Into To World of CPAs

 

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

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UNIT I INTRODUCTORY MATTERS Chapter 1

AN INTRODUCTION TO THE UNIVERSE OF CPA SERVICES Chapter Objectives: 1. Ident Identif ify y an and d de desc scri ribe bed d the the funda fundame ment ntal al co conc ncep epts ts in audit auditin ing, g, at atte test stat atio ion n an and d assurance services. 2. Explain Explain the relation relationship ship among among assurance, assurance, attestat attestation ion and audit audit services. services. 3. Distingui Distinguish sh between between consulting consulting and assura assurance nce services; services; accounti accounting ng and auditing. auditing. 4. Discuss Discuss the demand for financial financial statement statement audit. audit. 5. Describe Describe the the diff different erent types of audit audit and and auditors. auditors. 6. Explain Explain the framework framework of Philippine Philippine Standard Standard on Auditing Auditing 7. Describe Describe the the primary primary types types of audit and related related servic services. es. 8. State State the curren currentt d deve evelop lopmen ment. t. 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 CPA services and presents the subsequent chapters. cha pters. NATURE: AUDITING, ATTESTATION, ASSURANCE SERVICES

systemati aticc proces processs of object objective ively ly obtain obtaining ing and evalua evaluati ting ng AUDITING  is a system evidence regarding selected assertions about economic actions and events to ascertain the degre deg reee of co corr rres espo ponde ndenc ncee betwe between en thos thosee as asse sert rtio ions ns an and d es esta tabl blis ishe hed d cr crit iter eria ia an and d commun com munica icatin ting g the result resultss to intere intereste sted d users. users. This This broad broad defini definitio tion n identi identifie fiess key elements:   





Systematic process – audits are a re 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. p arties.

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 Evi shedence is biased in theinformat accumulation and evaluation of evidence. Evidenc e is any infor mation ion used by the auditor audit or to determ determine ine whether whether the

 

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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 au ditor’s findings to users.  ATTEST  ATTESTA ATION ,

general generally ly refers refers to an expert expert’’s writte written n commun communica icatio tion n of a conclusion about the reliability of someone else’s assertions. It occurs when a practitioner  is engaged engaged to issue issue a writte written n commun communica icati tion on that that express expresses es a conclus conclusion ion about about the reliabilit relia bility y of a written written assertion assertion that is the responsibi responsibility lity of another party. party. Attestati Attestation on service is a type of assurance service whose subject matter (both financial and nonfinancial in nature) is the responsibility of another party. party. Attest services offering offering some level lev el of assura assurance nce about about manage management ment’’s assert assertion ionss includ includee (1) audit, audit, (2) review review,, (3) agreed-upon procedures. Other examples of o f subject matter of attest service are: 1. 2. 3. 4.

Future Future-or -orien iented ted financ financial ial inform informati ation on Managem Management ent’’s discuss discussion ion and and analysi analysiss The effec effectiv tivene eness ss of inte interna rnall control control Compliance Compliance with with statutory statutory,, regulatory regulatory and contract contractual ual obligatio obligations ns

 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 CP As under the umbrella of assurance services.  ASSURANCE  ASSUR ANCE SERV SERVICE ICE

1. Risk assess assessment ment – provide provide independent independent assessm assessments ents of the the likelihood likelihood of adverse adverse even events ts an and d how thes thesee ev event entss may may af affe fect ct th thee en enti tity ty’’s ab abil ilit ity y to ac achi hiev evee it itss objectives. Risk can include risks, business process and asset risks, and information risks. Theseenvironmental services would benefit the owners, managers, and  board of directors of companies susceptible to the risks. 2. Inform Informati ation on system system reliabi reliabilit lity y – provid providee assura assurance nce that inform informati ation on system systemss are design des igned ed and operat operating ing to provid providee reliab reliable le inform informati ation on to the entit entity y. These 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  Electr  Electronic onic commerce  commerce  trans transactio actions, ns, electronic electronic documents, and support systems. These services would benefit all participants in Electronic commerce activities.

 

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4. Effective Effectiveness ness of Health Health care performa performance nce measurement measurement systems systems for for the benefit benefit of  health care recipients and their representatives. 5. Reliab Reliabili ility ty and relevanc relevancee of Business Business perform performanc ancee measur measureme ement. nt. For entiti entities es 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. differ. Earlier, highly structured services were cconsidered onsidered 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 CP A services. 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. activities. Also called called management management advisory advisory services, services, the practitio practitioner ner employs employs techni tec hnical cal skill skills, s, educati education, on, observ observati ations ons,, experi experience ences, s, and knowle knowledge dge of analyti analytical cal approach and procedures used in the consulting engagement. The areas of consulting services and the related practitioner’s function are listed below.

