Which of the following statements about theoretical framework of auditing is(are) incorrect

What is Verifiability in Accounting?

Verifiability means that it should be possible for an organization's reported financial results to be reproduced by a third party, given the same facts and assumptions. For example, an outside auditor should be able to construct the same financial statement results as a client, using the same set of financial records and using the same assumptions applied by the client. When financial statements are verifiable, this assures the users of the statements that they fairly represent the underlying business transactions.

The Need for Assumption Testing and Documentation

Verifiability cannot be achieved without knowing the assumptions used by a business in the construction of its financial statements. For example, the depreciation expense calculated by a third party could easily vary from the same expense calculated by a business, depending on the projected useful life and salvage value used by the business. Similarly, a business uses assumptions regarding the number of products that will be returned when it derives an allowance for product returns.

Verifiability involves more than simply duplicating the results reported by another party. It also involves deciding whether the assumptions used by the other party are reasonable. It is quite possible that an auditor investigating the financial statements of a client will conclude that the client made incorrect assumptions. Another aspect of verifiability is that a business provides clear documentation of how it achieved its numbers. By examining these documents, one can see if there is a logical flow from the source documents to the financial statements.

Which of the following objectives are generally a component of a firm's quality control?

A. Professional requirements
B. Skills and competence
C. Assignment
D. Inspection
E. Consultation
F. Due professional care
G. Monitoring
H. Delegation

a. A, B, C, D, E, F
b. A, B, C, F, E, G
c. A, B, C, E, G, H
d. B, C, G, F, H

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MCQ - Intro To Audit

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CPA REVIEW SCHOOL OF THE PHILIPPINES

M a n i l a AUDITING THEORY

Overview of Auditing

Related PSAs : PSA 100, 120, 200 and 610

1. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the following is not a postulate of auditing? a. No long-term conflict exists between the auditor and the management of the enterprise under audit. b. Economic assertions can be verified. c. The auditor acts exclusively as an auditor. d. An audit has a benefit only to the owners.

2. In all cases, audit reports must a. Be signed by the individual who performed the audit procedures. b. Certify the accuracy of the quantitative information which was audited. c. Communicate the auditor’s finding to the general public. d. Inform readers of the degree of correspondence between the quantifiable information and the established criteria.

3. The auditor communicates the results of his or her work through the medium of the a. Engagement letter c. Management letter. b. Audit report d. Financial statements.

4. As used in auditing, which of the following statements best describes "assertions"? a. Assertions are the representations of management as to the reliability of the information system. b. Assertions are the auditor's findings to be communicated in the audit report. c. Assertions are the representations of management as to the fairness of the financial statements. d. Assertions are found only in the footnotes to the financial statements.

5. 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 ASC Statements.

6. The framework for auditing and related services as addressed by PSA excludes a. Review c. Compilation b. Tax services d. Agreed upon procedure

7. It refers to the level of auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another party. a. Confidence level c. Assurance level b. Reasonableness level d. Tolerable level

8. Indicate the level of assurance provided by audit and related services. a b c d

• Audit High High Negative Absolute
• Review Moderate None Moderate High
• Agreed-upon procedures None None None Limited
• Compilation None None None None

1. Which of the following is true of the report based on agreed-upon-procedures? a. The report is restricted to those parties who have agreed to the procedures to be performed. b. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in the financial information. c. The report states that the auditor has not recognized any basis that requires revision of financial statements. d. The report should state that the procedures performed are limited to analytical procedures and inquiry.

2. Which of the following is an objective of a review engagement? a. Expressing a positive opinion that the financial information is presented in conformity with generally accepted accounting principles. b. Expressing a limited assurance to users who have agreed as to procedures that will be performed by the CPA. c. Reporting whether material modifications should be made to such financial statements to make them conform with generally accepted accounting principles. d. Reporting that the financial statements, in all materials respects, fairly present the financial position and operating results of the client.

3. According to Philippine Standard on Auditing, the procedures employed in doing compilation are: a. Designed to enable the accountant to express a limited assurance. b. Designed to enable the accountant to express a negative assurance. c. Not designed to enable the accountant to express any form of assurance. d. Less extensive than review procedures but more extensive than agreed-upon procedures.

