Calamba Review Center - Laguna (LCRC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang, Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW (May 2020 Batch)
Auditing Theory - 02 Randy S. Paderes, CPA

• PSA 120- FRAMEWORK ON PHILIPPINE STANDARDS ON AUDITING

• PREFACE TO THE PHILIPPINE STANDARDS ON QUALITY CONTROL, AUDITING, REVIEW, OTHER
ASSURANCE AND RELATED SERVICES
• PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
• PSA 200- OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AND AUDIT OF FINANCIAL STATEMENTS

PSA 120- FRAMEWORK ON PHILIPPINE STANDARDS ON AUDITING

1. The following are examples of services that are provided by professional accountants, except
a. Audit
b. Review
c. Aggreged-upon procedures
d. Compilation
e. All of the above may be provided by professional accounts.

2. This refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party.
a. Assurance c. Professional Skepticism
b. Degree of confidence d. Audit risk

3. Which of the following is not true regarding audit of financial statements?

a. The objective of an audit of financial statements 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. In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence to be able to draw
conclusions on which to base that opinion.
c. The auditor’s opinion enhances the credibility of financial statements by providing a high but not absolute
assurance.
d. All of the above is true.

4. Absolute assurance in auditing is not attainable because of

a. Need for judgment and use of testing
b. Inherent limitations of any accounting and internal control systems
c. Most of the evidence available to auditor is persuasive rather than conclusive in nature
d. All of the above are factors why absolute assurance is not attainable.

5. Which of the following is not considered “related services” in the context of PSA?
a. Auditing c. Review
b. Agreed-upon procedures d. Compilation

6. 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 agreed with the auditors the procedures that will be carried out to
form a conclusion from.
c. Reporting whether 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.
d. Reporting that the financial statements, in all material respects, fairly present the financial position and
operating results of the client.

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

8. Which of the following is not true?

a. The level of assurance provided in a review report is correspondingly less than that given in an audit report.
b. Review engagements normally involves the application of audit skills and techniques and the gathering of
evidence.
c. In a review engagement, the auditor is likely to assess accounting and internal control systems and test of
records.
d. The auditor can only provide a moderate assurance and a negative type of report in a review engagement.

9. In an engagement to perform agreed-upon procedures, an auditor is engaged to

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 a. Carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third
parties have agreed and to report on factual findings.
b. 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 misstatement.
d. Provide a high, but not absolute level of assurance that the information is free of material misstatement.

10. Which of the following is the recipient of the report on agreed-upon procedures?
a. Stockholders
b. Those parties who have agreed to the procedures to be performed.
c. Management
d. Board of directors

11. What is the level of assurance provided by agreed-upon procedures?

a. High, but not absolute c. Moderate
b. No assurance d. Reasonable

12. Which of the following statements concerning compilation engagement is incorrect?

a. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing
expertise to collect, classify and summarize financial information.
b. The procedures employed in a compilation engagement enable the accountant to express a moderate level of
assurance on the compiled financial information.
c. Users of the compiled financial information derive some benefit as a result of the accountant’s involvement
because the service has been performed with due professional skill and care.
d. A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable form
without a requirement to test the assertions underlying that information.

13. What is the level of assurance provided by agreed-upon procedures?

a. High, but not absolute c. Moderate
b. No assurance d. Reasonable

14. Which of the following is false?

a. An auditor is associated with financial information when the auditor attaches a report to that information or
consents to the use of the auditor’s name in a professional connection.
b. If the auditor learns that an entity is inappropriately using the auditor’s name in association with financial
information, the auditor should already sue the management.
c. The auditor may inform third party users of financial information of the inappropriate use of the auditor’s name
in connection with the information.
d. To resolve issues on inappropriate use of the auditor’s name associated with financial information, the auditor
may seek legal advice.

15. What is the proper organizational role of internal auditing?

a. To serve as an 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 assist in the attainment of more efficient operations.
d. To serve as the investigative arm of the audit committee of the board of directors.

16. Which of the following best describes the scope of internal auditing as it has developed to date?
a. Internal auditing involves appraising the economy and efficiency with which resources are employed.
b. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding
assets.
c. Internal auditing has evolved to more of an operational orientation from a strictly financial orientation.
d. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding
assets.

17. Which of the following is considered a primary reason for creating an internal audit department?
a. To evaluate and improve the effectiveness of control processes.
b. To ensure the accuracy, reliability and timeliness of financial and operating data used in management’s decision
making.
c. To relieve management of the responsibility for establishing effective controls.
d. To safeguard resources entrusted to the organization.

18. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of
financial presentation and includes audits of efficiency, economy, effectiveness and also
a. Accuracy c. Evaluation
b. Compliance d. Internal control

19. A government audit may extend beyond an audit leading to the expression of an opinion on the fairness of financial
presentation to include
I. Program results
II. Compliance
III. Economy and efficiency

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

20. An objective of a performance audit is to determine whether an entity’s

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

PREFACE TO THE PHILIPPINE STANDARDS ON QUALITY CONTROL, AUDITING, REVIEW, OTHER

ASSURANCE AND RELATED SERVICES

21. Its mission is the worldwide development and enhancement of an accountancy profession with harmonized standards,
able to provide services of consistently high quality in the public interest.
a. Financial Reporting Standards Council (FRSC) c. International Federation of Accountants (IFAC)
b. Auditing and Assurance Standards Council (AASC) d. Philippine Institute of CPAs (PICPA)

22. This is created by the International Federation of Accountants’ (IFAC) Board to develop and issue, under its own
authority, high quality standards on auditing, assurance and related service engagements, related Practice Statements
and quality control standards for use around the world.
a. Auditing and Assurance standards Council (AASC)
b. International Auditing and Assurance Standards Board (IAASB)
c. Financial Reporting Standards Council (FRSC)
d. International Federation of Accountants (IFAC)

23. Which of the following is the correct order of the due process and working procedures of the development of IAASB’s
standards and practice statement?
I. Project Identification, Prioritization and approval.
II. Public Exposure
III. Re-exposure
IV. Responses to exposure drafts and consideration of respondents’ comments
V. Research, Consultation and debate
VI. Final International Standard or Practice Statement
a. I, II, III, IV, V and VI c. I, V, II, IV, III, VI
b. I, II, V, III, IV, VI d. I, II, III, V, IV, VI

24. This is the body authorized by to establish and promulgate generally accepted auditing standards in the Philippines.
a. Auditing and Assurance Standards Council (AASC)
b. Philippine Institute of Certified Public Accountants (PICPA)
c. Auditing Standards and Practices Council (ASPC)
d. Financial Reporting Standards Council (FRSC)

25. The Preface to the Philippine Standards on Quality Control, Auditing and Other Assurance and Related Services is issued
to facilitate understanding of the
I. Objectives and operating procedures of the Auditing and Assurance Standards Council (AASC).
II. Scope and authority of the documents issued by the AASC.
a. I only c. Both I and II
b. II only d. Neither I nor II.

26. Which of the following are collectively referred to as “Engagement Standards?”

a. PSA and PSREs
b. PSAs, PSREs and PSAEs
c. PSAs, PSREs, PSAEs and PSRSs
d. PSAs, PSREs, PSAEs, PSRSs and PSQCs

27. In case the standards issued by the AASC is in conflict with local laws and regulations,
a. AASC standards shall apply.
b. Local laws shall apply.
c. Whichever is stricter between the AASC Standards and Local laws and regulations shall apply.
d. The application will depend on the judgment of the auditor.

28. These are issued to provide interpretive guidance and practical assistance to professional accountants in implementing
PSAs and to promote good practice.
a. Philippine Related Service Practice Statements (PRSPs)
b. Philippine Auditing Practice Statements (PAPSs)
c. Philippine Review Engagement Practice Statements (PREPs)
d. Philippine Assurance Engagement Practice Statements (PAEPSs)

29. Statement I. The Philippine Framework for Assurance Engagements defines and describes the elements and objectives
of an assurance engagement, and identifies engagements to which PSAs, PSREs and PSAEs apply.

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 Statement II. A Professional accountant who does not consider and apply the guidance included in a relevant Practice
Statement need not explain how the basic principles and essential procedures in the Engagement Standard(s)
addressed by the Practice Statement have been complied with.

a. Both statements are true. c. True; False

b. Both statements are false. d. False; True

30. Statement I. AASC’s standards contain basic principles and essential procedures (identified in bold type lettering)
together with related guidance in the form of explanatory and other material, including appendices.

Statement II. The basic principles and essential procedures are to be understood and applied in the context of the
explanatory and other material that provide guidance for their application. It is therefore necessary to consider the
whole text of a Standard to understand and apply the essential procedures.

