AT-8001

AUDITING THEORY

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

POTHER ASSURANCE AND RELATED SERVICES
 PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
 FRAMEWORK OF PHILIPPINE STANDARDS ON AUDITING (PSA 120)
 OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT
IN ACCORDANCE WITH PHILIPPINE STANDARDS ON AUDITING (PSA 200)

The Authority Attaching to Philippine Standards Issued by the AASC

Standards Application
1. Philippine Standards on Auditing (PSAs)  Audit of historical financial information
2. Philippine Standards on Review  Review of historical financial information
Engagements (PSREs)
3. Philippine Standards on Assurance  Assurance engagements dealing with
Engagements (PSAEs) subject matters other than historical
financial information
4. Philippine Standards in Related Services  Compilation engagements
(PSRSs)  Engagements to apply agreed-upon
procedures to information
 Other related services engagement as
specified by the AASC

1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
2. Philippine Standards on Quality Control (PSQC) are to be applied for all services falling under the
AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public Sector.

The Authority Attaching to Practice Statements Issued by the AASC

1. Philippine Practice Statements are issued to:

 Provide interpretive guidance and practical assistance to professional
accountants in implementing Philippine Standards; and
 Promote good practice.
2. Professional accountants should be aware of and consider Practice Statements applicable to
the engagement.
3. A professional accountant who does not consider and apply the guidance included in a
relevant Practice Statement should be prepared to explain how the basic principles and
essential procedures in the AASC’s Engagement Standards(s) addressed by the Practice
Statement have been complied with.
AASC Bulletins and AASC Alerts
 A regular publication issued by the AASC to provide guidance to auditors in the
application of PSAs.
 Not part of PSAs and do not change the requirements of relevant PSAs.

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

1. The Framework does not itself establish standards or provide procedural requirements for
the performance of assurance engagements.
2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform
assurance engagements are governed by:
 the Philippine Code of Ethics for Professional Accountants; and
 Philippine Standards on Quality Control (PSQCs).
 AT-8001
ASSURANCE ENGAGEMENTS

1. “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. “Subject matter information” refers to the outcome of the evaluation or measurement of a

subject matter.

3. In some assurance engagements, the evaluation or measurement of the subject matter is

performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended uses (assertion-based
engagements).

4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that
has performed the evaluation or measurement that is not available to the intended users. The
subject matter information is provided to the intended users in the assurance report (direct
reporting engagements).

Two Types of Assurance Engagement

1. Reasonable assurance engagement – the objective 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.
2. Limited assurance engagement – the objective is a reduction in assurance engagement risk
to a level that is acceptable in the circumstances of the engagement, but where the risk is
grater than for a reasonable assurance engagement, as a basis for a negative form of
expression of the practitioner’s conclusion.

Scope of the Framework

The following are non-assurance engagements and therefore are not covered by the Framework:

1. Engagements covered by PSRSs such as agreed-upon procedures engagements and compilations

of financial or other information.
2. The preparations of tax returns where no conclusion conveying assurance is expressed.
3. Consulting (or advisory) engagements, such as management and tax consulting.

Elements of an Assurance Engagement

1. A three-party relationship involving:

 a practitioner;
 a responsible party; and
 intended users.
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.

OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN

ACCORDANCE WITH PSAs

1. In conducting an audit of financial statements, the auditor’s OVERALL OBJECTIVES are:

a) To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
 AT-8001
prepared, in all material respects, in accordance with an applicable financial
reporting framework; and
b) To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.

2. The auditor SHALL:

c) The auditor SHALL:
 Comply with all PSAs relevant to the audit.
 Comply with relevant ethical requirements, including those pertaining to
independence relating to financial statement audit engagements
 Plan and perform an audit with professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially
misstated.
 Exercise professional judgment in planning and performing an audit of financial
statements.
 Obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level.

ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS

1. The objective of a review of financial statements is to enable a practitioner 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 practitioner’s attention that causes the practitioner to
believe that the financial statements are not prepared, in all material respects, in
accordance with an identified financial reporting framework (negative assurance).
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review
the reliability of an assertion that is the responsibility of one party for use by another party.

3. A review does not ordinarily involve an assessment of accounting and internal control
systems, tests of records and of responses to inquiries by obtaining corroborating evidence
through inspection, observation, confirmation and computation, which are procedures
ordinarily performed during an audit.

4. The level of assurance provided in a review report is less than that given in an audit report.

ENGAGEMENTS TO PERFORM AGREEN-UPON PROCEDURES REGARDING FINANCIAL INFORMATION

1. In an engagement to perform agreed-upon procedures, an auditor is engaged 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 ACTUAL FINDINGS.
2. The recipients of the report must form their own conclusion from the report of the auditor.
3. The report is restricted to those parties that have agreed to the procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.

ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

1. In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify, and summarize financial information.
2. It ordinarily entails reducing detailed data to manageable and understandable form without
a requirement to test the assertions underlying that information.
3. The procedures performed are not designed and do not enable the accountant to express
any assurance on the financial information.
4. Users of 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.
 AT-8001
SUMMARY

Nature of Service Audit Review Agreed-upon Compilation

Procedures
Level of Assurance Provided High, but not Moderate No assurance No assurance
absolute assurance
assurance
Report Provided Positive Negative Factual findings of Identification of
assurance on assurance on procedures information compiled
assertion(s) assertion(s) (Compilation Report)
(Audit (Review
Report) Report)

MULTIPLE CHOICE QUESTIONS

1. Which of the following statements 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 of the collection, classification, and
summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.
2. Which of the following engagements is covered by the Framework for Assurance
Engagements?
A. Consulting engagements.
B. Agreed-upon procedures engagement.
C. Preparation of tax returns.
D. Independent financial statements audit.
3. Assurance services differ from consulting services in that they
I. Focus on providing advice.
II. Involve monitoring of one party by another.
A. I only C. Both I and II
B. II only D. Neither I nor II
4. How many separate parties are involved in an assurance engagement?
A. 2 C. 4
B. 3 D. 5
5. An assurance engagement should have which of the following elements?
Subject matter Criteria
A. Yes No
B. No Yes
C. Yes Yes
D. No No
6. The subject matter of an assurance engagement may include
Financial Internal Compliance
Information Controls with Regulation

A. Yes Yes Yes

B. No No No
C. Yes No Yes
D. No Yes No
7. Suitable criteria are required for reasonably consistent evaluation or measurement of the
subject matter of an assurance engagement. Which of the following statements concerning
the characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
 AT-8001
B. Relevant criteria allow reasonably consistent evaluation or measurement of the
subject matter including, where relevant, presentation and disclosure, when used in
similar circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear,
comprehensive, and not subject to different interpretations.
8. Criteria that are embodied in laws or regulations, or issued by authorized or recognized
bodies of experts that follow a transparent due process are called
A. Suitable criteria
B. Established criteria
C. Specifically developed criteria
D. General criteria
9. In an assurance engagement, the outcome of the evaluation or measurement of a subject
matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
10. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users. These
engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assertion engagements
D. Recurring engagements
11. _____________ is the risk that the practitioner expresses an inappropriate conclusion when
the subject matter information is materially misstated.
A. Assurance engagement risk.
B. Business risk.
C. Client risk.
D. Information risk.
12. Which of the following is the objective of a reasonable assurance engagement?
A. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of the
practitioner’s conclusion.
B. A reduction in assurance engagement risk to a very low level in the circumstances of
the engagement as a basis for a disclaimer of the practitioner’s conclusion.
C. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a qualified form of expression of the
practitioner’s conclusion.
D. 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.
13. Which of the following statements is true concerning evidence in an assurance
engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
C. The reliability of evidence is influenced by not its nature but by its source.
D. Obtaining more evidence may compensate for its poor quality.
14. Reducing assurance engagement risk to zero is very rarely attainable por cost beneficial as a
result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is persuasive rather
than conclusive.
C. The practitioner may not have the required assurance knowledge and skills to
gather and evaluate evidence.
 AT-8001
D. The use of the judgment in gathering and evaluating evidence and forming
conclusions based on that evidence.
15. The Philippine Framework for Assurance Engagements
A. Contains basic principles, essential procedures, and related guidance for the
performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance engagement,
and identifies engagements to which PSAs, PSREs, and PSAEs apply.
C. Provides a frame of reference to CPAs in public practice when performing audits,
reviews and compilations of historical financial information.
D. Established standards and provides procedural requirements for the performance of
assurance engagements.
16. After accepting an assurance engagement, a practitioner is not allowed to change the
engagement to a non-assurance engagement, or from a reasonable assurance engagement
to a limited assurance engagement, except when there is reasonable justification for the
change. Which of the following ordinarily will justify a request for a change on the
engagement?
I. A change in circumstances that affects the intended users’ requirements.
II. A misunderstanding concerning the nature of the engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II
17. Which of the following standards are to be applied, as appropriate, in the audit of historical
financial information?
A. PSREs C. PSRSs
B. PSAEs D. PSAs
18. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in
February 1008, applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner other than the
entity’s auditor.
C. Reviews of historical financial or other information by a practitioner other than the
entity’s auditor.
D. Reviews of historical financial or other information of an audit client.
19. The Philippine Standards on Assurance Engagements (PSAEs) are to be applied in
A. Assurance engagements dealing with subject matters other than historical financial
information.
B. Compilation engagements and agreements to apply agreed-upon procedures to
information.
C. The audit or review of historical financial information.
D. Assurance engagements dealing with historical financial information.
20. The Philippine Standards on Quality Control (PSQCs) are to be applied to
A. Assurance engagements only.
B. Review engagements only.
C. Compilation and review engagements only.
D. All services that fall under the AASC’s engagement standards.
21. These statements are issued by the AASC to provide interpretive guidance and practical
assistance to auditors in the implementation of PSAs and to promote good practice.
A. PREPs C. PAEPs
B. PAPSs D. PRSPSs
22. What level of assurance is provided by the auditor in an audit engagement?
A. Absolute C. Moderate
B. High, but not absolute D. No assurance
23. What level of assurance is provided by the practitioner in a review engagement?
A. No assurance C. Reasonable
B. High, but not absolute D. Moderate
24. When performing a compilation engagement, the accountant is required to
A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of the
information provided.
 AT-8001
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.
25. What assurance is provided by the auditor in an agreed-upon procedures engagement?
A. Reasonable
B. Absolute
C. Moderate
D. No assurance
26. The review of a company’s financial statements by a CPA firm
A. Is substantially less in scope of procedures than an audit.
B. Required detailed analysis of 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.
27. An engagement to perform agreed-upon procedures may involve the auditor in performing
certain procedures concerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and II
28. A summary of findings rather than assurance is most likely to be included in a/an
A. Agreed-upon procedures report.
B. Compilation report.
C. Examination report.
D. Review report.
29. Inquiries and analytical procedures ordinarily form the basis for which type of engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.
30. Independence is not a requirement for which of the following engagements?