1. Consultati Consultations ons – provide provide counsel in a short short time time frame. frame. 2. Advisor Advisory y – develo develop p findin findings, gs, conclus conclusion ions, s, and recomm recommend endati ations ons for client client consideration and decision making. 3. Implementat Implementation ion – put an action action plan plan into into effect effect.. 4. Tr Transact ansaction ion – provide provide services services related related to a specifi specificc client transa transaction ction.. 5. Staff Staff and other support support – provide provide appropriat appropriatee staff staff to perform perform tasks specif specified ied  by the client.

 

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6. Pr Produ oduct ct – prov provid idee the the cl clie ient nt wi with th a pr prod oduct uct and as asso soci ciat ated ed pr prof ofes essi siona onall 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.

Parties involved Primary  purpose Focus Output’s objective

Assurance Services Three-party contracts

Consulting Services Two-party contracts

To iimp mpro rove ve qu qual alit ity y of of info inform rmat atio ion n

To rec recom omme mend nd us uses es of in info form rmat atio ion n

Decision ma makers and information used for optimum decisions Intended to improve decision maker’s condition indirectly through recommendations

Outcomes Design to improve client’s condition directly through findings, conclusions and recommendations

Primary Concerns of Auditing vs. Accounting

Auditing Auditi ng is primar primaril ily y concer concerned ned with with the verifi verificat cation ion of financ financial ial statem statement ent 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, GAAP, respectively. Demand for Audits

There are four conditions that create the demand for audits, to wit: 1. There There is a potent potential ial confli conflict ct between between those those who prepare prepare informat information ion and those who use information. This potential conflict can result to biased information. 2. Inform Informati ation on can have substan substantia tiall economi economicc conseque consequence ncess for a decisi decision on maker. 3. Expertise Expertise is often require required d for preparin preparing g and verifyi verifying ng informatio information. n. 4. Users of inform information ation frequent frequently ly are prevented prevented from from directly directly assessing assessing the the quality of information. The stewardship or agency theory provides another explanation for the demands for for audi audits ts.. This This theo theory ry im impl plie iess that that the the mana manage gerr, as well well as th thee owne ownerr, want wantss th thee 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 party are differ different ent.. Accord According ing to the stewar stewardshi dship p or agency agency theory theory,, the owner  owner 

 

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 perceives that the manager’s goals or objectives may be detrimental to the owner’s own goals. goal s. Hence, Hence, the manage managerr wants wants financi financial al statem statement ent repres represent entati ations ons audite audited d by an independent party to enhance stewardship of these financial statements and to lessen the owner’s mistrust of the manager. manager. TYPES OF AUDITS

While Whi le the focus of this this text text is on financ financial ial statemen statements ts audit, audit, other other types types of  evidence-gathering methods of auditing or performance audits are also employed by an audit practitioner in the following areas: 1. Comp Compli lian ance ce au audi ditt – condu conduct cted ed to de dete term rmin inee compl complia iance nce wi with th cr crit iter eria ia,, 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. activity. 2. Managem Management ent audit audit – an examinat examination ion and evaluat evaluation ion of the activit activities ies of  management; also referred to as effectiveness or performance 3. Performance Performance audit audit – analyzes an organizat organization’ ion’ss structure, structure, internal internal systems, systems, workfl wor kflow ow and manage manageria riall perfor performan mance ce to determ determine ine the ef effic ficien iency cy,, effectiveness and economy of these items. 4. Compre Comprehens hensive ive audit audit – usuall usually y includ includes es the component componentss of complian compliance, ce,  performance and financial statements audit. 5. Oper Operat atio iona nall audit audit – pe perf rfor orme med d to de dete term rmin inee th thee exten extentt to whic which h so some me aspect of an organization’s operating activities is functioning effectively and efficiently. 6. Intern Internal al audit – an independe independent nt appraisal appraisal functi function on establish established ed within within an organization to examine and evaluate its activities as a service to the organization. 7. Enviro Environme nmenta ntall audit audit – covers covers envir environm onment ental al issue issuess which which may have have an impact on the financial statements 8. Fo Fore rens nsic ic au audi ditt – re refe fers rs to the the ex exam amin inat atio ion n of ev evid iden ence ce re rega gard rdin ing g 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 agreem agr eement ent,, which which is the subjec subjectt of lit litiga igatio tion. n. Forens Forensic ic auditi auditing ng 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.

