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Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 1

UNIT I

INTRODUCTORY MATTERS

Chapter 1
AN INTRODUCTION TO THE UNIVERSE OF CPA SERVICES

Chapter Objectives:
1. Identify and described the fundamental concepts in auditing, attestation and
assurance services.
2. Explain the relationship among assurance, attestation and audit services.
3. Distinguish between consulting and assurance services; accounting and auditing.
4. Discuss the demand for financial statement audit.
5. Describe the different types of audit and auditors.
6. Explain the framework of Philippine Standard on Auditing
7. Describe the primary types of audit and related services.
8. State the current development.

FOREWORD

Most Certified Public Accountant (CPAs) provide a variety of services that allow
their client to operate more effectively and efficiently. Chapter 1 provides an introduction
to the universe of CPA services and presents the subsequent chapters.

NATURE: AUDITING, ATTESTATION, ASSURANCE SERVICES

AUDITING is a systematic process of objectively obtaining and evaluating


evidence regarding selected assertions about economic actions and events to ascertain the
degree of correspondence between those assertions and established criteria and
communicating the results to interested users. This broad definition identifies key
elements:

 Systematic process – audits are structured activities;


 Objectively – freedom from bias;
 Obtaining and evaluating evidence – allow the auditor to determine the support
for assertions or representations;
 Assertions about economic actions and events – describes the subject matter of an
audit is to determine conformity with some specified criteria; and
 Communicating results – the result must be communicated to interested parties.

Auditing should be done by a competent independent person. The auditor must be


qualified to understand the criteria used and must be competent to know the types and
amount of evidence to accumulate to reach the proper conclusion after the evidence have
been examined. The competence of the individual performing the audit is of little value
if he or she is biased in the accumulation and evaluation of evidence.
Evidence is any information used by the auditor to determine whether the
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 2

information being audited is stated in accordance with established criteria (for example,
the financial reporting framework in the financial statement audit or rules and regulation
in a compliance audit). Auditing is determining whether recorded information properly
reflects the economic events that occurred during the accounting period.
Accordingly, the auditor must have a thorough understanding of the entity and its
environment.
The final stage in the auditing process is preparing the Audit Report, which is the
means of communication of the auditor’s findings to users.

ATTESTATION, generally refers to an expert’s written communication of a


conclusion about the reliability of someone else’s assertions. It occurs when a practitioner
is engaged to issue a written communication that expresses a conclusion about the
reliability of a written assertion that is the responsibility of another party. Attestation
service is a type of assurance service whose subject matter (both financial and non-
financial in nature) is the responsibility of another party. Attest services offering some
level of assurance about management’s assertions include (1) audit, (2) review, (3)
agreed-upon procedures. Other examples of subject matter of attest service are:

1. Future-oriented financial information


2. Management’s discussion and analysis
3. The effectiveness of internal control
4. Compliance with statutory, regulatory and contractual obligations

ASSURANCE SERVICE pertains to independent professional services designed


to improve the quality of information, or its context, for decision making. Assurance
services are broader in scope than either auditing or attestation. The following are broad
categories of services, which are not intended to be all-inclusive, that may be provided by
CPAs under the umbrella of assurance services.

1. Risk assessment – provide independent assessments of the likelihood of adverse


events and how these events may affect the entity’s ability to achieve its
objectives. Risk can include environmental risks, business process and asset risks,
and information risks. These services would benefit the owners, managers, and
board of directors of companies susceptible to the risks.

2. Information system reliability – provide assurance that information systems are


designed and operating to provide reliable information to the entity. These
services provide benefits to both the organization itself as well as those who rely
on information provided by the entity.

3. Adequacy of security over Electronic commerce transactions, electronic


documents, and support systems. These services would benefit all participants in
Electronic commerce activities.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 3

4. Effectiveness of Health care performance measurement systems for the benefit of


health care recipients and their representatives.

