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ACCO 3116 : Pre Midterm SCORE ______________________

Name: _________________________________________________ Year/Section: ____________________

1. Quality Control for a CPA firm, as referred to in Philippine Standard on Quality Control (PSQC) 1, applies to
a. Audits of historical financial information.
b. Audits of historical financial information and consulting services.
c. Audits of historical financial information and tax services.
d. Audits and reviews of historical financial information and other assurance and related services engagements.

2. Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality
control policies and procedures?

Ethical Human Engagement


Requirements Resources Performance
a. NO YES NO
b. YES NO NO
c. YES YES YES
d. NO NO YES

3. This quality control element requires a CPA firm to establish policies and procedures to provide it with a reasonable
assurance that engagements are performed in accordance with professional standards and regulatory and legal
requirements and that the firm or the engagement partner issue reports that appropriate in the circumstances.
a. Ethical requirements
b. Engagement performance
c. Monitoring
d. Human Resources

4. In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for
a. Setting the scope of the audit
b. Determining the minimum procedures necessary for unaudited financial statements
c. Deciding whether to accept or continue a client
d. Setting the scope of internal control study and evaluation

5. A firm of CPAs may use policies and procedures such as notify professional personnel as to the names of audit clients having
publicly held securities and confirming periodically with such personnel that prohibited relations do not exist. This is done
to achieve effective quality control in which of the following areas?
a. Acceptance and continuance of client
b. Assigning personnel to engagements.
c. Independence
d. Inspection

6. The objective of quality control mandates that a public accounting firm should establish policies and procedures for
professional development that provide reasonable assurance that all entry-level personnel
a. Prepare working papers that are standardized in form and content
b. Have knowledge required to enable them to fulfill responsibilities assigned
c. Will advance within the organization
d. Develop specialties in specific areas of public accounting

7. Before accepting an audit engagement, successor auditor should make specific inquiries of the predecessor auditor
regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of GAAP between periods
d. Evaluation of all matters of continuing accounting significance

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8. Which of the following is the proper when a change of auditors has taken place or is process?
a. The successor auditor should advise the client of his intention to contact the predecessor auditor and request
permission for the contact
b. The integrity of management should not be subject of communication between the predecessor and successor
auditors.
c. The successor auditor should not seek permission to make reference to the work of the predecessor auditor as a basis,
in part of his own opinion
d. Communication between the predecessor and successor auditors should take place only after the successor auditor has
accepted the engagement

9. Which of the following statements regarding quality control policies and procedures is incorrect
a. Quality control policies and procedures should be implemented at both the level of the audit firm and on an individual
audits.
b. The audit firm should implement quality control policies and procedures designed to ensure that all audits are
conducted in accordance with PSAs or relevant national standards and practices.
c. Quality control policies are objectives and goals while quality control procedures are steps to be taken to accomplish
the policies adopted.
d. The policies and procedures adopted by the individual audit firms should not vary since PSA 220 prescribed quality
control policies and procedures that must be adopted by all auditing firms.

10. The following statements relate to engagement partner’s responsibility to conduct timely reviews of the audit
documentation to be satisfied that sufficient appropriate evidence has been obtained to support the conclusions reached
and for the auditor’s report to be issued. Which is false?
a. The engagement partner’s review of the audit documentation allows significant matters to be resolved on a timely
basis to his/her satisfaction before the auditor’s report is issued.
b. The engagement partner should review all audit documentation.
c. The engagement partner should document the extent and timing of the reviews.
d. The reviews cover critical areas of judgment, especially those relating to difficult or contentious matters identified
during the course of the engagement, significant risks and other areas the engagement partner considers important.

11. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement
letter to the client?
a. A recent change in partner and /or staff involved in the audit engagement.
b. A change in the terms engagement
c. A recent change of client management
d. A significant change in the nature or size of the client’s business

12. On recurring audits, the auditor may decide not to send a new engagement letter each year. However he might decide to
send a new letter each year. However he might decide to send a new letter when:
a. There is change in the auditors who will assist in the conduct of the audit.
b. There is a legal requirement
c. There is a change in the client’s accounting policy for inventories.
d. There is a change in the estimated life of the client’s property and equipment.

13. According to PSA 210, which of the following statements is correct?


a. The auditor and the client need not agree on the terms of the engagement.
b. Where the terms of the engagement are changed, the auditor and the client need not agree on the new terms if they
already agreed on the old terms.
c. The auditor may agree to a change of engagement where there is reasonable justification for doing so.
d. The engagement letter assists in the supervision and review of the audit work.