4. Any services in which the CPA firm issues a written communication that express a conclusion with respect to the reliability of a written assertion that is the responsibility of another party is a (n) a. Accounting and bookkeeping service c. Attestation service b. Management advisory service d. Tax service

5. The three types of attestation services are: a. Audits, review, and compilations b. Audits, compilations, and other attestation services c. Reviews, compilations, and other attestation services d. Audits, reviews, and other attestation services

6. Which of the following is not primary category of attestation report? a. Compilation report b. Review report c. Audit report d. Special audit report based on a basis of accounting other than generally accepted accounting principles.

7. The primary goal of the CPA in performing 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 client's assertions are fairly stated d. Assure the consistent application of correct accounting procedures

8. Which of the following criteria is unique to the independent auditor’s attest function? a. General competence b. Familiarity with the particular industry of each client c. Due professional care d. Independence

9. Assurance engagement a. Is an engagement in which a 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 a systematic process of objectively obtaining and evaluating evidence regarding 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. 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 misstatement. 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 user.

10. The single feature that most clearly distinguishes auditing, attestation, and assurance is a. Type of service. c. Scope of services. b. Training required to perform the service d. CPA’s approach to the service

b. May be sufficiently independent to conduct an audit c. Is never considered to be independent d. Must receive approval of the Securities and Exchange Commission before conducting an audit

1. Which of the following is responsible for an entity’s financial statements? a. The entity’s management c. The entity’s audit committee b. The entity’s internal auditors d. The entity’s board of directors

2. The best statement of the responsibility of the auditor with respect to audited financial statement is: a. The audit of the financial statements relieves management of its responsibilities b. The auditor’s responsibility is confined to his expression of opinion about the audited financial statements. c. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements. d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.

3. Which of the following least likely limits the auditors ability to detect material misstatement? a. Most audit evidences are conclusive rather than being persuasive. b. The inherent limitations of any accounting and internal control system. c. Audit is based on testing d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in detecting intentional misstatements.

4. Because an examination in accordance with generally accepted auditing standards is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of a. Professional responsiveness c. Objective judgment b. Conservative advocacy d. Professional skepticism

5. Which of the following best describes why an independent auditor reports on financial statements? a. Independent auditors are likely to detect fraud b. Competing interests may exist between management and the users of the statements c. Misstated account balances are generally corrected by an independent audit. d. Ineffective internal controls may exist.

6. An audit can have a significant effect on a. Information Risk c. Business Risk b. The risk-free interest rate d. All of these

7. The main way(s) to reduce information risk is to have a. The user verify the information b. The user share the information risk with management c. Audited financial statements provided d. All of the above

8. Which of the following is an appraisal activity established within an entity as a service to the entity? a. External auditing c. Financial auditing b. Internal auditing d. Compliance auditing

9. 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

   • Review of the accounting and internal control systems Yes Yes Yes Yes
   • Examination of financial and operating information Yes Yes Yes No
   • Review of the economy, efficiency and effectiveness of operations Yes Yes No No
   • Review of compliance with laws, regulations and other external requirements Yes No No No

10. To operate effectively, an internal auditor must be independent of a. The line functions of the organizations b. The entity c. The employer-employee relationship which exists for other employees in the organization d. All of the above

11. 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-e mployee relationship exists.

12. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to a. Board of Directors. c. Corporate Controller. b. Vice-President for Finance. d. Corporate Stockholders.

13. Which statement is correct regarding the relationship between internal auditing and the external auditor? a. Some judgments relating to the audit of the financial statements are those of the internal auditor. b. The external audit function's objectives vary according to management's requirements. c. Certain aspects of internal auditing may be useful in determining the nature, timing and extent of external audit procedures. d. The external auditor is responsible for the audit opinion expressed, however that responsibility may be reduced by any use made of internal auditing.

14. Which of the following statements is not a distinction between independent auditing and internal auditing? a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors report directly to management. b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity. c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors. d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and performance auditing.

15. Which of the following is a correct qualification of the Chairman and Two Commissioners of the Commission on Audit? a. A citizen of the Philippines. b. At least 40 years of age upon appointment. c. CPA’s with no less than 5 years of auditing experience or members of Philippine bar who have been engaged in law practice for at least 5 years. d. Must not have been candidates for any elective position preceding appointment.