 

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TYPES OF AUDITORS

The auditing activities described above are performed by four types of auditors: independent indepen dent (external) (external) auditors, internal auditors, auditors, government government auditors auditors and forensic forensic auditors. 1. Extern External al (indep (independe endent) nt) auditor auditorss – public public accountan accountants, ts, both individ individual ualss or  firms, who perform audit, tax, consulting and other types of services for  external clients 2. Internal Internal auditors auditors – perform perform services services for for a single single organizati organization on to which they 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 Government auditors auditors – are full-t full-time ime employees employees of the governm government ent tasked tasked to determ determine ine compli compliance ance with with laws, laws, statut statutes, es, polici policies es and procedu procedures res.. Examples are those with the Commission on Audit (COA) and the Bureau of Internal Revenue (BIR). 4. Forensic Forensic auditors auditors – financial financial auditi auditing ng specialist specialistss who focus on on unearthing unearthing the truth truth and/or and/or provid providing ing evidenc evidencee in legal/ legal/fin financi ancial al disput disputes es and/or  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 Associa Associati tion on of CPAs CPAs in Public Public Practi Practice ce is the body author authorize ized d to establ establish ish and  promulgate generally accepted auditing standards GAAS) in the Philippines. These standar sta ndards ds and relate related d interp interpret retati ations ons are embodi embodied ed in the Phili Philippi ppine ne Standa Standards rds 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 ser ve the vario various us nee needs ds of many many of these these users users who do have have the direc directt access access to to additio addi tional nal inform informati ation on that that is vital vital in mak making ing economi economicc decisi decisions ons,, the Accountin Accounting g Standar Sta ndard d Council Council (ASC) (ASC) establ establish ish standa standards rds that that become become mandat mandatory ory after after receiv receiving ing approvall from BOA. Current approva Current internation international-ali al-aligned gned accounting accounting standards standards require 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

 

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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 framew framework ork distin distingui guishe shess audits audits from from rel relate ated d servic services. es. Rel Relate ated d servic services es compri com prise se review review,, agreedagreed-upo upon n proced procedure uress and compil compilati ation. on. Figure Figure 1.2 presen presents ts 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  Comparison  Nature of services Level Lev el of assura assurance nce  provided Report provided

Procedures

Features

Auditing

Audit High, but not absolute Positive assurance on

Related Services

Review Moderate

Agreed-upon None

Compilation None

 Negative assurance on

Factual findings

Identification of  information

assertion(s) Select from all available  procedures any combination that can low level limit audit risk to an appropriately Auditors opinion enhances credibility of

assertion(s) Inquiry and analytical  procedures designed to review reliability of an assertions

 procedures

compiled

Audit skills techniques applied but accounting &

Recipients of the report from their own

Accounting not auditing expertise use ;  benefits derived

financial statements ;absolute assurance not attainable

internal control systems not assessed

conclusions; report is restricted to the parties in the contract

 by users arise from the services that was rendered with due  professional skill and care

The main distinguishing distinguishing featur featuree of auditing and related services services is the level of  assurance provided assurance  provided by the auditor in the engagement. Level of assurance represents the degree of satisfact satisfaction ion achieved as to the reliabili reliability ty of the client’s client’s assertions 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.

 

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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 The input to the the proc proces esss re repr pres esen ente ted d by th thee amor amorph phous ous fr from om of th that at in inpu putt 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

Evidenceevents about economic

Auditors training & experience

Economic events

ACCOUNTING SYSTEM

A S G A P

Recording

Data Processing

Statement Preparation

Financial reports

AUDITING PROCESS Evidence and sample size

Procedure applied

Evaluat e evidens e

Auditors report

Other report

P S A

 

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Auditor association with Financial Statements

An auditor’s responsibility on the audited financial statements is the expression of  an opinio opinion n on those those financi financial al statem statement ents. s. An auditor auditor becomes becomes associ associate ated d with 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 Sarbanes Oxley act of 2002 is a legislation legislation passed passed in the United States 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 Audit Auditing ing Standard Standardss and Practic Practicee Counci Councill (AS (ASPC) PC),, a creati creation on of PICPA PICPA and the Association of CPAs in Public Practice, has been authorized to issue the Philippine Standards on Auditing. 2. Financ Financial ial Stateme Statements nts need to be prepared prepared in accordanc accordancee with with account accounting ing standar standards ds generally genera lly accepted accepted in the Philippines, Philippines, the Internatio International nal Accounting Accounting standards standards and another authoritat another authoritative ive and comprehensi comprehensive ve financial financial reporting framework has been designed for use in financial reporting and is identified in the financial statements.) 3. Related Related services services comprise comprise reviews reviews,, agreed-upon agreed-upon procedures procedures and compilati compilations. ons. 4. The framework framework does does not apply apply to other servic services es provided provided by auditors auditors such such as taxation, taxation, consultancy and financial and accounting advice. 5. An auditor auditor is associate associated d with financial financial informat information ion when the auditor auditor attaches attaches a report report on that information or consents to the use of the auditor’s name in a professional connection.