14. The primary reason for an audit by an independent, external audit is


a. To guarantee that there are no misstatements in the financial statements.
b. To relieve management of responsibility for the financial statements.
c. To provide increased assurance to users as to the fairness of the financial statements
d. To insure that any fraud will be discovered.
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15. The communication between an external auditor and client is confidential. Ordinarily,
a. The client is not required to answer an external auditor’s questions in certain circumstances.
b. An external auditor is not permitted to testify in a court of a law without the permission of the client.
c. An external auditor is not required to divulge client information even if demanded by a subpoena.
d. An external auditor should not disclose information obtained in the course of the engagement without the client’s
permission.

16. Documentary evidence is one of the principal types of corroborating information used by an auditor to substantiate an
opinion. Which of the following examples is the most reliable audit evidence?
a. Time tickets c. Copies of sales invoices
b. Material requisition slips d. Bank statement
17. Which of the following is incorrect regarding accounting estimates?
a. The auditor is responsible for making accounting estimates included in financial statements.
b. Accounting estimates are often made in conditions of uncertainty regarding the outcome of events that have occurred
or likely to occur and involve the use of judgment.
c. The risk of material misstatement is greater when accounting estimates are involved and in some cases the auditor
may determine that it is a significant risk that requires special audit considerations.
d. The auditor should obtain sufficient appropriate audit evidence regarding accounting estimates.

18. The party responsible for assumptions identified in the preparation of prospective FS is usually
a. The client’s management c. The reporting accountant
b. The client’s independent auditor d. A third party lending institution

19. Which of the following is not the function of BSP (Central Bank)?
a. Recommend measures to improve the efficiency and effectiveness of government operations.
b. Supervise banks and exercise regulatory powers over non-bank institutions performing quasi-bank functions
c. Determine the exchange rate of the Philippines
d. Extend discounts, loan and receivable to banking institutions for liquidity purposes.

20. The auditor’s opinion


a. Guarantees the credibility of the FS
b. Is not an assurance as to the future viability of the entity
c. Is an assurance as to the efficiency with which management has conducted the affairs of the entity but not
effectiveness
d. Certifies the correctness of the financial statement

21. Which of the following best describes “high level of assurance”?


a. It refers to the professional accountant having obtained evidence based on procedures agreed upon between the
practitioner and the intended users to be satisfied that findings be reported to the intended users.
b. It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be
satisfied that the subject matter is plausible in the circumstances.
c. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject
matter conforms in all material respects with identified suitable criteria.
d. It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of
any required modifications to be made in the financial statements in order for them to conform of prescribed criteria.

22. Which statement is incorrect regarding an engagement to perform agreed-upon procedures?


a. 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.
b. The recipients of the report must form their own conclusions from the report by the auditor.
c. The report is restricted to those parties that have agreed to the procedures to be performed.
d. The report on factual findings is expressed in the form of negative assurance.

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23. Which of the following engagements provides third parties the highest level of assurance about the client’s financial
statements?
a. Audit
b. Review
c. Agreed-upon procedures
d. Compilation

24. The independent auditor lends credibility to client’s financial statements by


a. Maintaining a clear-cut distinction between management’s representations and the auditor’s representation.
b. Testifying under oath about client’s financial statements.
c. Stating in the auditor’s management letter that the examination was made in accordance with generally accepted
auditing standards.
d. Attaching an auditor’s opinion to the client’s financial statements.

25. A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no
material misstatements in the financial statements taken as a whole.
a. Reasonable assurance
b. Positive assurance
c. Moderate assurance
d. Negative assurance

26. Which statement is correct regarding assurance engagements?


a. It is an engagement in which a practitioner expresses a conclusion design to enhance the degree of confidence of the
intended users other than the responsible party about the outcome of the evaluation or measurement of the subject
matter against criteria.
b. All engagements performed by professional accountants are assurance engagements.
c. Whether a particular engagement will depend upon whether it exhibits all the following elements – three party
relationships, a subject matter and a suitable criterion.
d. All of the above statements are correct.

27. Assurance services are best described as


a. Services designed for the improvement of operations, resulting in better outcomes.
b. Independent professional services that improve the quality of information or its context for decision makers.
c. The assembly of financial statements based on assumptions of a reasonable party.
d. Services designed to express an opinion on historical financial statements based on the results of an audit.

28. Assurance services least likely involve


a. Improving the quality of information for decision purposes.
b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of information.

