Auditing Fundamentals

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Auditing Theory - Fundamentals of Auditing and Assurance Services
1. Which of the following is least likely an objective of an assurance engagement?
a. The engagement is intended to prevent the issuance of materially misleading information

b. The engagement is intended to enhance the credibility of information about a subject matter
c. An assurance engagement is intended for a professional accountant to express a conclusion that
provides the intended users with a level of assurance about the subject matter.
d. The engagement is intended to provide a level of assurance to be issued by a professional
accountant about the information of being in conformity, in all material respects, with suitable
criteria.
2. The broad range of assurance engagements includes all, but which of the following?
I. Engagements intended to provide high or moderate levels of assurance.

II. Preparation of tax returns, though no conclusion is expressed
III. Attest and direct reporting engagements
IV. Engagement to report externally, but not internally
V. Engagement in private and public sector
VI. Agreed upon procedure engagement
a. II, IV, V
b. II, IV, VI
c. II, V, VI
d. IV, VI
3. Suitable criteria are required for reasonably consistent evaluation or measurement of the subject
matter of an assurance engagement. Which of the following statements concerning the characteristics
of suitable criteria is correct?
a. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to
significantly different interpretations.
b. Relevant 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.
c. Neutral criteria contribute to conclusions that are free from bias.
d. Criteria are sufficiently complete when they contribute to conclusions that are clear.
4. Which of the following mostly describes the function of AASC?
a. To monitor full compliance by auditors to PSAs

b. To assist BOA in conducting administrative proceeding on erring CPAs in audit practice
c. To promulgate auditing standards, practices and procedures that shall be generally accepted by
the accounting profession in the Philippines
d. To undertake continuing research on both auditing and financial accounting in order to make
them responsive to the needs of the public
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5. The Philippine Standards on Auditing issued by AASC
a. Apply to independent examination of financial statements of any entity when such examination
is conducted for the purpose of expressing an opinion
b. Must not apply to other related activities of auditors.
c. Need to be applied on all audit related.
d. Require that in no circumstances would an auditor may judge it necessary to depart from a PSA,
even though such a departure may result to more effective achievement of the objective of an
audit
6. In some assurance engagements, the evaluation or measurement of the subject matter is performed
by the responsibly 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 base engagements
c. Non-assurance engagements
d. Recurring engagements
7. 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 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.
8. The primary goal of the CPA in performing the attest function is to
a. Detect fraud
b. Examine individual transaction so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.
9. Which of the following best describes the objective of an assurance engagement?
a. To improve the company's outcomes.

b. To prepare the company's information and policies to those of other entities
c. To enhance the credibility of the information in order to improve the likelihood that the
information will meet the needs of an intended users.
d. To implement a system that improves the processing of information

10. The following are the elements of an assurance engagement except:
a. Suitable Criteria
b. An appropriate subject matter
c. A two-party relationship involving a practitioner and intended users
d. Sufficient appropriate evidence
11. Assurance engagements encompass the following types of services except
a. Attestation services
b. Audit of historical financial statements
c. Review engagements
d. Management consulting
12. Why does a company choose to have an independent auditor to report on its financial statements?
a. Independent auditors will always detect management fraud.

b. The company preparing the statements may have a vested interest in reporting certain results
c. Independent auditors guarantee the accuracy of the financial statements
d. An independent audit is designed to search for deficiencies in the company's internal control
13. Which of the following is the responsible party for an entity's financial statements?
a. The entity's management.

b. The entity's audit committee
c. The entity's internal auditor
d. The entity's board of directors
14. The AASC considers the comments and suggestions received as a result of the exposure of Philippine
Standards and Practice Statements and revises the exposure draft when deemed appropriate. Such
exposure draft is then issued as a final Philippine Standards on Practice Statement after meeting the
approval of
a. The majority of the AASC members

b. At least 10 members of the AASC
c. At least 5 members of the AASC
d. All the AASC members
15. Which of the following best describes review assurance?
a. Review engagements focus on providing assurance on the assertions contained in the financial
statements of a public company.
b. Review engagements focus on providing assurance on the internal controls of a public company
c. Review engagements focus on providing limited assurance on financial statements of a private
company

d. Review engagement focus on providing advice in a three party contract
16. When the professional accountant has obtained sufficient appropriate evidence to be satisfied that
the subject matter is plausible in the circumstances, he or she can provide which level of assurance?
a. None
b. High
c. Moderate
d. Absolute
17. The objective of the attest function is to
a. Ascertain the consistent application of GAAP