5. Reliability and relevance of Business performance measurement. For entities


without existing performance measurement systems, CPAs can identify relevant
performance measures and assist in the design and implementation of a
performance measurement system.

Assurance services evolved naturally from attestation services, which in turn evolved
from audit. The root of all three is in independent verification. However, the form and
content of the services differ. Earlier, highly structured services were considered to be
relevant to more users. The newer services are more customized and targeted since
these are intended to be highly useful in more limited circumstances. Even when
assurance services do not deal with traditional accounting data, they are consistent
with the concept of certified public accounting. Figure 1.1 presents this universe of
CPA services.

Figure 1.1

ASSURANCE
E
ATTESTATION
CONSULTING

AUDIT

CONSULTING SERVICES are professional services that provide advice and


assistance concerning an entity’s organization, personnel, finances operations, systems or
other activities. Also called management advisory services, the practitioner employs
technical skills, education, observations, experiences, and knowledge of analytical
approach and procedures used in the consulting engagement. The areas of consulting
services and the related practitioner’s function are listed below.

1. Consultations – provide counsel in a short time frame.


2. Advisory – develop findings, conclusions, and recommendations for client
consideration and decision making.
3. Implementation – put an action plan into effect.
4. Transaction – provide services related to a specific client transaction.
5. Staff and other support – provide appropriate staff to perform tasks specified
by the client.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 4

6. Product – provide the client with a product and associated professional


services in support of the installation, use or maintenance of the product.

Assurance and Consulting Services Compared

The table below provides a comparison between two major categories of services
offered by professional firms that traditionally have been called public accounting firms.

Assurance Services Consulting Services


Parties Three-party contracts Two-party contracts
involved
Primary To improve quality of information To recommend uses of information
purpose
Focus Decision makers and information Outcomes
used for optimum decisions
Output’s Intended to improve decision maker’s Design to improve client’s condition
objective condition indirectly through directly through findings,
recommendations conclusions and recommendations

Primary Concerns of Auditing vs. Accounting

Auditing is primarily concerned with the verification of financial statement


informtion and its fairness, emphasizing evidence and the odds. A financial statement, the
object of auditing, is generated by the accounting system that deals with collecting,
sorting, summarizing and reporting financial measurements, plus interpreting financial
information. Auditing and accounting are separate disciplines with unrelated foundations
and dissimilar bodies of knowledge: GAAS and GAAP, respectively.

Demand for Audits

There are four conditions that create the demand for audits, to wit:

1. There is a potential conflict between those who prepare information and


those who use information. This potential conflict can result to biased
information.
2. Information can have substantial economic consequences for a decision
maker.
3. Expertise is often required for preparing and verifying information.
4. Users of information frequently are prevented from directly assessing the
quality of information.

The stewardship or agency theory provides another explanation for the demands
for audits. This theory implies that the manager, as well as the owner, wants the
credibility an audit adds to the financial statement assertions. The manager is the steward
or agent of the owner, but each party acts according to its self-interest and the goals of
each party are different. According to the stewardship or agency theory, the owner
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 5

perceives that the manager’s goals or objectives may be detrimental to the owner’s own
goals. Hence, the manager wants financial statement representations audited by an
independent party to enhance stewardship of these financial statements and to lessen the
owner’s mistrust of the manager.

TYPES OF AUDITS

While the focus of this text is on financial statements audit, other types of
evidence-gathering methods of auditing or performance audits are also employed by an
audit practitioner in the following areas:

1. Compliance audit – conducted to determine compliance with criteria,


standards, or rules set by an authoritative body. It involves testing and
reporting on conformity with laws and regulations relating to a specific
entity or activity.
2. Management audit – an examination and evaluation of the activities of
management; also referred to as effectiveness or performance
3. Performance audit – analyzes an organization’s structure, internal systems,
workflow and managerial performance to determine the efficiency,
effectiveness and economy of these items.
4. Comprehensive audit – usually includes the components of compliance,
performance and financial statements audit.
5. Operational audit – performed to determine the extent to which some
aspect of an organization’s operating activities is functioning effectively
and efficiently.
6. Internal audit – an independent appraisal function established within an
organization to examine and evaluate its activities as a service to the
organization.
7. Environmental audit – covers environmental issues which may have an
impact on the financial statements
8. Forensic audit – refers to the examination of evidence regarding an
assertion to determine its correspondence to established criteria carried out
in a manner suitable to the court. An example would be a Forensic Audit
of sales records to determine the quantum of rent owing under a lease
agreement, which is the subject of litigation. Forensic auditing is the
specialist area of financial auditing that focuses on unearthing the truth
and/or providing evidence in legal/financial disputes and/or irregularities
(including fraud), as well as providing preventive advice on the subject.
So forensic auditing is an area of expertise rather than a profession.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 6

TYPES OF AUDITORS

The auditing activities described above are performed by four types of auditors:
independent (external) auditors, internal auditors, government auditors and forensic
auditors.

1. External (independent) auditors – public accountants, both individuals or


firms, who perform audit, tax, consulting and other types of services for
external clients
2. Internal auditors – perform services for a single organization to which they
are employed on a full-time basis, typically reporting to the board of
directors who are the primary users of their work. Internal auditors may be
certified as Certified Internal Auditor by the Institute of Internal auditors.
3. Government auditors – are full-time employees of the government tasked
to determine compliance with laws, statutes, policies and procedures.
Examples are those with the Commission on Audit (COA) and the Bureau
of Internal Revenue (BIR).
4. Forensic auditors – financial auditing specialists who focus on unearthing
the truth and/or providing evidence in legal/financial disputes and/or
irregularities (including fraud), as well as providing preventative advice on
the subject

Framework of Philippine Standards on Auditing

The Auditing Standards and Practices Council (ASPC) established by PICPA nd


the Association of CPAs in Public Practice is the body authorized to establish and
promulgate generally accepted auditing standards GAAS) in the Philippines. These
standards and related interpretations are embodied in the Philippine Standards on
Auditing (PSAs) that apply to independent examination of financial statements of any
entity when conducted for the purpose of expressing an opinion thereon. The PSAs and
Interpretations also apply to other related activities of auditors and to material matters.

Financial Reporting Framework

Financial statements are ordinarily prepared and presented annually to provide


financial information about a business enterprise that is useful to a wide range of user. To
serve the various needs of many of these users who do have the direct access to
additional information that is vital in making economic decisions, the Accounting
Standard Council (ASC) establish standards that become mandatory after receiving
approval from BOA. Current international-aligned accounting standards require that
financial statements be prepared and presented in accordance with one, or a combination
of
 Accounting standards generally accepted in the Philippines (ASGAP)
 International accounting standards; and
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 7

 Another authoritative and comprehensive financial reporting framework which


has been designed for use of in financial reporting and is identified in the
financial statements

Framework for Auditing and Related Services

The framework distinguishes audits from related services. Related services


comprise review, agreed-upon procedures and compilation. Figure 1.2 presents a
comparison of the attestation services rendered by an auditor while Figure 1.3 depicts a
systems flowchart indicating the general framework of financial statement audits and
provides an overview of the audit process.

Aspect of Auditing Related Services


Comparison
Nature of services Audit Review Agreed-upon Compilation
Level of assurance High, but not Moderate None None
provided absolute
Report provided Positive Negative Factual Identification of
assurance on assurance on findings information
assertion(s) assertion(s) procedures compiled
Procedures Select from all Inquiry and
available analytical
procedures any procedures
combination designed to
that can low review
level limit audit reliability of
risk to an an assertions
appropriately
Features Auditors Audit skills Recipients of Accounting not
opinion techniques the report auditing
enhances applied but from their expertise use ;
credibility of accounting & own benefits derived
financial internal conclusions; by users arise
statements control report is from the
;absolute systems not restricted to services that
assurance not assessed the parties in was rendered
attainable the contract with due
professional
skill and care