 

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MULTIPLE MUL TIPLE CHOICE QUESTIONS: 1. An ex exte tern rnal al audi auditt a. Su Suppo pport rtss an an inte intern rnal al audi auditt  b. Duplicates an internal audit c. Over Overla laps ps an an inte intern rnal al aud audit it d. Comple Complemen ments ts an intern internal al audit audit 2. The primary primary objective objective of the the ordinary ordinary examina examination tion of financi financial al statement statementss by a CPA CPA is the expression of an opinion on the a. Compet Competenc encee of managem management ent in accounti accounting ng matters matters which which is implied implied by whether  whether  the opinion is qualified or not  b. Conformity of the statements with the books of accounts c. Conformity Conformity of the the financial financial statements statements with with generally generally accepted accepted auditing auditing standards standards applied on a basis consistent with that of the preceding year. d. Fairness Fairness with with which the financial financial statem statements ents present present financial financial positio position n and results results of operations. 3. Al Alth thou ough gh the the CPA CPA does does no nott guara guarant ntee ee his his fi find ndin ings gs,, hi hiss op opin inio ion n is never neverth thel eles esss valuable to various parties. The value of the CPAs CPAs opinion lies in the fact that a. He has the qualifi qualification cationss required required by by law to be a CPA CPA  b. He is under the supervision of the Board of Accountancy c. He has gathered gathered suffi sufficient, cient, compete competent, nt, evidential evidential matter matter to to support support his opinion. opinion. d. He has has followed followed generally generally accepted accepted auditing auditing standards. standards. 4. Oper Operat atio iona nall au audi dits ts ge gene nera rall lly y ha have ve be been en co cond nduc ucte ted d by in inte tern rnal al au audi dito tors rs an and d governmental audit agencies but may be performed performed by certified public accountants. A  primary purpose of an operational audit is to provide a. A means means of assuran assurance ce that internal internal accounti accounting ng controls controls are functio functioning ning as planned planned  b. A measure measure of management performance in meeting organizational goals c. The The resu result ltss of inte intern rnal al exami examinat natio ion n of fi fina nanc ncia iall and accoun accounti ting ng matt matter erss to a company’s top level management d. Aid to the the independent independent auditor auditor,, who is conductin conducting g the examinatio examination n of the financial financial statements. 5. The independent independent auditor auditor lends lends credibil credibility ity to a clients clients financi financial al statements statements by a. St Stat atin ing g in the the audit auditor orss mana managem gemen entt le lett tter er th that at th thee ex exam amin inat atio ion n was was made 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 Attaching an auditor’ auditor’ss opinion opinion to the client’ client’ss financial financial statemen statements ts d. Testing esting under oath about about clients clients financial financial statem statements ents 6. Which Which of the follow following ing best describe describess why publicly publicly-tr -trade aded d corpor corporati ations ons follow 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) a.  b. c. d.

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To comply comply with the the regulation regulationss of the Accounting Accounting Standards Standards Council Council To emphasize auditors independence from the management of the corporation To encourage encourage a policy policy of of rotation rotation of of the independent independent auditor auditors. s. To prov provid idee the the co corp rpor orat atee owne owners rs with with oppo opport rtun unit ity y to voic voicee th thei eirr op opin inio ion n concerning the quality of the auditing a uditing firm selected by the directors.

7. A CPA CPA firm’ firm’ss primary purpose purpose for performi performing ng non-audit non-audit services services is to a. Prepar Preparee the CPA CPA firm firm fro the changing changing needs and requirem requirement entss of the busine business ss community  b. Establish the CPA CPA firm as a consultant, which will enable the CPA CPA firm to ensure future viability and growth c. Provid Providee advice advice and technic technical al assista assistance nce that will will enable enable a client client to conduct conduct its its  business more effectively effectively d. Enab Enable le st staf afff memb member erss of the the CPA CPA firm firm to acqui acquire re th thee ne nece cess ssar ary y conti continu nuin ing g education in all areas of business. 8. Which Which of the follo followin wing g types types of audits audits would would be intende intended d to determi determine ne whether whether a governmental entity is following sound procurement practices? a. A fin finan anci cial al stat statem ement ent audi auditt  b. An optional audit c. A prog progrram audi auditt d. A co comp mpli lian ance ce aud audit it 9. The criteria criteria for for evaluatin evaluating g quantitati quantitative ve informati information on vary. vary. For example, example, in in the audit audit of  historical financial statements by CPA CPA firms, the criteria are usually a. Genera Generall lly y accept accepted ed audit auditing ing stan standar dards ds  b. Generally accepted accounting principles c. Regula Regulati tions ons of the the Bureau Bureau of Inte Interna rnall Revenue Revenue d. Regulations Regulations of the the Securit Security y and exchange Commission Commission 10. Which of the following types of audits would be intended to cover environm environmental ental matters that may impact on the financial statements? a. A Fin Financ ancia iall stat statem emen entt audit audit  b. An operational audit c. A prog progrram audi auditt d. An en envi viro ronm nment ental al au audi ditt 11. An audit of financial statements statements is conducted to determine determine if the a. Organizat Organization ion is is operati operating ng efficie efficiently ntly and effecti effectively vely  b. Auditee is following specific procedures or rules suet down by some higher  authority c. Overall Overall financial financial statemen statements ts are stated stated in accordan accordance ce with specifi specified ed criteria criteria d. None None of the the abo above ve 12. Auditing is based on the assumption assumption that financial data and sstatements tatements are a. In co conf nfor ormi mity ty wi with th GAAP GAAP  b. Verifiable

