ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 46  October 2023 CPA Licensure Examination AT- 03

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

INTRODUCTION TO AUDITING
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.

AUDIT is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these
assertions and established criteria and communicating the results thereof. (AAA)

Auditing is a structured process that:

(a) involves the application of analytical skills, professional judgment and professional skepticism;
(b) is usually performed by a team of professionals, directed with managerial skills;
(c) uses appropriate forms of technology and adheres to a methodology;
(d) complies with all relevant technical standards, such as International Standards on Auditing
(ISAs), International Standards on Quality Management (ISQMs), International Financial Reporting
Standards (IFRS), International Public Sector Accounting Standards (IPSAS), and any applicable
international, national or local equivalents; and
(e) complies with required standards of professional ethics. (IFAC)

Types of Audit:
1. Independent Financial Statements Audit
2. Internal Audit
a. Operational Audit
b. Management Audit
c. Financial Audit
3. Government
a. Compliance
b. Financial Audit
c. Performance Audit
-Economy and efficiency
-Effectiveness Audit

Objective of Audit of Financial Statements (FS)

FS Audit enables the auditor to express an opinion whether the financial statements are prepared, in
all material respects, in accordance with an identified financial reporting framework.

General Principles
1. Audit shall be conducted in accordance with Philippine Standards on Auditing.
2. The auditor shall comply with Code of Professional Ethics for Certified Public Accountants.
3. The auditor should plan and perform the audit with an attitude of professional skepticism.
4. Audit enhances credibility of FS by providing a high, but not absolute, level of
assurance.
ABSOLUTE Assurance NOT ATTAINABLE due to the following factors:
▪ Use of judgment (obtaining and evaluating evidence)
▪ Use of selective testing
▪ Inherent limitations of internal control
▪ Evidence available to the practitioner is persuasive rather than conclusive
5. Audit says nothing about the viability of an entity or the stewardship function of the
management.
6. The responsibility for preparing and presenting the financial statements is that of the
management of the entity.
7. Audit does not relieve the management of its responsibilities.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
INTRODUCTION TO AUDITING AT-03
1. Which of the following statements refers to the definition of auditing?
A. A service activity which function is to provide quantitative information primarily financial in
nature about economic entities that is intended to be useful in making economic decisions.
B. The art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.
C. The process of identifying, measuring and communicating economic information to permit
informed judgment and decisions by users of the information.
D. A systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these
assertions and established criteria and communicating the results thereof.
2. Evaluate the following statements:
I. Audit is a branch of accounting.
II. Audit typically provides guarantee that financial data are fairly presented.
A. All statements are true
B. All statements are false
C. Only I and II are true
D. Only III and IV are true

3. Classify which relates more to accounting than auditing:

I. Recording of financial transactions, culminating in the preparation of the financial statements.
II. Evaluation of evidence supporting an assertion.
A. Both
B. Neither
C. I only
D. II only
4. Classify the following statements related to the underlying theories behind the necessity for audit
services:
I. Managers generally have more information about the financial position and operations of the
entity compared to other stakeholders.
II. In theory, the will and wishes of the shareholders should be operationalized by management
but problems exist with respect to goal congruence.
A. Both are related to the agency theory
B. Both are related to the information asymmetry theory
C. Agency theory, information asymmetry
D. Information asymmetry, agency theory
5. Which best describes the representations by management, explicit or otherwise, that are embodied
in the financial statements, as used by the auditor to consider the different types of potential
misstatements that may occur.
A. Financial statement assertions
B. Notes to the financial statements
C. Audit evidence
D. Disclosure requirements
6. Which is a type of audit is performed to determine whether an entity’s financial statements are
fairly presented in accordance with an identified financial reporting framework.
A. Financial statement audit
B. Compliance audit
C. Operational audit
D. Internal audit
7. The results the auditor’s work is communicated through the:
A. Audit engagement letter.
B. Management letter.
C. Audit report.
D. Notes to the financial statements.
8. Financial statements need to be prepared in accordance with one, or a combination of:
A. PFRS
B. Other authoritative basis
C. IFRS
D. All of the answers.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
INTRODUCTION TO AUDITING AT-03
9. Evaluate theWD following statements related to the purpose of audit engagements:
I. Provide government agencies, such as BIR with basis for assessments.
II. To prove accuracy and reliability of financial statements.
III. Enhance the degree of confidence of intended users of the financial statements.
IV. To obtain reasonable assurance about whether the financial statements are free from material
misstatements, due to fraud and error.
A. All statements are true
B. All statements are false
C. Only I and II are true
D. Only III and IV are true
10. Classify the following types of audits:
• This type of audit involves a review of an organization’s procedures to determine whether the
organization has adhered to specific procedures, rules or regulations set down by some higher
authority.
• This type of audit involves a review of an organization’s procedures and methods for the
purpose of evaluating efficiency and effectiveness of operations, identifying areas for
improvement, and making recommendations to improve performance.
A. Both are operations audits
B. Both are compliance audits
C. Operations, compliance
D. Compliance, operations
11. Which is/are overall responsibilities of the internal audit function?
I. Serve as an independent assurance and consulting activity designed to add value and
improve the company's operations.
II. Assess the company's methods for safeguarding its assets and, as appropriate, verify the
existence of the assets.
A. Both
B. Neither
C. I only
D. II only
12. Which internal audit activity directly contributes to the improvement of the organization’s
governance process
I. Evaluating the effectiveness of internal controls over financial reporting
II. Evaluating the design of ethics-related activities
A. Both
B. Neither
C. I only
D. II only
13. Engagement risk is influenced by the risks associated with the following, except:
A. Nature and form of the subject matter
B. Nature and form of the criteria applied to the subject matter
C. Nature and extent of the process used to collect and evaluate evidence
D. Unreasonably low professional fee
14. Classify the following types of audits:
• This is an independent appraisal activity established within an entity as a service to the entity.
• This type of audit goes beyond the usual financial statement audit, to include audits of
compliance with laws and regulations, operations of governmental entities, and the proper
disbursement and management of public funds.
A. Both are operations audit
B. Both are government audits
C. Operations, government
D. Government, operations

15. To provide for the greatest degree of independence in performing internal auditing functions, an
internal auditor most likely should report to
A. Board of Directors. C. Corporate Controller.
B. Vice-President for Finance. D. Corporate Stockholders.
16. An operating committee of a company's board of directors that is in-charge of overseeing
financial reporting and disclosure.
A. Governance C. Control environment
B. Audit committee D. Management

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
INTRODUCTION TO AUDITING AT-03
17. Evaluate the following statements:
I. The primary audience for the written report issued by the internal auditor at the completion of
an audit should be the external auditors when they intend to rely on the internal auditor’s work.
II. In a broad sense, society benefits from internal auditing because the internal auditor promotes
the efficient and effective use of resources.
A. All statements are true
B. All statements are false
C. Only I is true
D. Only II is true
18. This type of activity is a subset of internal audit that attempts to measure the effectiveness with
which an organizational unit is administered.
A. Economy and efficiency audit
B. Management audit
C. Financial Audit
D. Compliance Audit
19. In government auditing, the three elements of expanded scope auditing are:
A. Goal analysis, audit of operations, audit of systems.
B. Financial and compliance, economy and efficiency, program results.
C. Pre-audit, post-audit, internal audit.
D. National government audit, local government audit, corporation audit.
20. An audit designed to determine the extent to which the desired results of an activity established
by the legislative or other authorizing body are being achieved.
A. Economy audit.
B. Program results audit.
C. Efficiency audit.
D. Financial-related audit.

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