Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

(LUZON) Manila 87339344 * Calamba City, Laguna * Dasmariñas City, Cavite * Lipa City,

Batangas (0917) 8852769 * (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032)

2537900 loc. 218 (MINDANAO) Cagayan De Oro (0917) 7081465 * Davao City (082) 2250049

AUDITING THEORY
AT.3003 – Risk-based Financial R.C.P. SOLIMAN/ K.J. UY Statements Audit, Responsibilities &
Objectives MAY 2021

Reference:
a. PSA 200 (Revised and Redrafted), Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Philippine Standards on Auditing

DISCUSSION QUESTIONS
a. Identifying areas posing the highest risk of
Risk-based Financial Statements Audit financial statement errors.
b. Analysis of internal control.
1. The purpose of an audit is to enhance the degree of c. Collecting and evaluating evidence.
confidence of intended users in the financial d. Concentrating audit resources in those areas
statements. presenting the highest risk of financial statement
errors.
The financial statements subject to audit are those of
the entity, prepared and presented by management The Financial Statements and The Management’s
of the entity with oversight from those charged with Responsibilities
governance.
a. True, False 5. An audit is conducted on the premise that
b. False, True management and, where appropriate, those charged
c. True, True with governance, have acknowledged and understand
d. False, False that they have responsibilities that are fundamental
to the conduct of an audit in accordance with PSAs.
2. Which of the following statements about theoretical Which of the following is not one of those
framework of auditing is(are) incorrect? I. The data responsibilities?
to be audited can be verified a. To provide the auditor unrestricted access to
II. Long-term conflicts may exist between managers persons within the entity from which the auditor
who prepare the data and auditors who examine determines it necessary to obtain audit evidence.
the data b. The preparation and presentation of financial
III. Auditors act on behalf of management statements in accordance with the
IV. An audit benefits the public pronouncements issued by AASC.
a. II and III only c. II only c. The establishment and maintenance of internal
control relevant to the preparation and
b. II, III and IV only d. III only
presentation of financial statements that are free
from material misstatement, whether due to fraud
3. Which of the following procedures is not one of the
or error.
features of a risk-based audit process in accordance
d. To provide complete information to the auditor.
with PSAs?
a. Identify and assess risks of material
Overall Objectives of the Auditor
misstatement, whether due to fraud or error,
based on an understanding of the entity and its
environment, including the entity’s internal 6. Which of the following statements is false?
control. a. In an audit of financial statements, being an
b. Obtain sufficient appropriate audit evidence about assurance engagement, the auditor is engaged
whether material misstatements exist, through for purposes of expressing an opinion designed to
designing and implementing appropriate enhance the degree of confidence of intended
responses to the assessed risks. users in the financial statements.
c. Subject all available evidence related to entity’s b. The overall objective of the independent auditor is
financial statements to testing to get reasonable to obtain reasonable assurance about whether the
assurance that the financial statements are free financial statements as a whole are free from
from material misstatements. material misstatement, whether due to fraud or
d. Form an opinion on the financial statements error, and to report on the financial statements in
based on conclusions drawn from the audit accordance with the auditor’s findings.
evidence obtained. c. In order to obtain reasonable assurance, the
auditor shall obtain sufficient appropriate audit
evidence to be able to draw reasonable
4. Which of the following is not a distinguishing feature
conclusions on which to base the audit opinion.
of risk-based auditing?
Reasonable assurance is obtained when the