b. Determine the validity of transaction examined
c. Express an opinion on the fairness of the financial statements
d. Detect fraud
18. 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 is:
a. Reasonable Assurance
b. Positive Assurance
c. Moderate Assurance
d. Negative Assurance
19. It is the auditor's duty
a. To prevent fraud and error

b. To obtain reasonable assurance that material misstatements arising from fraud and error are
detected
c. Both "a" and "b"
d. Neither "a" nor "b"
20. Engagements frequently performed by professional accountants that are not assurance
engagements include the following except
a. Agreed upon procedures

b. Audit of financial statements
c. Management advisory services
d. Compilation of financial statements
21. An assurance engagement
a. Is an engagement in which practitioner is engaged to issue, or does issue, a written

communication that expresses a conclusion about the reliability of a written assertion that is the
responsibility of another party.

b. Is an engagement involving a systematic process of objectively obtaining and evaluating

evidence regarding assertions about economic actions and events, to ascertain the degree of
correspondence between those assertion and established criteria, and communication the
results to intended users.
c. Is an engagement in which the auditor provides a moderate level of assurance that the
information subject to the engagement is free of material misstatements
d. Is an engagement 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 users.
22. Which of the following statements is correct concerning an auditor's responsibilities regarding
financial statements?
a. Auditor responsibilities for audited financial statements are confined to the expression of the
auditor's opinion.
b. The fair presentation of audited financial statements in conformity with GAAP is an implicit part
of the auditors responsibility
c. Making suggestions that are adopted about the form and content of an entity's financial
statements impairs and auditors independence.
d. The auditor's report should provide an assurance as to future viability of the entity.
23. When a CPA expresses an opinion on the financial statements, his responsibilities extend to
a. The underlying wisdom of the client's management decision.

b. Active participation in the implementation of the advice given to the client.
c. An ongoing responsibility for the client's solvency.
d. Whether the result of the client's operating decision are fairly presented in the financial
statements
24. A financial statement audit aids in the communication of economic data because the audit
a. Assures the readers of the financial statements that any fraudulent activity has been corrected.
b. Guarantees that the financial data are fairly presented.
c. Lends credibility to the financial statements
d. Confirms the accuracy of the management's financial representations.
25. 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 concluded the affairs of the
entity
d. Detect fraud.
26. The primary responsibility for the adequacy of disclosure in the financial statement 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
27. An audit is conducted on the premise that management, and where appropriate, those charge with
governance have acknowledged and understand that they have responsibilities that are fundamental to
the conduct of an audit in accordance with PSA's. Which of the following is not one of those
responsibilities?
a. To provide the auditor restricted access to persons within the entity from which the auditor
determines if necessary to obtain audit evidence.
b. The preparation an presentation of financial statements in accordance with the applicable
financial reporting framework
c. The establishment and maintenance of internal control relevant to the preparation and
presentation of financial statements that are free from material misstatements, whether due to
fraud or error
d. To provide complete information to the auditor
28. Absolute assurance in auditing is not attainable because of
a. The need for judgment

b. The use of testing
c. The inherent limitation and internal control systems
d. All of the above
29. According to Preface on Assurance Engagements, these are the standards on benchmarks used to
evaluate or measure the subject matter of an assurance engagement
a. Criteria
b. Engagement standards
c. Auditing Postulate
d. Generally Accepted Auditing Standards
30. The criteria for evaluating quantitative information vary. For example, in the audit of historical
financial statements by CPA firms, the criteria are usually
a. International accounting standards

b. Generally Accepted Accounting Principles
c. Regulations of the BIR
d. Regulations of the SEC
31. The decision of whether the criteria are suitable involves considering whether the subject matter of
the assurance engagement is capable of reasonably consistent evaluation or measurement using such

criteria. Which of the following characteristics is not considered necessary in determining whether the
criteria are suitable?
a. Relevance
b. Neutrality
c. Reliability
d. Sufficiency
32. According to Philippine Standard on Auditing, a compilation presents information in the form of
financial statements, that is, the representation of management. The accountant who prepares the
compilation undertakes to express
a. Limited assurance on the statements.

