POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND FINANCE

Manila

ACCO 4093 – AUDITING THEORY

P R A C T I C E E X A M I N A T I O N I I

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Philippine Framework for Assurance

Engagements/Framework of Philippine
Standards on Auditing

1. What is an assurance engagement?

a. Assurance engagement enables the auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified financial reporting framework.
b. Assurance engagement enables 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.
c. Assurance engagement carries 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.
d. Assurance engagement means an engagement in which a practitioner expresses a conclusion designed to
enhance the degree of confidence of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria.

2. The following governs practitioner in the performance of assurance engagement, except:

a. Philippine Standards on Accounting
b. Philippine Standards on Review Engagement
c. Code of Ethics for Professional Accountants in the Philippines
d. Philippine Standards on Quality Control

3. Which of the following services would be most likely be classified as an assurance engagement?
a. Agreed-upon procedure
b. Compilation of financial or other information
c. Examination of prospective financial statement
d. Engagements to testify in legal proceedings regarding accounting, auditing, taxation or other matters
e. Professional opinion restricted for use by intended users specified in the report

4. Which of the following are not elements of assurance engagement?

a. A third-party relationship involving a practitioner, a responsible party, and intended users;
b. An appropriate subject matter;
c. Suitable criteria;
d. Sufficient appropriate evidence; and
e. A written assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement.

5. An assurance engagement should have the following elements?

Sufficient Appropriate Assurance Report,

Evidence which can be oral
a. Yes No
b. No Yes
c. Yes Yes
d. No No

6. In an assurance engagement, the responsible party and the intended users

a. Are from different entities
b. Are from the same entities
c. May be (a) or (b)
d. Neither (a) or (b)
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ACCO 4093 – AUDITING THEORY

7. Audit risk has three components: inherent risk, control risk, and detection risk. Which of the following
statements which pertain to these components is incorrect?
a. The acceptable level of detection risk is inversely related to the combined assessed level of inherent risk and
control risk.
b. The higher the assessment of inherent and control risks, the lower the detection risk that can be accepted by
the auditor.
c. Detection risk cannot be changed at the auditor’s discretion.
d. The auditor considers the combined assessments of inherent and control risk in order to determine the level
of detection risk which may be accepted.

8. The responsibility for the preparation of the financial statements and the accompanying footnotes belong to
a. management
b. auditor
c. both management and the auditor equally
d. management for the statements and the auditor for the notes

9. The following are fundamental ethical principles that all professional accountants are required to observe,
except:

a. Objectivity
b. Professional competence and due care
c. Professional Behavior
d. Independence

10. BB Corp. orally engaged MM, CPA to audit its financial statements. BB informed MM that it suspected that the
accounts receivable were materially overstated. Although the financial statements that MM audited did, in fact,
include a materially overstated accounts receivable balance, MM issued a standard unqualified report. If BB sues
MM for negligence in failing to discover the overstatement, MM’s best defense would be that:
a. MM had signed no engagement letter.
b. MM did not perform the audit recklessly or with intent to deceive.
c. MM was not in privity of contract with BB’s customers.
d. MM performed the audit in accordance with PSAs.

11. The auditor should consider materiality when

a. Determining the nature, timing, and extent of audit procedures
b. Evaluating the effect of misstatements
c. Both I and II
d. Neither I and II

12. It is an appraisal activity established within and entity

a. external auditing
b. governmental auditing
c. Internal auditing
d. internal control

13. The risk that an auditor may give an inappropriate opinion when the financial statements are materially
misstated is called
a. audit risk
b. detection risk
c. business risk
d. inherent risk

14. Which is false?

a. There is an inverse relationship between detection risk and the combined leve of inherent and control risks
b. When inherent and control risk are high, the acceptable level of detection risk needs to be low to reduce
audit risk to an acceptably low level
c. The assessed level of inherent and control risks can be sufficiently low to eliminate the need for the auditor
to perform any substantive procedures
d. When inherent and control risks are low, and auditor can accept a higher detection risk and still reduce
audit risk to an acceptably low level

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15. When the professional accountant has obtained sufficient appropriate evidence to conclude that the subject
matter criteria conforms in all material respects with identified criteria, he or she can provide what level of
assurance?
a. Absolute
b. None
c. Moderate
d. High

16. What level of assurance does auditor give in compilation engagement?

e. Absolute
f. None
g. Moderate
h. High

17. What is inherent risk?

a. the susceptibility of the subject matter information to a material misstatement, assuming that there are no
related controls; and
b. the risk that a material misstatement that could occur will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk is relevant to the subject matter, some control
risk will always exist because of the inherent limitations of the design and operation of internal control;
c. the risk that the practitioner will not detect a material misstatement that exists.
d. the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.

18. What is control risk?

a. the susceptibility of the subject matter information to a material misstatement, assuming that there are no
related controls; and
b. the risk that a material misstatement that could occur will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk is relevant to the subject matter, some control
risk will always exist because of the inherent limitations of the design and operation of internal control;
c. the risk that the practitioner will not detect a material misstatement that exists.
d. the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.