Statement III. In exceptional circumstances, a practitioner may judge it necessary to depart from a standard in order to
more effectively achieve the objective of an engagement. When such a situation arises, the practitioner should be
prepared to justify the departure.

a. All statements are true. c. True; False, True

b. All statements are false d. False; True, True

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

31. The auditor’s satisfaction as to the reliability of an assertion being made by one party for use of another is called
a. Assurance c. Precision
b. Reliance factor d. Materiality

32. 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 a criterion
a. Assurance engagement c. Audit engagement
b. Attestation engagement d. Management consulting engagement

33. In addition to the Framework for Assurance engagements, and PSAs, PSREs and PSAEs, practitioners who perform
assurance engagements are governed by:
I. The Code of Ethics for Professional Accountants in the Philippines.
II. Philippine Standards on Quality Control
III. All provisions of the Republic Act No. 9298
a. I only c. II only
b. I, II and III d. I and II only

34. Which of the following best describes assurance services?

a. Independent professional services that are intended to enhance the credibility of information to meet the needs
of an intended user.
b. Services designed to express an opinion on the fairness of historical financial statements based on the results of
an audit.
c. The preparation of financial statements or the collection, classification and summarization of financial
information.
d. Services designed for the improvement of operations, resulting in better outcomes.

35. The following statements relate to the two types of assurance engagement that a practitioner is permitted to perform:

Statement 1: The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the
practitioner’s conclusion.

Statement 2: The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable
assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion.

a. Statement 1 is True; Statement 2 is False. c. Both statements are false.

b. Statement 1 is False; Statement 2 is True. d. Both Statements are true.

36. All of the following are not assurance engagements except

a. Agreed-upon procedures c. Preparation of tax returns
b. Audit d. Advisory engagements

37. A limited assurance engagement is one in which:

a. The aim is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the
engagement as a basis for a positive form of expression of the practitioner’s conclusion.

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 b. The aim is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the
engagement but where that risk is greater than for a reasonable assurance engagement as the basis for a
negative form of expression of the practitioner’s conclusion.
c. The auditor is responsible not only for the conclusion but also for the subject matter.
d. None of the choices apply.

38. Which of the following is false?

a. When an assurance engagement is a part of a larger engagement, (audit of historical or prospective financial
information required under a business acquisition consulting engagement), the Assurance framework shall be
applied to the entire scope of engagement.
b. Engagements to testify in legal proceedings regarding accounting, auditing, taxation and other matters need not
be in compliance with the Philippine Framework for Assurance engagements.
c. A practitioner reporting on an engagement that is not an assurance engagement should avoid including a
statement that could reasonably be mistaken for a conclusion designed to enhance the degree of confidence of
intended users about the outcome of the evaluation or measurement of a subject matter against a criteria.
d. When there are no intended users other than the responsible party but where all the requirements of the PSAs,
PSREs or PSAEs are met, the practitioner’s report should include a statement restricting the use of the report to
the responsible party.

39. An assurance engagement should have which of the following elements?

I. A three-party relationship involving a practitioner, a responsible party and intended users.
II. An appropriate subject matter
III. Suitable criteria
IV. Sufficient, appropriate evidence
V. A written assurance reports
a. I, II and III only. c. I, II and iV only
b. II, III, IV and V only. d. I, II, III, IV and V.

40. All of the following are true, except

a. A practitioner should accept an assurance engagement if and only if the five elements of assurance
engagements are present.
b. When a potential engagement cannot be accepted as an assurance engagement because it does not exhibit all
the characteristics of an assurance engaging, the engaging party may be able to identify a different
engagement that will meet the needs of the intended users.
c. Once an assurance engagement is accepted, a practitioner may change that engagement to a non-assurance
engagement or from a reasonable assurance engagement to a limited assurance engagement provided there is
a reasonable justification to do so.
d. A change in circumstances that affect the intended users’ requirements or a misunderstanding concerning the
nature of the engagement are justifiable reasons for a request for a change in the engagement. In such case,
the practitioner may disregard evidence that was obtained prior to the change.

41. S1: The responsible party and the intended users may be from different entities or the same entity.
S2: The relationship between the responsible party and the intended users need not be viewed within the context of a
specific engagement.
a. Only Statement 1 is true. c. Both statements are true.
b. Only Statement 2 is true. d. Both statements are false.