The main distinguishing feature of auditing and related services is the level of
assurance provided by the auditor in the engagement. Level of assurance represents the
degree of satisfaction achieved as to the reliability of the client’s assertions through the
application of evidence –gathering procedures. An auditor performing related services
need not be the auditor of the entity whose financial statements are examined.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 8

The systems flowchart in Figure 1.3 shows the inputs and outputs of the audit as
well as relationship of the audit to the clients accounting system. ASGAP should be
followed by the client in designing and operating the accounting system while the auditor
should use PSAs in the conduct of the audit. Interpretation and judgment are vital in
applying these broadly stated principles and standards to both the operations of the
accounting system in the execution of the audit.

The input to the process represented by the amorphous from of that input
indicates that members of the audit team possess varied levels of training and experience.
The audit process uses these inputs through a variety of decisions involved in applying
audit procedures and interpreting the results of those procedures. The outputs of the
process are the audited financial statements and other report such as audit matters of
governance interest and reportable conditions.

Figure 1.3 – Systems Flowchart Indicating the Framework of Auditing

CLIENT AUDITOR

Evidence about Auditors


Evidence about
economic events
Economic events training &
experience

AUDITING PROCESS
ACCOUNTING SYSTEM

A Evidence
S
Recording and P
sample size
G S
A A
P Data Processing Procedure applied

Statement Preparation Evaluat


e
evidens
e

Financial reports Auditors report Other report


Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 9

Auditor association with Financial Statements

An auditor’s responsibility on the audited financial statements is the expression of


an opinion on those financial statements. An auditor becomes associated with the
financial information through the attachment of a report or when consenting to yhe use of
the auditor’s name in a professional connection.

Ordinarily an auditor has no responsibility to third parties when association with


financial information is not established in the aforementioned manner. Thus, when an
auditor learns that an entity is inappropriately using the auditors name in association with
the financial information remedies such as the following are available:

 Request management to stop the inappropriate association of auditors name


 Inform any known third parties
 Seek legal advices

Current Developments

The Sarbanes Oxley act of 2002 is a legislation passed in the United States of
America which has objectives as follows:

1. to restore public confidence in both public accounting and publicly traded securities
and
2. to assure ethical business practices through heightened levels of executive awareness
and accountability

Summary of Key Points:

1. The Auditing Standards and Practice Council (ASPC), a creation of PICPA and the
Association of CPAs in Public Practice, has been authorized to issue the Philippine
Standards on Auditing.
2. Financial Statements need to be prepared in accordance with accounting standards
generally accepted in the Philippines, the International Accounting standards and
another authoritative and comprehensive financial reporting framework has been
designed for use in financial reporting and is identified in the financial statements.)
3. Related services comprise reviews, agreed-upon procedures and compilations.
4. The framework does not apply to other services provided by auditors such as taxation,
consultancy and financial and accounting advice.
5. An auditor is associated with financial information when the auditor attaches a report
on that information or consents to the use of the auditor’s name in a professional
connection.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 10

MULTIPLE CHOICE QUESTIONS:

1. An external audit
a. Supports an internal audit
b. Duplicates an internal audit
c. Overlaps an internal audit
d. Complements an internal audit

2. The primary objective of the ordinary examination of financial statements by a CPA


is the expression of an opinion on the
a. Competence of management in accounting matters which is implied by whether
the opinion is qualified or not
b. Conformity of the statements with the books of accounts
c. Conformity of the financial statements with generally accepted auditing standards
applied on a basis consistent with that of the preceding year.
d. Fairness with which the financial statements present financial position and results
of operations.

3. Although the CPA does not guarantee his findings, his opinion is nevertheless
valuable to various parties. The value of the CPAs 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 Board of Accountancy
c. He has gathered sufficient, competent, evidential matter to support his opinion.
d. He has followed generally accepted auditing standards.

4. 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.