29. The following are assurance engagements, except


a. Reasonable Assurance engagement
b. Other assurance engagement
c. Limited assurance engagement
d. Tax services

30. Engagements frequently performed by professional accountants that are not assurance engagement include the following,
except
a. Agreed upon procedures
b. Reasonable assurance engagement
c. MAS
d. Compilation of FS

31. The subject matter of an assurance engagement may take many forms, including
a. Financial performance or condition
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b. Behavior
c. Systems and processes
d. All of the above

32. The Framework of PSA (PSA 120) does not apply to


a. Agreed upon procedures
b. Consultancy
c. Review
d. Compilation

33. These are the benchmark used to evaluate or measure the subject matter of an assurance.
a. Criteria
b. GAAP
c. Assertions
d. Conclusions

34. I Independence in appearance is the avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including applied, would reasonably conclude a firm's,
or a member of the assurance teams', integrate, objectivity or professional skepticism had been compromised.

II Independence of mind is a state of mind that permits the provision of an opinion unaffected by influence that
compromise professional judgment, allowing an individual to act with integrity, and to exercise objectivity and professional
skepticism.
a. I is True, II is False
b. I is False, II is True
c. Both statement is True
d. Both statement is False

35. Which of the following types of audits are most similar?


a. Operational audits and compliance audits c. Compliance audits and independent FS audits
b. Independent FS audits and operational audits d. Internal audits and independent FS audits

36. A type of audit the purpose of which is to determine whether the auditee is following specific procedures or rules set down
by some higher authority
a. Operational Audit c. Financial Audit
b. Compliance Audit d. Management Audit

37. A technique for regularly and systematically appraising a unit of function and its effectiveness against corporate and
industry standards with the objective of assuring management that its aim are being carried out and/or identifying
conditions capable of being improved
a. Operational Audit
b. Compliance Audit
c. Financial Audit
d. Management Audit

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

39. I In exceptional circumstances, an auditor may judge it necessary to depart from PSA in order to more effectively achieve
the objective of an audit. When such situation arises, the auditor is not required to justify the departure.

II PSAs need only be applied to material matters.

a. False, False b. True, True


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c. True, False d. False, True

40. I Information Theory is in value information concerning the financial potential losses, that the auditor is seen to have
greater ability to pay.
II Motivational Theory is to improve the non-financial and financial data for internal decision making.
a. False, False c. True, False
b. True, True d. False, True

41. Auditors mostly perform financial statement audits, but sometimes they may also perform compliance and operational
audits.
a. Independent auditors c. Government auditors
b. Internal auditors d. None of the above

42. I Compliance audit determine the efficiency of economy and effectiveness of an entity’s operating activities.
II FS audit determine whether the client is following specified procedures set by higher authority such as policy and
procedures.
a. False, False
b. True, True
c. False, True
d. True, False

43. Preliminary arrangements agreed to by the auditor and client should be reduced writing by the auditor. The best place to
set forth these arrangements is in
a. A memorandum to be placed in the permanent section of the auditing working papers.
b. An engagement letter
c. A client representation letter.
d. A confirmation letter attached to the constructive services letter.

44. Engagement letters are widely used in practice for the professional engagements for all types. The primary purpose of the
engagement letter is to
a. Remind management that the primary responsibility for the financial statements rests with management
b. Provide a written record of the agreement with the client as to the services to be provided
c. Satisfy requirements of the CPA’s liability for insurance policy
d. Provide a starting point for the auditor’s preparation of the preliminary audit program.

45. It is the interest of both client and auditor that the auditor sends an engagement letter, preferably before
a. The performance of substantive testing
b. The commencement of the engagement
c. The completion of audit
d. Before the issuance of audit report.

46. Which of the following factors do not influence decision of the auditor to send a separates engagement letter to the parent
entity and its component (subsidiary, branch or division) assuming the same auditor handles both entities?
a. Legal requirements
b. Degree of ownership by parent
c. Ethical requirements
d. Whether a separate audit report is to be issued on the component

47. An audit engagement letter least likely includes


a. A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.
b. Identification of specific audit procedures that the auditor needs to undertake
c. Description of any letters or report that the auditor expects to submit to the client
d. Arrangements concerning the involvement of internal auditors and other client’s staff.

48. Which of the following is not included in an engagement letter?


a. Limitation in the scope of examination as imposed by client
b. Limitation in the scope of examination as imposed by circumstances
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c. Restrictions on auditor’s liability, when such possibility exists
d. Satisfactory title to assets, liens on assets and assets pledged

49. When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based
on the revised engagement (choose the incorrect one)
a. Should not contain a separate paragraph that refers to the original engagement
b. Should not refer to any procedures that may have need performed in the original engagement
c. Should qualify the opinion due to scope limitation.
d. Omits reference to the original engagement.

