intent of the program being audited.
B. Collect quantifiable data on the program’s success or failure.
C. Determine the time frame to be audited.
D. Evaluate the system used to measure results.

A. The audit of a government program involves obtaining information

about the costs, outputs, benefits, and effects of the program.
Auditors attempt to measure the accomplishments and relative
success of the program based on the actual intent of the legislation
that established the program.
 
Answers B, C,  and D  are incorrect because the procedures described
are subsequent steps.

111. A persuasive characteristic of a CPA’s role in a consulting services

engagement is that of being a(an)
 
A. Independent practitioner
B. Computer expert
C. Confidential reviewer
D. Objective advisor
D. While maintaining objectivity and integrity, the CPA in a consulting
services engagement serves the client’s interest by pursuing the
objectives established by the understanding with the client.

112. 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 involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also
provide consulting services to their clients.

C. The performance of consulting services is usually for the sole use

and benefit of the client.

113. Which of the following are considered consulting services?

 
a) Advisory Services   b) Transaction Services  c) Assurance Services
A. No  Yes  Yes
B. Yes  Yes  No
C. Yes  No  Yes
D. Yes  Yes  Yes

B. Assurance services are “independent professional services that are

intended to enhance the credibility of information to meet the needs
of an intended user.” Assurance services do not encompass consulting
services. Advisory services and transaction services are both consulting
services.
114. The form of communication with a client in a consulting services
engagement should be
 
A. Either written or oral.
B. Written, and a copy should be sent to management alone.
C. Oral, with appropriate documentation in working papers.
D. Written, and copies should be sent to both management and the
board of directors.

A. The form of communication with a client in a consulting service

may be written or oral depending on the:
Understanding with the client;
Need for a formal record;
Intended use of results;
Significance or sensitivity of material covered; and
Degree results are communicated during the engagement.

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

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

A. A CPA is not precluded from accepting the engagement but he/she
should perform additional research or consult with others to obtain a
sufficient level of knowledge about the subject of the engagement.
 
Answer B  is incorrect because the CPA need not decline the
engagement.
 
Answer C  is incorrect because a CPA is required to always include a
caveat in his/her report on prospective financial information that the
prospective results may not be achieved.
 
Answer D  is incorrect because audits, not consulting services, are
required to be performed in accordance with Philippine Standards on
Auditing.

TRUE OR FALSE

1. As used in the Philippine Framework for Assurance Engagements,

the term “practitioner” refers to a CPA in public practice.

TRUE

2. In a limited assurance engagement, the practitioner expresses

his/her conclusion in positive form.

FALSE

3. Common examples of assurance engagements are engagements to

apply agreed-upon procedures and consulting.

FALSE

4. When an assurance engagement is a part of a larger engagement

(for example, a business acquisition consulting engagement which
includes a requirement to provide assurance on historical financial
information), the Philippine Framework for Assurance Engagements
shall be applied only to the assurance portion of the engagement.

TRUE

5. In some cases, the ethical requirements on professional competence

can be satisfied by using the work of individuals from other disciplines
referred to in the standards as experts.

TRUE

6. In a direct reporting engagement, the responsible party is

responsible for the subject matter of the engagement.

TRUE

7. Under all situations, the responsible party is the party who engages
the practitioner (i.e., the engaging party).

FALSE

8. The responsible party can be one of those for whom the practitioner
prepares the assurance report.

TRUE

9. In an engagement to provide assurance about the effectiveness of

an entity’s internal control, the subject matter is the assertion of
management about its effectiveness.
FALSE

10. An appropriate subject matter is one that is capable of consistent

evaluation of measurement against the identified criteria.

TRUE

11. The criteria or benchmarks that are used to measure or evaluate

the subject matter of the assurance engagement need not be available
to the intended users.

FALSE

12. The quantity of evidence is affected by the risk of the subject

matter information being materially misstated and also by the quality
of such evidence (the greater the risk and the higher the quality, the
more evidence is likely to be required).

FALSE

13. Assurance engagement risk is the possibility that the practitioner

will express an inappropriate conclusion on a subject matter
information that is materially misstated.

TRUE

14. The conclusion: “in our opinion, internal control is effective in all
material respects, based on XYZ criteria.” expresses a reasonable
assurance in positive form.

TRUE
15. The practitioner’s conclusion in an assertion-based engagement
can be worded in terms of the intended users’ assertion.

FALSE

16. PSA 120 (Framework of Philippine Standards on Auditing) applies

to audits and related services such as taxation and consultancy.

FALSE

17. In a review engagement, the auditor provides a high, but not

absolute level of assurance (expressed in the form of negative
assurance) that the information subject to review is free of material
misstatement.

FALSE

18. For agreed-upon procedures and compilation engagements, no

assurance is expressed.

TRUE

19. Because most of the evidence available to the auditor is conclusive,

rather than persuasive, in nature, absolute assurance in auditing is not
attainable.

FALSE
20. A review of financial statements normally involves as assessment of
an entity’s accounting and internal control systems.

FALSE

21. A practitioner engaged to perform related services such as agreed-

upon procedures, review, and compilation need not be the auditor of
the entity’s financial statements.

TRUE

22. A practitioner is associated with financial information when he/she

attaches a report to that information or consents to the use of his/her
name in a professional connection.

TRUE

23. Independence is not a requirement for a compilation engagement.

TRUE

24. In a financial statement audit, reasonable assurance is obtained

when the auditor has gathered sufficient appropriate audit evidence to
reduce risk to an acceptably low level.

TRUE
25. In general, misstatements are considered to be material if,
individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of the
financial statements.

TRUE

26. Audit risk is the risk that the auditor will provide an unmodified
opinion on financial statements that are, in fact, materially misstated.

TRUE

27. A practitioner’s report expressing an opinion on an entity’s internal

controls should state that the study and evaluation of the internal
controls was conducted in accordance with Philippine Standards on
Auditing (PSAs).

FALSE

28. A summary of findings rather than assurance is most likely to be

included in an examination report.

FALSE

29. The risk that information is misstated is referred to as information

risk.
TRUE

30. The work of internal auditor is primarily for the benefit of the
entity’s management and its board of directors.

TRUE