b. Minimal assurance on the statements.
c. No assurance on the statements
d. Full assurance on the statements
33. In an engagement to perform agreed upon procedures an auditor is engaged to
a. Carry out those procedures of an audit to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings
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 misstatements
d. Provide a high, but not absolute assurance that the information is free of material
misstatement.
34. What best describes the word "assurance" in the context of the Philippine Standards on Auditing?
a. Auditor's satisfaction as to the reliability of an assertion being made by one party for use by
another party.
b. Level of assurance which may be provided is determined by the reporting objective
c. Expressed positively in the report
d. Assurance is of limited in nature.
35. This refers to the audit procedures that, in the auditors judgment and based on the PSA's are
deemed appropriate in the circumstances to achieve the objective of an audit.
a. Analytical Procedures
b. Scope of an audit
c. Audit Sampling
d. Documentation
36. Auditing standards differ from auditing procedures in that procedures relate to:

a. Measure of performance
b. Audit principles
c. Acts to be performed
d. Audit judgments
37. Auditing is based on the assumption that financial data and statements are:
a. In conformity with GAAP

b. Verifiable
c. Presented fairly
d. Consistently applied
38. An operational audit is designed to
a. Assess the efficiency and effectiveness of management's operating procedures.

b. Assess the presentation of management's financial statements in accordance with generally
accepted accounting principles
c. Determine whether management has complied with applicable laws and regulations.
d. Determine whether the audit committee of the board of directors is effectively discharging its
responsibility to oversee management's operations.
39. Operational auditing is mainly concerned about:
a. Past protection provided by current internal control.

b. Future improvements for management goals.
c. Verification of fair presentation of financial data.
d. Accuracy of data of financial records.
40. An audit conducted to determine whether an entity is following specific procedures or rules set
down by some higher authority.
a. Operational audit
b. Compliance audit
c. Financial audit
d. Detailed audit
41. Which of the following type of audits are most similar?
a. Operational audits and compliance audits

b. Independent financial statement audits and operational audits
c. Compliance audits and independent financial statement audits
d. Internal audits and independent financial statement audits
42. Internal auditing is an independent appraisal function established within an organization to examine
and evaluate its activities. To that end, internal auditing provides assistance to

a. External auditors
b. Management and board of directors
c. Shareholders
d. Statutory authorities
43. Internal auditors should review the means of physically safeguarding assets from losses arising from
a. Exposure to the elements

b. Under usage of physical facilities
c. Misapplication of accounting principles
d. Procedures that are not cost justified
44. Operational audits generally have been conducted by internal auditors and governmental audit
agencies but may be performed by certified public accountants. A primary purpose of an operational
audit is to provide.
a. A means of assurance that internal accounting controls are functioning as planned

b. A measure of management performance in meeting organizational goals.
c. The results of internal examination of financial and accounting matters to a company's top level
management
d. Aid to the independent auditor, who is conducting the examination of the financial statements
45. The internal auditing profession has advanced primarily as a result of
a. The limitation of financial statement audit scope

b. Job qualification specifications that included added emphasis on background knowledge and
skills
c. Increased complexity and sophistication of business operations
d. Increased interest by Bachelor of Science in Accountancy (BSA) graduates and experienced
auditors
46. In general, internal auditor's independence will be greatest when they report directly to the
a. Financial Vice President

b. Corporate Controller
c. Audit Committee of the Board of Directors
d. Corporate Stockholders
47. Governmental auditing, in addition to including audits of financial statements, often includes audits
of efficiency, effectiveness and
a. Adequacy
b. Evaluation
c. Accuracy
d. Compliance

48. In "auditing" accounting data, the concern is with:
a. Determining whether recorded information properly reflects the economic events that occurred
during the accounting period
b. Determining if fraud occurred.
c. Determining if taxable income has been calculated correctly.
d. Analyzing the financial information to be sure that it complies with government requirements.
49. Although a CPA does not guarantee his findings, his opinion is nevertheless valuable to various third
parties. The value of the CPA's opinion lies in the fact that
a. He has the qualifications required by law to be a CPA

b. He is under the supervision of the Professional Regulatory Board of Accountancy
c. He has gathered sufficient, competent, evidential matter to support his opinion
d. He has followed generally accepted auditing standards.
50. It refers to the level of satisfaction as to the reliability of an assertion being made by one party for
use by another party.
a. Confidence level
b. Assurance level
c. Reasonableness level
d. Tolerable level
51. Who is responsible for forming and expressing an opinion on financial statements
a. Auditor
b. Management
c. Public
d. External Users
52. The expertise that distinguishes auditors from accountants is in the
a. Ability to interpret generally accepted accounting principles

b. Requirement to possess education beyond the Bachelor's degree
c. Accumulation and interpretation of evidence
d. Ability to interpret PAS
53. The market for auditing services is driven by
a. The regulatory authority of the Securities and Exchange Commission.