42. The person or persons who in a direct reporting engagement is responsible for the subject matter; or in an assertion-
based engagement, is responsible for the subject matter information (the assertion) and may be responsible for the
subject matter.
a. General public c. Audit committee
b. Responsible party d. Intended users

43. Which of the following forms may the subject matter of an assurance engagement take?
I. Financial performance or conditions.
II. Non-financial performance or conditions.
III. Physical characteristics.
IV. Systems and processes
V. Behavior

a. I and II. c. I, III and IV

b. I, II and III. d. I, II, III, IV and V.

44. Which of the following is true?

a. Subject matters have difference characteristics, including the degree to which information about them is
qualitative versus quantitative, objective versus subjective, historical versus prospective, and relates to a point
in time or covers a period.
b. The characteristics of subject matters affect the precision with which the subject matter can be evaluated or
measured against criteria and the persuasiveness of available evidence.
c. An appropriate subject matter is identifiable and capable of consistent evaluation or measurement against the
identified criteria and such that the information about it can be subjected to procedures for gathering sufficient
appropriate evidence to support a reasonable assurance or limited assurance conclusion, as appropriate.

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 d. All of the above is true.

45. These are the benchmarks used to evaluate or measure the subject matter, including, where relevant, benchmarks for
presentation and disclosure.
a. Criteria c. Assertions
b. Generally Accepted Accounting Principle d. Conclusion

46. Suitable criteria should have which of the following characteristics?

I. Relevance IV. Neutrality
II. Completeness V. Understandability
III. Reliability
a. I, II and III only. c. I, II, III, and IV only
b. II, III, IV and V only. d. I, II, III, IV and V.

47. Which of the following is false?

a. The practitioner should plan and perform an assurance engagement with an attitude of professional skepticism
recognizing that circumstances may exist that cause the subject matter information to be materially misstated.
b. An assurance engagement involves the authentication of documentation as part of the evidence gathering
procedures.
c. An attitude of professional skepticism means the practitioner makes a critical assessment with a questioning
mind, of the validity of evidence obtained and alert to evidence that contradicts or brings into question the
reliability of documents or representations by the responsible party.
d. Sufficiency is the measure of the quantity of evidence while appropriateness is the measure of the quality of
evidence; that is its relevance and its reliability.

48. Which of the is incorrect?

a. When considering materiality, the practitioner understands and assess what factors might influence the
decisions of the intended users.
b. Assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
c. Engagement risks include: inherent risk, control risk, detection risk and sampling risk.
d. The exact nature, timing and extent of evidence-gathering procedures vary from one engagement to the next.

49. 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 internal control Yes Yes Yes Yes
• Evidence available are mostly persuasive than conclusive Yes Yes No Yes
• Use of judgement in gathering and evaluating evidence and
forming conclusions based on that evidence No Yes No No

50. Which of the following statements exemplifies a positive assurance report?

a. “In our opinion internal control is effective, in all material respects, based on XYZ criteria.”
b. “Based on our work described in this report, nothing has come to our attention that causes us to believe that
internal control is not effective, in all material respects, based on XYZ criteria.
c. Both A and B.
d. Neither A nor B.

PSA 200- OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS

51. Which of the following is incorrect?

a. The objective of an audit of financial statements 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. The audit of financial statements expresses a positive assurance on the future viability of the entity and the
efficiency or effectiveness with which management has conducted the affairs of the entity.
c. The unique identifying characteristic of auditors in the performance of audit services is its independence.
d. The auditor should conduct an audit in accordance with the Philippine Standards on Auditing.

52. The purpose of an audit of financial statements is to

a. Enhance the understanding of the stakeholders of the company.
b. Provide government agencies, such as BIR with basis for assessments.
c. Enhance the degree of confidence of intended users of the financial statements.
d. Enhance the knowledge and skills of auditors.

53. Which of the following is incorrect?

a. The auditor is responsible for forming and expressing an opinion on the financial statements.
b. The responsibility for the preparation and presentation of financial statements rest with the entity’s
management.
c. An entity’s management may delegate to the auditors its responsibilities for preparing financial statements as
auditors are perceived as more knowledgeable in applying and interpreting accounting standards.
d. The audit of the financial statements does not relieve management of its responsibilities.

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54. The assurance provided in the audit of historical financial statements is
a. Reasonable c. Limited
b. High but not absolute d. Negatives.

55. Which of the following is true?

a. Professional skepticism assumes that the client is dishonest.
b. Professional skepticism would require the auditor to check consistency of audit evidence gathered.
c. The auditor should accept audit evidence verbally provided by a client personnel who appears to be trustworthy
and honest.
d. All of the above is true.

END OF MMC AT-02

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