5. The independent auditor lends credibility to a clients financial statements by


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

6. Which of the following best describes why publicly-traded corporations follow the
practice of having the outside auditor appointed by the board of directors elected by
the stockholders?
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 11

a. To comply with the regulations of the Accounting Standards Council


b. To emphasize auditors independence from the management of the corporation
c. To encourage a policy of rotation of the independent auditors.
d. To provide the corporate owners with opportunity to voice their opinion
concerning the quality of the auditing firm selected by the directors.

7. A CPA firm’s primary purpose for performing non-audit services is to


a. Prepare the CPA firm fro the changing needs and requirements of the business
community
b. Establish the CPA firm as a consultant, which will enable the CPA firm to ensure
future viability and growth
c. Provide advice and technical assistance that will enable a client to conduct its
business more effectively
d. Enable staff members of the CPA firm to acquire the necessary continuing
education in all areas of business.

8. Which of the following types of audits would be intended to determine whether a


governmental entity is following sound procurement practices?
a. A financial statement audit
b. An optional audit
c. A program audit
d. A compliance audit

9. The criteria for evaluating quantitative information vary. For example, in the audit of
historical financial statements by CPA firms, the criteria are usually
a. Generally accepted auditing standards
b. Generally accepted accounting principles
c. Regulations of the Bureau of Internal Revenue
d. Regulations of the Security and exchange Commission
10. Which of the following types of audits would be intended to cover environmental
matters that may impact on the financial statements?
a. A Financial statement audit
b. An operational audit
c. A program audit
d. An environmental audit

11. An audit of financial statements is conducted to determine if the


a. Organization is operating efficiently and effectively
b. Auditee is following specific procedures or rules suet down by some higher
authority
c. Overall financial statements are stated in accordance with specified criteria
d. None of the above

12. Auditing is based on the assumption that financial data and statements are
a. In conformity with GAAP
b. Verifiable
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 12

c. Presented fairly
d. Consistently applied

13. The essence of the attest function is to


a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the clients financial statements are fairly stated
d. Assure the consistent application of correct accounting procedures.

14. A CPAs opinion of financial statements is of little value to those who relied on him
unless he
a. Issue an unqualified opinion
b. Maintains a program of continuing education
c. Serves his clients with professional concern for their best interests
d. Maintains his independence.

15. The review of a company’s financial statements by a CPA firm:


a. Is substantially less in scope of procedures than an audit
b. Requires detailed analysis on the major accounts
c. Is of similar scope as an audit and adds similar credibility to the statements
d. Culminates in issuance of a report expressing the CPA’s opinion as to the fairness
of the statements.

16. When an accountant is not independent, the accountant is precluded from issuing a
a. Compilation report
b. Review report
c. Management Advisory report
d. Tax planning report
17. A typical objective of an operational audit is for the auditor to
a. Report on the entity’s relative success in maximizing profits
b. Make recommendations for improving performance
c. Determine whether the financial statements fairly present the entity’s operations
d. Evaluate the feasibility of attaining the entity’s operational objective.

18. Which of the following is the authoritative body designed to promulgate auditing
standards?
a. PICPA
b. Accounting Standards Council
c. Auditing Standards and Practices Council
d. Association of CPAs in Public Practice and PICPA

19. An Attestation engagement is one in which a CPA is engaged to


a. Testify as an expert witness in accounting, auditing or tax matters, given certain
stipulated facts.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 13

b. Issue a written communication expressing a conclusion about the reliability of a


written assertion that is the responsibility of another party.
c. Assemble prospective financial statements based on the assumptions of the
entity’s management without expressing any assurance.
d. Provide tax advice or prepare a tax return based on financial information the CPA
has not audited or reviewed.

20. Performing inquiry and analytical procedures is the primary basis for an accountant to
issue a
a. Review report on comparative financial statements for a non-public entity in its
second year of operations.
b. Review report on prospective financial statements that present an entity’s
expected financial position, given one or more hypothetical assumption.
c. Report on compliance with covenants in a long-term loan agreement.
d. All of the above.