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EXCEL PROFESSIONAL SERVICES, INC.
auditor has thereby reduced audit risk to an
acceptably high level.
d. The objective of an audit cannot be fulfilled unless
the auditor achieves the overall objective of the
auditor. In all cases when the overall objective of
the auditor cannot be achieved, the PSAs require
that the auditor modifies the auditor’s opinion
accordingly or withdraws from the engagement.
7. The concept of reasonable assurance indicates that
the auditor is:
a. not an insurer of the correctness of the financial
statements.
b. not responsible for the fairness of the financial
statements.
c. responsible only for issuing an opinion on the
financial statements.
d. responsible for finding all misstatements.
The Auditor’s Opinion
8. The auditor’s opinion
a. Guarantees the credibility of the financial
statements.
b. Is an assurance as to the future viability of the
entity.
c. Is not an assurance as to the efficiency with
which management has conducted the affairs of
the entity.
d. Certifies the correctness of the financial
statements.
9. When an auditor issues a qualified opinion, the
implication is that the auditor
a. Does not know if the financial statements are
presented fairly.
b. Does not believe the financial statements are
fairly presented.
c. Is satisfied that the financial statements are
presented fairly except for a specific aspect of
them.
d. Is satisfied that the financial statements are
presented fairly.
10. When an auditor issues an adverse opinion, the
implication is that the auditor
a. Does not know if the financial statements are
presented fairly.
b. Does not believe the financial statements are
fairly presented.
c. Is satisfied that the financial statements are
presented fairly except for a specific aspect of
them.
d. Is satisfied that the financial statements are
presented fairly.
Conduct of an Audit of Financial Statements
Ethical Requirements
11. Which of the following is incorrect regarding the
general principles of an audit?
a. The auditor should comply with the “Code of
Ethics for Professional Accountants in the
Philippines.”
b. The auditor should conduct an audit in accordance
with PSAs.
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c. The auditor shall not represent compliance with
PSAs unless the auditor has complied with all of
the PSAs relevant to the audit.
d. The auditor would ordinarily expect to find
evidence to support management representations
and assume they are necessarily correct.
12. The following are the general principles governing an
audit of FS Audit, except
a. Independence c. Confidentiality
b. Professionalism d. Professional behavior
Professional Skepticism and Professional Judgment
13. The auditor shall plan and perform an audit with an
attitude of professional skepticism recognizing that
circumstances may exist that cause the financial
statements to be materially misstated.
The auditor shall exercise professional judgment in
planning and performing the audit in accordance with
PSAs.
a. True, True c. False, True
b. False, False d. True, False
14. Which of the following is least likely an application of
maintaining an attitude of professional skepticism?
a. The auditor does not consider representations
from management as substitute for obtaining
sufficient and appropriate audit evidence to be
able to draw reasonable conclusions on which to
base the audit opinion.
b. The auditor is alert to audit evidence that
contradicts or brings into question the reliability
of documents or management representations.
c. The auditor makes a critical assessment, with a
questioning mind, of the validity of audit evidence
d. In planning and performing an audit, the auditor
assumes that management is dishonest.
Materiality
15. Financial reporting frameworks often discuss the
concept of materiality in the context of the
preparation and presentation of financial statements.
Although financial reporting frameworks may discuss
materiality in different terms, they generally explain
that
a. Misstatements, including omissions, are
considered to be material if they, individually or in
the aggregate, could reasonably be expected to
influence the economic decisions of users taken
on the basis of the financial statements.
b. Judgments about materiality are made in the light
of surrounding circumstances and are affected by
the size or nature of a misstatement, or a
combination of both.
c. Judgments about matters that are material to
users of the financial statements are based on a
consideration of the common financial information
needs of users as a group. The possible effect of
misstatements on specific individual users, whose
needs may vary widely, is not considered.
d. All of the above
16. Materiality is:
a. Expressed only in terms of pesos
b. Measured using guidelines established by PICPA
c. Not applicable to assurance engagements
d. Addressed within a practitioner’s audit and other
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EXCEL PROFESSIONAL SERVICES, INC.
assurance reports
Sufficient Appropriate Audit Evidence
17. Two overriding considerations affect the many ways
an auditor can accumulate evidence:
I. Sufficient appropriate evidence must be
accumulated to meet the auditor’s professional
responsibility.
II. Cost of accumulating evidence should be
minimized.
In evaluating these considerations:
a. the first is more important than the second.
b. the second is more important than the first.
c. they are equally important.
d. it is impossible to prioritize them.
Audit Risk
18. The existence of audit risk is recognized by the
statement in the standard auditor’s report that the
a. The auditor is responsible for expressing an
opinion on the financial statements, which are the
responsibility of management.
b. Financial statements are presented fairly, in all
material respects, in conformity with GAAP.
c. Audit includes examining, on a test basis,
evidence supporting the amounts and disclosures
in the financial statements.
d. Auditor obtains reasonable assurance about
whether the financial statements are free of
material misstatement.
19. Risk of material misstatement is
a. The risk that the auditor might express an opinion
that the financial statements are materially
misstated when they are not.
b. The likelihood that the financial statements are
materiality misstated prior to the audit.
c. Both a and b.
d. Neither a nor b.
20. What are the two elements of the risk of material
misstatement at the assertion level? a. Inherent risk
and detection risk
b. Audit risk and detection risk
c. Inherent risk and control risk
d. Detection risk and control risk
DO-IT-YOURSELF (DIY) DRILL
21. Detection risk is
a. The risk that the auditor gives an inappropriate
audit opinion when the financial statements are
materially misstated.
b. The risk that a misstatement, that could occur in
an account balance or class of transactions and
that could be material individually or when
aggregated with misstatements in other balances
or classes, will not be prevented or detected and
1. The objective of the ordinary examination of financial
statements is the expression of an opinion on the
accuracy of such financial statements.
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corrected on a timely basis by the accounting and
internal control systems.
c. The risk that an auditor's substantive procedures
will not detect a misstatement that exists in an
account balance or class of transactions that
could be material, individually or when
aggregated with misstatements in other balances
or classes.
d. The susceptibility of an account balance or class
of transactions to misstatement that could be
material, individually or when aggregated with
misstatements in other balances of classes,
assuming that there were no related internal
controls.
22. Inherent risk and control risk differ from detection
risk in that inherent risk and control risk
a. arise from the misapplication of auditing
procedures
b. may be assessed in either quantitative or
nonquantitative terms
c. exist independently of the financial statement
audit
d. can be changed at the auditor’s discretion
23. Which of the following is an incorrect statement?
a. Detection risk cannot be changed at the auditor’s
discretion
b. Detection risk bears an inverse relationship to
inherent and control risks
c. The greater the inherent and control risks the
auditor believes exists, the less detection risk that
can be accepted
d. The auditor might make separate or combined
assessments of inherent risk and control risk
24. In implementing the audit risk model, which of the
following is not a limitation of the model that makes
its implementation difficult?
a. Inherent risk is difficult to formally assess.
b. Audit risk is objectively determined.
c. The model treats each risk component as
separate and independent.
d. Audit technology is not precisely developed in
assessing each component.
25. Which of the following statements does not properly
describe a limitation of an audit?
a. Some evidence supporting peso representations
in the financial statements must be obtained by
oral or written representation of management.
b. Human weakness, such as fatigue and
carelessness, can cause auditors to overlook
pertinent evidence or cause them to make the
wrong conclusions.
c. Judgment is used throughout
the audit engagement.
d. Many audit conclusions are made on the basis of
examining all available evidence.
- now do the DIY drill –
The independent auditor’s opinion is an assurance as
to the future viability of the entity.
a. The first statement is false, the second statement
is true
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EXCEL PROFESSIONAL SERVICES, INC.