b. A demand by external users of financial statements
c. Pronouncements issued by the Auditing and Assurance Standards Council
d. Congress at the national level
54. Which of the following is a correct statement relating to the theoretical framework of auditing?

a. The financial data to be audited can be verified.

b. Short-term conflicts do not exist between management managers who prepare data and
auditors who examine data
c. Auditors do not necessarily need independence
d. An audit is of benefit only to the owners
55. The most important procedure performed in a review is
a. A test of controls
b. Obtaining a letter of representation from management
c. Inquiry
d. Independent confirmation
56. A public accounting firm's primary role in performing non-attest services is to
a. Hedge against declines in the firm's audit practice

b. Establish firm as a consultant
c. Provide advice valuable to the client's business and industry
d. Acclimate staff members to the clients business and industry
57. The exposure period allowed for each exposure draft of PSA to be considered by the organizations
and persons to whom it is sent for comment is generally
a. Four months
b. Three months
c. Two months
d. Six months
58. To emphasize auditor independence from managements, many corporations follow the practice of
a. Appointing a partner of the CPA firm conducting the examination to the corporation's audit
b. Establishing a policy of discouraging social contact between employees of the corporation and
the staff of the independent auditor
c. Requesting that a representative of the independent auditor be on hand at the annual
stockholders meeting
d. Having the independent auditor report to an audit committee of outside members of the board
of directors.
59. Which one of the following is not a logical function of a CPA in public practice?
a. Attest function
b. Supervision of internal audit staff
c. Tax practice
d. Management consulting services

60. Independent auditors of financial statements perform audits that reduce and control
a. The business risks faced by investors

b. The information risk faced by investors
c. The complexity of financial statements
d. Quality reviews performed by other CPA firms
61. The main way(s) to reduce information risk is to have
a. The users verify the information

b. The users share the information risk with management
c. Audited financial statement provided
d. All of the above
62. Which of the following statements concerning the intended users of a professional accountant's
report is incorrect?
a. The intended user should never be established by agreement between the professional
accountant and the responsible party
b. In some circumstances, the intended user may be established by law
c. The responsible party may also be one of the intended users
d. The responsible party and the intended users may both be within the same organization
63. The following statements relate to a review of financial statements. Which is incorrect?
a. The objective of financial statements is to enable an auditor to state whether, on the basis of
procedures which do not provide all the evidence that would be required in an audit, anything
has come to the auditor's attention that causes the auditor to believe that the financial
statements are not prepared, in all material respects, in accordance with an identified financial
reporting framework
b. A review comprises inquiry and analytical procedures 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, tests of
records and of responses to inquiries by obtaining corroborating evidence through inspection,
observation, confirmation and computation.
d. The level of assurance provided in a review report is less than given in an audit report
64. An auditor is associated with financial information when
I. The auditor attaches a report to that financial information

II. The auditor consents to 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
65. Which of the following are considered consulting services?
Advisory Services Transaction Services Assurance Services
a. No Yes Yes
b. Yes Yes No
c. Yes No Yes
d. Yes Yes Yes
66. What is the proper organizational role of internal auditing?
a. To serve as 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 assists in the attainment of more efficient operations.
d. To serve as the investigate arm of the audit committee of the board of directors
67. 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 effect on amounts reported.
d. Design the audit provides reasonable assurance that the statements are free of material
misstatements resulting from illegal acts of having direct or indirect effects.
68. Reasonable Assurance means
a. Gathering of all available corroborating evidence for the auditor to conclude that there are no
material misstatements in the financial statements taken as a whole
b. Gathering of the audit evidence necessary for the auditor to conclude that the financial
statements, taken as a whole, are free from any misstatements
c. Gathering of the audit evidence necessary for the auditor to conclude that the financial
statements are free of material unintentional misstatements.
d. Gathering of the audit evidence necessary for the auditor to conclude that there are no material
misstatements in the financial statements, taken as a whole.
69. Which of the following statements best describes the primary purpose of Philippine Standards on
Auditing?