21. Which of the following statements is correct concerning both engagement to compile
and an engagement to review an entity’s financial statements?
a. The accountant does not contemplate obtaining an understanding of the internal
control system.
b. The accountant must be independent in fact and in appearance
c. The accountant expresses no assurance on the financial statements.
d. The accountant should obtain a written management representation letter.

22. The primary objective of the ordinary examination of financial statements by a CPA is
the expression of an opinion on
a. The competence of management in accounting matters which is implied by
whether the opinion is qualified or not
b. The conformity of the statements with the books of account
c. The Conformity of the financial statements with generally accepted auditing
standards applied on a basis consistent with that of the preceding year.
d. The fairness with which the financial statements present financial position and
results of operations.

23. When an accountant is not independent, the accountant is precluded from issuing a
a. Compilation report
b. Review report
c. Management advisory report
d. Tax planning report

24. Which of the following is an incorrect phrase?


a. Auditing is a systematic process
b. Auditing subjectively obtains and evaluates evidence
c. Auditing evaluates evidence regarding assertions
d. Auditing communicates results to interested users.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 14

25. 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 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.

26. Which of the following statements does not describe a condition that creates a
demand for auditing?
a. Conflict between an information preparer and a user can result in biased
information
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification
d. User can directly assess the quality of information

27. Which of the following is correct statement?


a. An audit provides limited assurance by attesting to the fairness of the client’s
assertions
b. A review provides positive assurance by attesting to the reliability of the client’s
assertions
c. Management consulting services provide attestation in all cases.
d. Accounting services do not provide attestation.

28. The market of auditing services is driven by


a. The regulation authority of the Security and Exchange Commission
b. A demand by external users of financial statements
c. Pronouncements issued by the Auditing Standards And Practice Council
d. Congress at the state level
29. Financial statement audit
a. Reduce the cost of the capital
b. Report on compliance with laws and regulations
c. Assess management’s efficiency
d. Overlook information risk

30. Which of the following services provide positive assurance through attestation?
a. Tax services
b. Review
c. Accounting services
d. Auditing

31. Choose one of the following which would describe best the phrase “generally
accepted auditing standards”
a. They identify the policies and procedures for the conduct of the audit
b. They define the nature and extent of the auditor’s responsibilities.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 15

c. They provide guidance to the auditor with respect to planning the audit and
writing the audit report.
d. They set forth a measure of the quality of the performance of audit procedures.

32. Unlike consulting services, assurance services


a. Confirm that financial statement assertions are accurate
b. Competing interests may exist between management and the users of statements
c. Misstated account balances are generally corrected by an independent audit
d. Ineffective internal controls may exist

33. 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

34. According to PSA 120, 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

35. An accountant may accept an engagement to apply agreed-upon procedures to


prospective financial statements provided that
a. Distribution of the report is to be restricted to the specified users
b. The prospective financial statements are also examined
c. Responsibility for the adequacy of the procedures performed is taken by the
accountant.
d. Negative assurance is expressed on the prospective financial statements taken as a
whole.

36. The statement that “nothing came to our attention which would indicate that these
statements are not fairly presented” expresses which of the following?
a. Disclaimer of opinion
b. Negative assurance
c. Negative confirmation
d. Qualified opinion

37. Which of the following procedures is not included in a review engagement of a


nonpublic entity?
a. Inquiries of management
b. Inquiries regarding events subsequent to the balance sheet date.
c. Procedures designed to identify relationships among data that appear to be
unusual.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 16

d. A study and evaluation of internal control.