50. Which of the following actions may be appropriate of the auditor is unable to agree to change of the engagement and is not
permitted to continue the original engagement?
I. Issue a disclaimer of opinion due to a significant scope limitation
II. Auditor should withdraw from the engagement
III. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances
necessitating withdrawal
a. I
b. I, II
c. II, III
d. I, II, III

51. Analytical procedures used in planning an audit should focus on


a. Reducing the scope of tests of control and substantive tests.
b. Providing assurance that the potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business
d. Assessing the adequacy of the available evidence.

52. The objective of performing analytical procedures in planning an audit is to identify the existence of
a. Unusual transactions and events
b. Illegal acts that went undetected because of internal control weakness
c. Recorded transactions that were not properly authorized.
d. Related party transaction
53. Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures
during the planning phase of an audit?
a. Turnover of personnel in the accounting department
b. Objectivity of audit committee members
c. Square footage of selling space
d. Management’s plans to repurchase stock.

54. What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet
accounts when reviewing the financial statements of a nonpublic entity?
a. Trend analysis
b. Ratio analysis
c. Regression analysis
d. Risk analysis

55. Financial statement assertions are established account balances,

Classes of transactions Disclosure


a. Yes Yes
b. Yes No
c. No Yes
d. No No

56. Which of the following is not a financial statement assertion relating to account balances?
a. Completeness
b. Existence
c. Rights and obligations

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d. Valuation and competence

57. An auditor may achieve audit objectives related to particular assertions by


a. Performing analytical procedures
b. Adhering to a system of quality control
c. Preparing auditor working paper
d. Increasing the level of detection risk

58. A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance
remains in the suspense account at year-end, the auditor would be most concerned about
a. Suspense debits that management believes will benefit future operations.
b. Suspense debits that auditor verifies will have realizable value to the client.
c. Suspense credits that management believes should be classified as “current liability”
d. Suspense credits that the auditor determines to customer deposits.

59. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions
from which of the following accounts most likely would yield the highest level of evidence?
a. Accounts receivable
b. Interest expense
c. Accounts payable
d. Travel and entertainment expense

60. Which statement is incorrect regarding related services


a. Related services comprise agreed-upon procedures and compilation
b. Audits and reviews are designed to enable the auditor to provide reasonable assurance and limited assurance,
respectively
c. Engagement to undertake agreed-upon procedures is not intended to enable the auditor to express assurance.
d. In a consultancy engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise
to collect, classify and summarize financial information.

61. I Absolute assurance in auditing is attainable as a result of such factors as the need for judgment, the use of testing, the
inherent limitations of any accounting and internal control systems and the fact that most of the evidence available to the
auditor is persuasive, rather than conclusive in nature.

II In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence to be able to draw conclusions on
which to base that opinion.
a. True, False
b. False, False
c. False, True
d. True, True

62. The risk that an external auditor may not detect a material error or fraud during an audit is increase by the possibility of
a. Executive appeal
b. Late appointment of the auditor
c. Management override of internal control
d. Audit committee review of the management letter

63. In planning an audit, the auditor considers audit risk. Audit risk is the
a. Susceptibility of an assertion to material misstatement assuming there are no related controls
b. Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the client’s
internal control.
c. Risk that the auditor’s procedures for verifying account balances will not detect a material misstatement that in fact
exists.
d. Risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are
materially misstated.

64. Which of the following best describe the interrelated components of internal control?
a. Organizational structure, management philosophy and planning
b. Control environment, risk assessment, control activities, information and communication systems, and monitoring

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c. Risk assessment, backup facilities, responsibility accounting and natural laws
d. Legal environment of the firm, management philosophy and organizational structure.

65. An external auditor will use internal auditors to assist in the audit of accounts receivable. Of the following procedures, the
one that would be most appropriate for the internal auditors to perform is the
a. Assessment of control risk for accounts receivable.
b. Determination of the number of positive confirmation requests to be mailed to substantiate the existence of accounts
receivable.
c. Preparation of an aged trial balance of accounts receivable.
d. Establishment of the amount of accounts receivable that is considered material.

66. An internal control objective in the revenue cycle is to insure that recorded sales are valid and documented. Which
evidence is least likely to satisfy that objective?
a. Bills of lading exist for all invoices
b. Customer purchase order support invoices
c. Shipping documents exist for all invoices.
d. Credit sales have been approved by the credit department.