16. The 1986 Constitution provides that the Chairman and Commissioners of the Commission on Audit shall be a. All Certified Public Accountants b. All lawyers c. One or two lawyers and one or two CPAs for a total of three d. Two lawyers and one CPA

17. Which of the following is not one of the duties of the Commission on Audit a. Define the scope of its audit and examination b. Assume fiscal responsibility for the government and its instrumentalities c. Keep the general accounts of the government d. Promulgate accounting rules and regulations

18. A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include Program results Compliance Economy and efficiency a. Yes Yes No b. Yes Yes Yes c. No Yes Yes d. No No Yes

b. It provides basic principles and essential procedures for engagements intended to provide a moderate level of assurance. c. When a professional accountant is engaged to perform an assurance engagement for which specific standards exist, those standards apply. d. If no specific standards exist for an assurance engagement, PSAE apply.

1. An assurance engagement should exhibit the following elements except a. A three party relationship c. Appropriate professional fee b. A conclusion d. A subject matter

2. Which of the following is incorrect regarding the “three-party relationship” element of assurance engagements? a. Professional accountants as those persons who are members of an IFAC member body, which should be in public practice. b. The responsible party and the intended user will often be from separate organizations but need not be. c. The responsible party is the person or persons, either as individuals or representatives of an entity, responsible for the subject matter. d. The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose.

3. The following are assurance engagements except a. Financial statements audit c. Review of financial statements b. Information system reliability services d. Tax consulting

4. Engagements frequently performed by professional accountants that are not assurance engagements include the following except a. Agreed-upon procedures. c. Compilation b. Compliance audit d. Management consulting.

5. The subject matter of an assurance engagement may take many forms, including a. Data b. Systems and processes c. Behavior d. All of these

6. The decision as to whether the criteria are suitable involves considering whether the subject matter is capable of reasonably consistent evaluation against or measurement using such criteria. The characteristics for determining whether criteria are suitable include the following, except a. Relevance b. Reliability: c. Understandability: d. Sufficiency

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

8. Absolute assurance is generally not attainable as a result of such factors as: a b c d

• the use of selective testing, Yes Yes Yes No
• the inherent limitations of control systems Yes Yes Yes Yes
• the fact that much of the evidence available to the professional accountant is persuasive rather than conclusive Yes Yes No Yes
• the use of judgment in gathering evidence and drawing conclusions based on that evidence Yes No No No

PSA 120 – Framework of PSA

1. The Framework of PSA applies to a. Taxation b. Consultancy c. Accounting advice d. Compilation

2. Agreed-upon procedures provides what level of assurance? a. None b. High c. Moderate d. Absolute

3. Which of the following procedures ordinarily performed during an audit are also performed in review? a. Assessment of accounting and internal control systems b. Test of controls c. Tests of records and of responses to inquiries

d. Inquiry and analytical procedures

1. The objective of a review of financial statements 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.

2. An auditor is associated with financial information when a b c d

• the auditor attaches a report to that information Yes No Yes No
• consents to the use of the auditor’s name in a professional connection Yes Yes No No

PSA 200 – Objective and general principles governing an audit of FS

1. The auditor’s opinion a. Enhances the credibility of the financial statements. b. Is an assurance as to the future viability of the entity. c. Is an assurance as to the efficiency with which management has conducted the affairs of the entity, but not effectiveness. d. Certifies the correctness of the financial statements.

2. Which of the following is incorrect regarding the general principles of an audit? a. The auditor should comply with the “Code of Ethics for Professional Ethics for Certified Public Accountants” promulgated by the Philippine Professional Regulation Commission. b. The auditor should conduct an audit in accordance with PSAs. c. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. d. The auditor would ordinarily expect to find evidence to support management representations and assume they are necessarily correct.

3. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. a. Scope of an audit c. Objective of an audit b. Audit program d. Reasonable assurance

4. Which of the following are sources of procedures to be considered by the auditor to conduct an audit in accordance with PSAs? PSA Legislation Terms of Audit Engagement Type of Opinion a. Yes No No No b. No No Yes Yes c. No Yes Yes No d. Yes Yes Yes No

- end of AT-5901 -

What is the theoretical framework of auditing?

What are the four theories of auditing?

Which of the following is not true about auditors duty?

Which of the following statements is not true in respect of the internal auditor?