38. “An engagement in which a practitioner is engaged to issue or does issue a written
communication that expresses a conclusion with respect to the reliability of a written
assertion that is the responsibility of another party” is the definition of a(an)
a. audit engagement
b. attestation engagement
c. review engagement
d. compiliation engagement

39. The report issued in attestation engagement may provide positive or negative
assurance to the reader. Which of the following types of engagements would provide
positive assurance?
a. An examination
b. A review
c. An agreed-upon procedures engagement
d. A compiliation

40. The level of assurance that is provided by the CPA on a compiliation report is
a. High
b. Medium
c. Low
d. None

41. Which of the following is least likely considered a part of the financial reporting
framework?
a. Generally accepted auditing standards (GAAS)
b. Generally accepted accounting principles (GAAP)
c. International accounting standards/ International Financial Reporting Standards
(IAS/FRS)
d. Another authoritative and comprehensive basis of reporting

42. Which of the listed services is not considered related to audit?


a. Agreed-upon procedures
b. Compilation of information
c. Management Consultancy
d. Review of procedures

43. What best describes the word “assurance in the context of the Philippine Standards on
Auditing?
a. Auditors 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 limited in nature.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 17

44. The auditing and related services framework include the following:
Agreed-upon Procedures Review Compilation
a. YES YES NO
b. YES YES YES
c. NO NO YES
d. NO YES YES

45. Which of the following are authoritative source for auditing standards for members of
the accountancy profession in the Philippines?
I. Pronouncements of GAAS, issued by ASPC
II. Pronouncements of GAAS issued by PICPA which are not superceded or
amended by statements issued by ASPC
III. Pronouncements issued by AICPA

a. I only
b. I and II only
c. I and III only
d. I, II and III

46. In the absence of pronouncements issued by the ASPC which are approved by the
Board of Accountancy of the Philippines and guidelines by other authoritative bodies,
like AICPA, IAPC and AFA are the basis of determining generally accepted auditing
standards. What effect do these pronouncements provide in determining the generally
accepted auditing standards?
a. Authoritative
b. Persuasive
c. Alternative
d. Parallel

RPCPA Board Examinations Multiple Choice Questions


47. Auditors of the commission on Audit perform the role of:
a. Internal auditors
b. Independent auditors
c. Management accountants
d. Financial Consultants

48. In comparison with the external auditor, an internal auditor is more likely to be
concerned with
a. Internal administrative procedures
b. Cost accounting procedures
c. Operational auditing
d. Internal control

49. A typical objective of an operational audit is for the auditor to


a. Determine whether the financial statements fairly present the entity’s operations
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 18

b. Evaluate the feasibility of attaining the entity’s operational objectives


c. Make recommendations for improving performance
d. Report on the entity’s relative success in attaining profit maximization.

50. The CPA title was conceived and created, under the first accountancy law, for
professional accountants engaged in:
a. Accounting education
b. Management accounting
c. Public accounting
d. Government accounting

51. Which of the following services is not within the area of public accounting?
a. Taxation service
b. Write-up work for one client
c. Management Advisory Services
d. Attest function

52. An independent appraisal activity within the organization for the review of the
accounting, financial, and other operations as a basis for protective and construction
service to management:
a. Internal auditing
b. Internal control
c. Operations audit
d. Management audit

53. The value of the auditor’s attest- function involves the application of:
a. The general standards
b. The standards of fieldwork
c. The standards of reporting
d. Due professional care

54. The main objective of operations auditing is:


a. To evaluate the integrity of accounting information
b. To verify fulfillment of plans and sound business requirements
c. To measure and evaluate the effectiveness of controls.
d. To produce results as desired or directed.

55. The independent audit is important to users of financial statements in as much as it


a. Reports on the validity of all accounting data in the financial statements
b. Involves the objective examination of and reporting on financial statements
prepared by management
c. Determines the management capability of the client whose financial statements
are under review.
d. Evaluates and communicates financial data included in financial statements.

56. Which of the following best describe “independent auditing’?


Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 19

a. A branch of accounting
b. A discipline which attests to the results of accounting and other functional
operations and data
c. A professional activity that measures and communicates financial and business
data
d. A regulatory function that prevents the issuance of improper financial information

57. The independent audit is important to readers of financial statements because it:
a. Determines the future stewardship of the management of the company whose
financial statements are audited.
b. Measures and communicates financial and business data included in financial
statements.
c. Involves the objective examination of and reporting of management prepared
statements.
d. Reports on the accuracy of all information in the financial statements.