67. The effect of a satisfactory internal audit function upon the work of the independent auditor will most likely be
a. A reduction in the scope of the audit procedures necessary by the independent auditor.
b. A substitution of the work of the internal auditor for the work of the independent auditor
c. A substitution of the internal auditor’s opinion of the financial statements in place of the independence auditor’s
opinion.
d. An acceptance of the financial statements as a fair representation of financial position and results of operations.

68. The primary purpose of the representation letter is the


a. Acceptance of the auditor’s engagement letter
b. Evaluation by management of the auditor’s performance.
c. Acknowledgment of management’s responsibility for the financial statements
d. Agreement by management to engage the auditor for the next annual audit

69. When the auditors performs test of controls, the primary concern is
a. Incorrect acceptance of an account balance
b. Incorrect rejection of an account balance
c. Assessing control risk too low
d. Assessing control risk too high

70. Victoria, CPA has a small public accounting practice. One of Victoria’s clients desires services that Victoria cannot
adequately provide. Victoria has recommended larger CPA firm, Maria and Company, to her client, and in return Maria and
Company has agreed to pay Victoria 10 percent of the fee for services rendered by Maria and Company for Victoria’s client.
Who, if anyone, is in violation of the Code of Ethics for Professional Accountants?
a. Both Victoria and Maria and Company
b. Neither of Victoria nor Maria and Company
c. Only Victoria
d. Only Maria and Company

71. In which one of the following situations would a CPA be in violation of the Code of Ethics for Professional Accountants in
determining his or her audit fee?
a. A fee based on whether the CPA’s report on the client’s financial statements results in the approval of a bank loan.
b. A fee based on the outcome of a bankruptcy proceeding.
c. A fee based on the nature of the service rendered and the CPA’s expertise instead of the actual time spent on the
nature spent on the engagement
d. A fee based on the fee charged by the prior auditor.

72. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and
fraud that might have a material effect on the financial statements. Which of the following, if material would be a fraud as
defined in PSA 240?
a. Misappropriation of an asset or group of assets.
b. Clerical mistakes in the accounting data underlying the financial statements

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c. Mistakes in the application of accounting policies
d. Misinterpretation of facts that existed when the financial statements were prepared.

73. The auditor looks for an indication on duplicate sales invoices to see if the invoices have been verified. This is an example of
a. A test of details of balances
b. A test of control
c. A substantive test of transactions
d. Both a test of control and a substantive test of transactions

74. A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit client believes
that this event could have a significant effect on the financial statements. The auditor should
a. Advise management to disclose the event in notes to the financial statements
b. Disclose the event in the auditor’s report
c. Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known.
d. Advise management to adjust the financial statements.

75. A practitioner who is engaged to perform an assurance engagement other than an audit or a review of historical financial
information should comply with which of the following standards?
a. PSAs
b. PSAEs and PSAs.
c. PSAs and PSREs.
d. PSAEs, PSREs and PSAs.

76. An auditor may report on summarized financial statements that are derived from complete audited financial statements if
the
a. Auditor indicates whether the information in the summarized financial statements is consistent with the audited
financial statements from which it was derived.
b. Summarized financial statements are distributed only to management and the board of directors
c. Auditor describes the additional review procedures performed on the summarized financial statements.
d. Summarized financial statements are presented in comparative form with the prior year’s summarized financial
statements.

77. Which of the following procedures should a practitioner perform during an engagement to review an entity’s financial
statements?
a. Examining cash disbursements in the subsequent period for unrecorded liabilities.
b. Sending bank confirmation letters to the entity’s financial institutions.
c. Obtaining a client representation letter from members of the management
d. Communicating material internal control weakness during the assessment of control risk

78. An agreed-upon procedures engagement may involve the accountant in performing certain procedures concerning
I. Individual items and financial data
II. A financial statement
III. A complete set of financial statement
a. I and II only
b. II and III only
c. I and III only
d. I, II and III

79. Which of the following is least likely to be included in an agreed-upon procedures engagement report?
a. Identification of the purpose for which the agreed-upon procedures were performed
b. A summary of procedures performed
c. Limited assurance on the information resented
d. Use of the report is restricted.

80. The audited financial statements to be filed with the SEC shall be accompanied by a
a. Management report
b. Registration statement
c. Statement of Management’s responsibility for the financial statements
d. Statement of the Board of Director’s responsibility for financial statement

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81. Indicate the level of assurance provided by audit and related services

a b c D
Audit engagement Reasonable Reasonable Limited Absolute
Review engagement Reasonable Limited Limited Reasonable
Agreed-upon procedures None None None Limited
Compilation None None None None

82.

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