 

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c. Pr Pres esen ente ted d fa fair irly ly d. Cons Consis iste tent ntly ly ap appl plie ied d 13. The essence essence of the attest function function is to a. Detect ffrraud  b. Examine individual transactions so that the auditor may certify as to their validity validity c. Determine Determine whether whether the the clients clients financia financiall statement statementss are fairly fairly stated stated d. Assure Assure the consis consistent tent applica application tion of correc correctt accounting accounting procedur procedures. es.

14. A CPAs CPAs opinion of financial statements statements is of little value to those who relied on him unless he a. Issu Issuee an unqu unqual alif ifie ied d opini opinion on  b. Maintains a program of continuing education c. Serves his clients clients with profes professional sional concern concern for their their best best interest interestss d. Main Mainta tain inss his indep indepen ende dence nce.. 15. The review of a company’s financial financial statements by a CPA CPA firm: firm: a. Is substa substantial ntially ly less less in in scope scope of procedures procedures than an an audit audit  b. Requires detailed analysis on the major accounts c. Is of simila similarr scope as an an audit and adds adds similar similar credibi credibility lity to the the statements statements d. Culminates Culminates in issuance issuance of a report expressin expressing g the CPA CPA’s opinion as to the fairness fairness of the statements.   16. When an accountant is not independent, the accountant iiss precluded from issuing a a. Comp Compil ilat atio ion n rep repor ortt  b. Review report c. Mana Manage geme ment nt Advi Adviso sory ry repo report rt d. Tax plann plannin ing g re repo port rt 17. A typical objective of an operational audit is for the auditor to a. Report on the entit entity’ y’ss relative relative success success in in maximizing maximizing profit profitss  b. Make recommendations for improving performance c. Determine Determine whether whether the financial financial statemen statements ts fairly fairly present present the entity’ entity’ss operations operations d. Evaluate Evaluate the feasibili feasibility ty of attaining attaining the entity’ entity’ss operational operational objective. objective. 18. Which Which of the follow following ing is the author authorita itativ tivee body designed designed to promul promulgat gatee auditin auditing g standards? a. PICPA  b. Accounting Standards Council c. Auditi Auditing ng Stand Standard ardss and Practi Practices ces Counc Council il d. Associati Association on of CPAs CPAs in Public Public Practi Practice ce and PICP PICPA A 19. An Attestation Attestation engagement is one in which a CPA CPA is is engaged to a. Testify estify as an expert witness witness iin n accounting, accounting, auditing auditing or tax matters, matters, given given certain certain stipulated facts.

 