58. Auditing standards differ from auditing procedures in that procedures relate to:
a. Measures of performance
b. Audit principles
c. Acts to be performed
d. Audit judgments

59. The principal reason for an independent auditor to gather and evaluate audit evidence
is to:
a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management
d. Evaluate internal control.

60. An independent audit aids in the communication of economic data because the audit:
a. Confirms the accuracy of management’s financial representations
b. Lends credibility to the financial statements
c. Guarantee that financial data are fairly presented.
d. Assures the readers of financial statements that any fraudulent activity has been
corrected.

61. In the preparation of an income tax return, the CPA is expected to:
a. To take a position of client advocacy
b. To take a position of independent neutrality
c. To present the taxable income in the audited financial statements conform with
the taxable net income in the income tax return.
d. To present the expenses in the audited financial statements as conforming with the
deductions in the income tax return.
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 20

62. Which of the following of audit is performed to determine whether an entity’s


financial statements are fairly stated in conformity with GAAP?
a. Operational audit
b. Compliance audit
c. Financial statement audit
d. Performance audit

63. Broadly defined, the subject matter of any audit consists of


a. Financial statements
b. Economic data
c. Assertions about economic actions and events
d. Operating data

64. The primary reason for an audit of financial statements is to


a. Satisfy government regulatory requirements
b. Guarantee that there are no misstatements in the financial statements and ensure
that any fraud will be detected.
c. Relieve management of responsibility for financial statements
d. Provide increased assurance to users as to the fairness of the financial statements.

65. What is the essence of the external audit function?


a. To detect fraud
b. To examine individual transactions so that the auditor may certify their validity
c. To determine whether the client’s financial statements are fairly stated
d. To assure the consistent application of correct accounting procedures.

66. Most of the independent auditors work in formulating an opinion on financial


statements consist of:
a. Studying and evaluating internal control
b. Obtaining and examining evidence matter
c. Examining cash transactions
d. Comparing recorded accountability with assets.

67. In financial statement audits, the audit process should conform with
a. Generally accepted auditing standards (GAAS)
b. Generally accepted accounting principles (GAAP)
c. The audit program
d. The auditor’s judgment

68. Which of the following types of audit uses as its criteria laws and regulations?
a. Operational Audit
b. Compliance audit
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 21

c. Financial Statement Audit


d. Performance Audit

69. 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 the Board of directors
c. Shareholders
d. Statutory authorities

70. Which of the following types of auditing is performed most commonly by CPAs on a
contractual basis?
a. Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing

71. Auditing to determine whether an entity is managing and utilizing its resources
economically and efficiently would most appropriately be classified as:
a. Compliance auditing
b. Operational auditing
c. Financial Auditing
d. Internal Auditing

72. A typical objective of an operational audit is to determine whether an entity’s


a. Internal control structure is adequately operating as designed
b. Operational information is in accordance with generally accepted governmental
auditing standards
c. Financial statements present fairly the results of operations
d. Specific operating units are functioning efficiently and effectively

73. 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.

74. An audit conducted to determine whether an entity is following specific procedures or


rules set down by some higher authority is
a. Operational audit
b. Compliance audit
c. Financial audit
Chap 1 An introduction to the Universe of CPA Services (Evangelista & Racasa) 22

d. Detailed audit

75. The overall objective of forensic auditing is to


a. Attest to the efficiency with which resources are employed
b. Unearth the truth and provide evidence in legal and financial disputes; controls
are costs justified.
c. Provide assurance that financial data have been accurately recorded
d. Assist members of the organization in the effective discharge of their
responsibilities

76. Which of the following terms does not belong to the group
a. Financial audit
b. Internal audit
c. External audit
d. Independent audit

end