b. The first statement is true, the second statement d. Qualified, disclaimer, or adverse
is true
c. The first statement is false, the second statement
is false 8. Which of the following criteria is unique to the
d. The first statement is true, the second statement independent auditor's attest function? a. General
is false competence.
b. Familiarity with the particular industry of each
2. Users of the audit report can reasonably expect the client.
audited financial statements to c. Due professional care.
a. Include complete information and contain all d. Independence.
financial disclosures
b. Be presented fairly according to the substance of 9. Which of the following best describes an auditor’s
GAAP professional skepticism?
c. Be Free from all errors a. Auditors must remember that they will be
d. All of the above responsible for the financial statements once they
are audited.
3. Why does a company choose to have an independent b. Auditors should treat all management
auditor report on its financial statements? representations with suspicion until they are
a. Independent auditor will always detect proven.
management fraud c. Auditors should make a critical assessment, with
b. The company’s management preparing the an inquisitive mind, of the sufficiency and
financial statements may have a vested interest appropriateness of audit evidence obtained.
in reporting certain results. d. Auditors should expect that there will be material
c. Independent auditors guarantee the accuracy of misstatements in the financial records being
the financial statements audited.
d. An independent audit is designed to search for
deficiencies in the company’s internal control 10. Which of the following elements of the audit risk
model is most likely to be the same across a range of
4. Which of the following is not one of the basic audits performed by a professional accounting firm?
assumptions of financial statements audit? a. Data is a. Audit risk c. Detection risk
auditable b. Control risk d. Inherent risk
b. No long-term conflict between the auditor and the
management - end of AT.3003 -
c. Effective internal control system does not reduce
risk of material misstatement of the financial
statements
d. An audit benefits the public

5. The responsibility for the preparation of the financial

statements and the accompanying footnotes belongs
to:
a. the auditor.
b. management.
c. both management and the auditor equally.
d. management for the statements and the auditor
for the notes.

6. Which of the following statements is correct

concerning an auditor’s responsibilities regarding
financial statements?
a. An auditor’s responsibilities for audited FSs are
not confined to the expression of the auditor’s
opinion.
b. Making suggestions that are adopted about the
form and content of an entity’s financial
statements impairs an auditor’s independence.
c. The fair presentation of audited financial
statements in conformity with GAAP is an implicit
part of the auditor’s responsibilities.
d. An auditor may draft an entity’s FSs based
information from management’s accounting
system.

7. When an auditor encounters a material GAAP

departure that is unresolved at the conclusion of the
audit, which of the following opinions are possible? a.
Qualified or adverse
b. Unqualified or qualified
c. Only adverse is possible

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