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 b. Issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party. c. Asse Assemb mble le pros prospe pect ctiv ivee finan financi cial al st stat atem emen ents ts based based on th thee as assu sump mpti tion onss of th thee entity’ss management without expressing any assurance. entity’ d. Provide Provide tax advice advice or prepare prepare a tax return return based based on financial financial informat information ion the CPA CPA has not audited or reviewed. 20. Performing inquiry and analytical procedures is the primary basis for an accountant to issue a a. Review Review report report on compar comparati ative ve financia financiall statemen statements ts for a non-pub non-public lic entity entity in it itss second year of operations.  b. Review report on prospective financial statements that present an entity’s entity’s expected financial position, given one or more hypothetical assumption. c. Report on complian compliance ce with with covenants covenants in in a long-ter long-term m loan agreement. agreement. d. All All of the the abo above ve.. 21. Which of the following statements is correct concerning concerning both engagement to compile and an engagement to review an entity’s financial statements? a. The account accountant ant does not contemp contemplat latee obtain obtaining ing an understan understandin ding g of the intern internal al control system.  b. The accountant must be independent in fact and in appearance c. The accountan accountantt expresses expresses no assurance assurance on the financial financial statem statements. ents. d. The accountant accountant should should obtain obtain a written written management management repres representat entation ion letter letter.. 22. The primary objective of the ordinary examination of financial statements by a CPA CPA is the expression of an opinion on a. The The compe compete tence nce of mana managem gement ent in ac acco count untin ing g matt matter erss whic which h is impli implied ed by whether the opinion is qualified or not  b. The conformity of the statements with the books of account c. The The Conf Confor ormi mity ty of the the finan financi cial al st stat atem emen ents ts wi with th gener general ally ly ac accep cepte ted d au audi diti ting ng standards applied on a basis consistent with that of the preceding year. d. The fairnes fairnesss with with which which the financ financial ial stateme statements nts present present financi financial al position position and results of operations. 23. When an accountant is not independent, the accountant iiss precluded from issuing a a. Comp Compil ilat atio ion n rep repor ortt  b. Review report c. Mana Manage geme ment nt adv advis isor ory y repo report rt d. Tax plann plannin ing g re repo port rt 24. Which of the following is an incorrect phrase? a. Auditi Auditing ng is is a system systemati aticc proce process ss  b. Auditing subjectively obtains and evaluates evidence c. Auditi Auditing ng evaluat evaluates es evidenc evidencee regardin regarding g assertio assertions ns d. Auditing Auditing communicates communicates results results to intere interested sted users. users.

 

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25. Which of the following is a correct stat statement ement relating to the theoretical theoretical framework of  auditing? a. The fina financi ncial al data data to be audit audited ed can be be verifi verified ed  b. Short-term conflicts do not exist between managers who prepare data and au auditors ditors who examine data c. Audito Auditors rs do not not necess necessari arily ly need need indepe independe ndence nce d. An audit audit is is of bene benefit fit only only to the the owner owners. s. 26. Which Which of the followi following ng statem statement entss does does not describe describe a condit condition ion that create createss a demand for auditing? a. Conf Confli lict ct be betw twee een n an info inform rmat atio ion n prep prepar arer er an and d a us user er ca can n re resu sult lt in bi bias ased ed information  b. Information can have substantial economic consequences for a decision maker. maker. c. Expertise Expertise is is often often required required for informati information on preparation preparation and and verificat verification ion d. User can directl directly y assess assess the the quality quality of of informa information tion 27. Which of the following is correct statement? a. An audit audit provides provides limited limited assuran assurance ce by att attest esting ing to the fairness fairness of the client’ client’ss assertions  b. assertions A review provides positive assurance by attesting to the reliability of the client’s client’s c. Management Management consult consulting ing servic services es provide provide attest attestation ation in in all cases. cases. d. Accounting Accounting services services do not provide provide attes attestatio tation. n. 28. The market of auditing auditing services services is driven driven by a. The regulat regulation ion authorit authority y of the the Security Security and and Exchange Exchange Commiss Commission ion  b. A demand by external users of financial financial statements c. Pronouncement Pronouncementss issued issued by the the Auditi Auditing ng Standards Standards And Practice Practice Council Council d. Cong Congre ress ss at at the the stat statee level level 29. Financial Financial statement statement audit audit a. Redu Reduce ce the the cost cost of of the the capi capita tall  b. Report on compliance with laws and regulations c. Assess Assess managem management’ ent’ss effi efficie ciency ncy d. Over Overlo look ok info inform rmat atio ion n risk  risk  30. Which of the following services services provide positive assurance assurance through attestation? a. Tax ser service vicess  b. Review c. Acco Accoun unti ting ng ser servi vice cess d. Auditing 31. Choos Choosee one of the the foll follow owin ing g whic which h would would de desc scri ribe be be best st th thee ph phra rase se “gene “genera rall lly y accepted auditing standards” a. They identi identify fy the policies policies and and procedures procedures for the the conduct conduct of the audit audit  b. They define the nature and extent of the auditor’s responsibilities. responsibilities.