Compilation Review Agreed-upon Procedures

A. No Yes No
B. No No No
C. Yes No Yes
D. Yes Yes Yes
31. A practitioner should accept an assurance engagement only if
A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’s conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the
practitioner.
32. A practitioner is associated with financial information when
I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a professional
connection.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
 AT-8001
33. The auditor is required to comply with all PSAs relevant to the audit of an entity’s financial
statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only C. Either I or II
B. II only D. Both I and II
34. The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether caused by
fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.
A. I and II only
B. II and IV only
C. I, II, and III only
D. I, II, III, and IV
35. The auditor is required to maintain professional skepticism throughout the audit. Which of
the following statements concerning professional skepticism is false?
A. A belief that management and those charged with governance are honest and have
integrity relieves the auditor of the need to maintain professional skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the
audit procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the critical assessment of audit evidence.
D. Professional skepticism is an attitude that includes questioning contradictory audit
evidence obtained.
36. Which of the following best describes the reason why independent auditors report on
financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. Different interests may exist between the company preparing the statements and
the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditors’ work.
D. Poorly designed internal control may be in existence.
37. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.
38. 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 auditor 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.
39. Operational audits generally have been conducted by internal and COA auditors, but may be
performed by certified public accountants. A primary purpose of an operational audit is to
provide.
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a
company’s top-level management.
C. Aid to the independent auditor, who is conducting the examination of the financial
statements.
D. A means of assurance that internal accounting controls are functioning as planned.
 AT-8001
40. Governmental auditing often extends beyond examinations leading to the expression of
opinion on the fairness of financial presentation and include audits of efficiency, economy,
effectiveness, and also
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control
41. Which of the following terms best describes the audit of a taxpayer’s return by a BIR
auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.
42. Which of the following statements concerning consulting services is false?
A. The performance of consulting services for audit clients does not, in and of itself,
impair the auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function of attesting to the
assertions of other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also provide
consulting services to their clients.
43. Operational auditing is primarily oriented toward
A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management’s financial records.
C. The verification that a company’s financial statements are fairly presented.
D. Past protection provided by existing internal control.
44. An audit to determine whether an entity is following specific procedures or rules set down
by some higher authority is classified as a/an
A. Audit of financial statements.
B. Compliance audit.
C. Operational audit.
D. Production audit.
45. Which of the following is the most appropriate action to be taken by a CPA who has been
asked to perform a consulting services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with others
to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on the
achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on
Auditing (PSAS).
46. 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.
47. Internal auditors should review the means of physically safeguarding assets from the losses
arising from
A. Exposure to the elements.
B. Underusage of physical facilities.
C. Misapplication of accounting principles.
D. Procedures that are not cost justified.
48. The internal auditing department’s responsibility for deterring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.
 AT-8001
49. Internal auditors review the adequacy of the company’s internal control system primarily to
A. Help determine the nature, timing, and extent of tests necessary to achieve audit
objectives.
B. Determine whether the internal control system provides reasonable assurance that
the company’s objectives and goals are met efficiently and economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Determine whether the internal control system ensures that financial statements
are fairly presented.
50. Which of the following services, if any, may a practitioner who is not independent provide?
A. Compilations but not reviews.
B. Reviews but not compilations.
C. Reviews but not financial statement audits.
D. Agreed-upon procedures but not compilations.