19. What is detection risk?

a. the susceptibility of the subject matter information to a material misstatement, assuming that there are no
related controls; and
b. the risk that a material misstatement that could occur will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk is relevant to the subject matter, some control
risk will always exist because of the inherent limitations of the design and operation of internal control;
c. the risk that the practitioner will not detect a material misstatement that exists.
d. the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.

20. What is assurance engagement risk?

a. the susceptibility of the subject matter information to a material misstatement, assuming that there are no
related controls; and
b. the risk that a material misstatement that could occur will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk is relevant to the subject matter, some control
risk will always exist because of the inherent limitations of the design and operation of internal control; and
c. the risk that the practitioner will not detect a material misstatement that exists.
d. the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.

21. Which of the following services would be most likely be classified as an assurance engagement?
a. Advocating a client’s position in tax matter
b. Compilation of prospective financial statement
c. An engagement to issue a report addressing an entity’s compliance with requirements of specified laws
d. Designing client’s internal control structure

22. Which of the following elements is most likely to be a component of a direct reporting assurance engagement?
a. Auditor independence

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b. Low level assurance

c. Absolute assurance
d. A written assertion

23. The following are not assurance engagements, except:

a. Compilation of FS
b. Review engagement
c. Agreed-upon procedure
d. MAS

24. Which of the following types 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

25. Which of the following is least likely application of professional skepticism?

a. The auditor does not consider representations from management as substitute for obtaining sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
b. In planning and performing and audit, the auditor assumes that management is dishonest.
c. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents or
management representations.
d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence.

26. Which of the following information is (are) required when an auditor’s report is issued on financial statements to
be filed with the SEC?

1. Audit report is manually signed

2. Certifying partner to sign his name
3. Partner’s Tax Identification Number
4. PRC Registration Number
5. Accreditation with SEC

a. 1,2,3,4,5
b. 2,4,5
c. 1,3,4,5
d. 2,3,4,5

27. Under which of the following sets of circumstances might an auditor disclaim an opinion?
a. There was a significant limitations on the scope of the audit
b. There has been a material change between periods in the method of the application of accounting principle
c. The principal auditor decides to make a reference to the report of another auditor who audited a subsidiary
d. The financial statements contain a departure from PFRS, the effect of which is material.

28. Which of the following would require auditing through the computer rather than auditing around the computer?
a. The system is complex and includes key parts of the accounting system
b. There are small volume of output/input data
c. The internal controls are not embedded in the computer system
d. The system was audited with CAATs in the previous year

29. The objective of an audit engagement

a. is to enable the auditor to express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework.
b. 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.

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c. is 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.
d. is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial
information.

30. The objective of a compilation engagement

a. is to enable the auditor to express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework.
b. 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.
c. is 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.
d. is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial
information.

31. The objective of a review engagement

a. is to enable the auditor to express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework.
b. 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.
c. is 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.
d. is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial
information.

32. The objective of a review engagement

a. is to enable the auditor to express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework.
b. 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.
c. is 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.
d. is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial
information.

33. The following are fundamental ethical principles that all professional accountants are required to observe,
except:
a. Integrity
b. Professional competence and due care
c. Confidence
d. Professional Behavior

34. Who are the three separate parties in assurance engagements?

a. Practitioner
b. Auditor
c. Engaging party
d. Reliable party

35. The following are characteristics of suitable criteria, except:

a. Relevance
b. Completeness
c. Reliability
d. Neutrality
e. Understanding

36. Which of the following is not a valid criteria for assurance engagement?
a. Accounting standards generally acceptable in the Philippines

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b. International Accounting Standards

c. Other authoritative financial reporting framework
d. Philippine Standards on Auditing

True or False

37. The responsible party can be one of the intended users.

38. External auditors may perform operational audits and internal auditors may perform financial audits.
39. The practitioner plans and performs an assurance engagement with an attitude of professional skepticism
recognizing that circumstances may exist that cause the subject matter information to be materially misstated.
40. The responsible party is the party who always engages the practitioner.
41. Criteria need not to be available to the intended users.
42. An assurance engagement always involves the authentication of documentation.
43. The criteria for any audit are GAAP
44. Both external and internal auditors can provide management advice to the company.
45. A financial audit is designed to determine if the company is acquiring resources at the lowest cost.
46. Part B of the Code of Ethics applies to professional accountants in commerce and industry
47. Sufficiency is the measure of the quality of evidence; that is, its relevance and its reliability.
48. Evidence is more reliable when it is obtained from dependent sources outside the entity.
49. Assurance engagement risk is the risk that the practitioner expresses an appropriate conclusion when the subject
matter information is materially misstated.

50. Accounting Jokes: Who is an auditor?

a. An auditor is one who opens the sheet, verifies the figures, and makes correcting entries.
b. An auditor is a person or a firm appointed by a company to execute an audit.
c. An auditor is an official whose job it is to carefully check the accuracy of business records.
d. In accounting, an auditor is someone who is responsible for evaluating the validity and reliability of a
company or organization's financial statements.

GIVE AUDITING A GOOD FIGHT

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