 

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c. They They provid providee guida guidanc ncee to the audito auditorr wi with th respect respect to pl plann annin ing g th thee au audi ditt an and d writing the audit report. d. They set forth forth a measure measure of the the quality quality of the performa performance nce of audit audit procedures. procedures. 32. Unlike consulting consulting services, assurance services services a. Confirm Confirm that that financi financial al stateme statement nt assert assertions ions are accurat accuratee  b. Competing interests may exist between management and the users of statements c. Misstated Misstated account account balance balancess are general generally ly corrected corrected by an an independent independent audit audit d. Ineff Ineffect ective ive inter internal nal contr controls ols ma may y exist exist 33. The most important important procedure performed in a review is a. A test test of co cont ntro rols ls  b. Obtaining a letter of representation from management c. Inquiry d. Indep Indepen enden dentt confi confirm rmat atio ion n 34. According According to PSA 120, a compilation compilation presents information information in the form of financial financial statements, that is, the representation representation of management. The accountant who prepares the compilation undertakes to express a. Minimal Limite Limited d assur as suranc ancee on sta tement entss  b. assurance onthe thestatem statements c. No ass assur uran ance ce on the the stat statem ement entss d. Full Full assur assuranc ancee on the statem statement entss   35. An accou account ntant ant may may ac acce cept pt an engag engagem emen entt to ap appl ply y ag agre reeded-up upon on pr proc ocedu edure ress to  prospective financial statements provided that a. Distribut Distribution ion of the the report report is to to be restrict restricted ed to the specified specified users users  b. The prospective financial statements are also examined c. Resp Respon onsi sibi bili lity ty for for the the ad adequ equac acy y of the the pr proc ocedu edure ress perfo perform rmed ed is taken taken by th thee accountant. d. Negative Negative assurance assurance is expres expressed sed on the prospect prospective ive financial financial statem statements ents taken taken as a whole. 36. The statement statement that “nothing came to our attention attention which would indicate that these statements are not fairly presented” expresses which of the following? a. Di Disc scla laim imer er of op opin inio ion n  b. Negative assurance c. Nega Negati tive ve co conf nfir irma mati tion on d. Qual Qualif ifie ied d opin opinio ion n 37. Which Which of the follow following ing procedur procedures es is not includ included ed in a review review engageme engagement nt of a nonpublic entity? a. Inqui Inquiri ries es of ma mana nage geme ment nt  b. Inquiries regarding events subsequent to the balance sheet date. c. Pr Proce ocedu dure ress de desi signe gned d to iden identi tify fy re rela lati tions onshi hips ps amon among g da data ta th that at ap appe pear ar to be unusual.

 

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d. A stud study y and evalua evaluati tion on of intern internal al contro control. l. 38. “An engagement engagement in which a practitioner practitioner is engaged to issue or does issue a written 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. audi auditt enga engage gem ment ent  b. attestation engagement c. revi review ew en enga gage geme ment nt d. comp compil ilia iati tion on engag engagem emen entt 39. The The repo report rt is issu sued ed in at atte test stat atio ion n en enga gagem gement ent may may pr prov ovid idee po posi siti tive ve or ne negat gativ ivee assurance to the reader. reader. Which of the following ttypes ypes of engagements would provide  positive assurance? a. An exam examiinati nation on  b. A review review c. An agreed agreed-upo -upon n proce procedur dures es engagem engagement ent d. A co comp mpil ilia iati tion on 40. The level of assurance that is provided by the CP CPA A on a compiliat compiliation ion report is a.  b. c. d.

High Medium Low None

41. Which Which of the followin following g is least likely likely conside considered red a part part of the financia financiall report reporting ing framework? a. Genera Generall lly y accepted accepted audit auditing ing stand standard ardss (GAAS) (GAAS)  b. Generally accepted accounting principles (GAAP) c. Intern Internati ational onal account accounting ing standar standards/ ds/ Intern Internati ational onal Financi Financial al Report Reporting ing Standa Standards rds (IAS/FRS) d. Another Another authorit authoritative ative and and comprehen comprehensive sive basis basis of reporti reporting ng 42. Which of the listed services services is not considered considered related to audit? a. Agre Agreed ed-u -upo pon n proc procedu edure ress  b. Compilation of information c. Mana Manage geme ment nt Cons Consul ulta tanc ncy y d. Revi Review ew of of proc proced edur ures es 43. What best describes the word “assurance “assurance in the context of the Philippine Standards on Auditing? a. Auditors Auditors satisfac satisfaction tion as to the the reliabili reliability ty of an asserti assertion on being made made by one party party for use by another party.  b. Level of assurance which may be provided is determined by the reporting objective. c. Expres Expressed sed positi positivel vely y in the report report d. Assura Assurance nce is limite limited d in nature nature..

 

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44. The auditing and related related services framework framework include the following: following: Agreed-upon Procedures Review Compilation a. YES YES NO  b. YES YES YES c. NO NO YES d. NO NO YES YES 45. Which of the following following are authoritative source for auditing standards for members of  the accountancy profession in the Philippines? I. Pronoun unccements of of GAAS, issued by ASPC II. II. Pr Pron onoun ounce ceme ment ntss of of GAAS GAAS is issu sued ed by PI PICP CPA A whic which h are are no nott sup super erce cede ded d or  or  amended by statements issued by ASPC III. II. Pron Pronou ounc ncem emen entts is issu sued ed by by AIC AICPA a.  b. c. d.