a. They are guides intended to set forth auditing procedures that are applicable to a variety of
situations.
b. They are procedural outlines which are intended to narrow the areas of inconsistency and
divergence of auditor opinion
c. They are authoritative statements, enforced through the Code of Professional Conduct that are
intended to limit the degree of auditors judgment
d. They are interpretations which are intended to clarify the meaning of "generally accepted
auditing standards"
70. An auditor need not abide by Philippine Standard on Auditing if the auditor believes that
a. The amount is insignificant

b. The requirement of the PSA is impractical to perform
c. The requirement of the PSA is impossible to perform
d. Any of the given three choices is correct.
71. Auditing standards are
a. Statutory in nature
b. Rules imposed by the SEC
c. Rules imposed by the PICPA
d. General guidelines to help auditors
72. Which of the following best describes what is meant by generally accepted auditing standards?
a. Pronouncement issued by the Auditing and Assurance Standards Council

b. Procedures to be used to gather evidence to support financial statements
c. Rules Acknowledged by the accounting profession because of their universal compliance
d. Measures of the quality of the auditor's performance
73. The scope and objectives of internal auditing vary widely and depend on the size and structure of
the entity and the requirements of its management. Ordinarily, internal auditing activities include one or
more of the following:
A B C D
I. Review of the accounting and internal control systems Yes Yes Yes Yes
II. Examination of financial an operating information Yes Yes Yes No
III. Review of the efficiency and effectiveness of operations Yes Yes No No
IV. Review of compliance with laws regulations and other
External requirements Yes No No No
74. To operate effectively, an internal auditor must be independent of

a. The line function of the organization
b. The entity

c. The employer-employee relationship which exist for other employees in the

organization
d. All of the above
75. Internal auditors cannot be independent
a. Since they do not possess the CPA license

b. Because they don't audit financial statements
c. Unless their immediate supervisor is a CPA
d. As long as an employer employee relationship exists.

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PH-Accountancy.blogspot.

com - Bridging the GAP

1. Which of the following is least likely an objective of an assurance engagement?

a. The engagement is intended to prevent the issuance of materially misleading information

I. Engagements intended to provide high or moderate levels of assurance.

4. Which of the following mostly describes the function of AASC?

a. To monitor full compliance by auditors to PSAs

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5. The Philippine Standards on Auditing issued by AASC

a. Direct reporting engagements

7. The following are characteristics of "direct reporting" assurance engagements, except

8. The primary goal of the CPA in performing the attest function is to

9. Which of the following best describes the objective of an assurance engagement?

a. To improve the company's outcomes.

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10. The following are the elements of an assurance engagement except:

11. Assurance engagements encompass the following types of services except

a. Independent auditors will always detect management fraud.

a. The entity's management.

a. The majority of the AASC members

15. Which of the following best describes review assurance?

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d. Review engagement focus on providing advice in a three party contract

17. The objective of the attest function is to

a. Ascertain the consistent application of GAAP

19. It is the auditor's duty

a. To prevent fraud and error

a. Agreed upon procedures

21. An assurance engagement

a. Is an engagement in which practitioner is engaged to issue, or does issue, a written

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b. Is an engagement involving a systematic process of objectively obtaining and evaluating

a. The underlying wisdom of the client's management decision.

25. The auditor's opinion

a. Guarantees the credibility of the financial statements

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a. Partner assigned to the audit engagement

28. Absolute assurance in auditing is not attainable because of

a. The need for judgment

a. International accounting standards

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a. Limited assurance on the statements.

33. In an engagement to perform agreed upon procedures an auditor is engaged to

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a. In conformity with GAAP

38. An operational audit is designed to

a. Assess the efficiency and effectiveness of management's operating procedures.

39. Operational auditing is mainly concerned about:

a. Past protection provided by current internal control.

41. Which of the following type of audits are most similar?

a. Operational audits and compliance audits

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a. Exposure to the elements

a. A means of assurance that internal accounting controls are functioning as planned

45. The internal auditing profession has advanced primarily as a result of

a. The limitation of financial statement audit scope

a. Financial Vice President

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48. In "auditing" accounting data, the concern is with:

a. He has the qualifications required by law to be a CPA

52. The expertise that distinguishes auditors from accountants is in the

a. Ability to interpret generally accepted accounting principles

53. The market for auditing services is driven by

a. The regulatory authority of the Securities and Exchange Commission.