I only I and II only I and III on only I, II an and d II III

46. In the absence absence of pronoun pronouncem cement entss is issue sued d by the ASPC which are approv approved ed 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 pronouncements provide in determining the generally accepted auditing standards? a. Aut Author horitat itativ ivee  b. Persuasive c. Alter ern native d. Parallel RPCPA Board Examinations Multiple Choice Questions 47. Auditors of the commission commission on Audit perform the role of:

a.  b. c. d.

Inte Intern rnal al au audi dito tors rs Independent auditors Mana Manage geme ment nt ac acco count untan ants ts Finan Fi nanci cial al Cons Consul ulta tant ntss

48. In compar compariso ison n with with the external external auditor auditor,, an intern internal al audito auditorr is more likely likely to be concerned with a. Intern Internal al admi adminis nistra trativ tivee proced procedure uress  b. Cost accounting procedures c. Oper Operat atio iona nall audi auditi ting ng d. Inte Intern rnal al co cont ntro roll 49. A typical objective of an operational audit is for the auditor to a. Determine Determine whether whether the financial financial statemen statements ts fairly fairly present present the entity’ entity’ss operations operations

 

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 b. Evaluate the feasibility of attaining the entity’ entity’ss operational objectives c. Make Make recommen recommendati dations ons for impro improvin ving g performa performance nce d. Report on the the entity’ entity’ss relative relative success in in attaining attaining profit profit maximization maximization.. 50. The CPA CPA title title was conceived conceived and created, created, under under the first first account accountanc ancy y law, law, for   professional accountants engaged in: a. Acco Accoun unti ting ng educ educat atio ion n  b. Management accounting c. Pu Publ blic ic ac acco coun unti ting ng d. Gove Govern rnme ment nt ac acco count untin ing g 51. Which of the following services services is not wit within hin the area of public accounting? a. Tax axat atio ion n ser servi vice ce  b. Write-up Write-up work for one client c. Mana Manage geme ment nt Adv Advis isor ory y Servic Services es d. Atte Attest st func functi tion on 52. An indepen independen dentt apprais appraisal al activi activity ty wit within hin the or organ ganiza izatio tion n for the review review of the accounting, financial, and other operations as a basis for protective and construction service toal management: a. Inte Intern rnal au audi diti ting ng  b. Internal control c. Oper Operat atio ions ns au audi ditt d. Mana Manage geme ment nt au audi ditt 53. The value of the auditor’s auditor’s attest- function involves the application of: a. The The gene genera rall stan standa dard rdss  b. The standards of fieldwork  c. The The stand standar ards ds of rep repor orti ting ng d. Due Due p pro rofe fess ssio ional nal ca care re 54. The main objective objective of operations operations auditing auditing is: a.  b. c. d.

To evaluate evaluate the the integri integrity ty of accounting accounting inform information ation To verify fulfillment of plans and sound business requirement requirementss To measure measure and and evaluate evaluate the the effecti effectiveness veness of control controls. s. To produce produce resul results ts as desir desired ed or direc directed ted..

55. The independent audit is important to to users of financial statements in as much as it a. Reports Reports on the validi validity ty of all all accounting accounting data data in the the financial financial stateme statements nts  b. Involves the objective examination of and reporting on financial statements  prepared by management c. Determ Determine iness the manageme management nt capabi capabilit lity y of the cli client ent whose financi financial al statemen statements ts are under review. review. d. Evaluates Evaluates and communica communicates tes financial financial data data included included in financia financiall statements statements.. 56. Which of the following best describe “independent auditing’?

 

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a. A bran branch ch of ac acco count untin ing g  b. A discipline which attests to the results of accounting and other functional operations and data c. A profess profession ional al activity activity that measures measures and commun communica icates tes financi financial al and business business data d. A regulat regulatory ory function function that prevents prevents the issuance issuance of improper improper financia financiall information information 57. The independent audit is important important to readers readers of financial statements statements because it: it: a. Determ Determine iness the future future stewards stewardship hip of the managem management ent of the company company whose whose financial statements are audited.  b. Measures and communicates financial and business data included in financial statements. c. Involv Involves es the object objective ive examina examinatio tion n of and report reporting ing of manage managemen mentt prepar prepared ed statements. d. Reports Reports on the accurac accuracy y of all informati information on in the financi financial al statement statements. s. 58. Auditing standards differ differ from auditing procedures iin n that procedures relate to: a. Meas Measur ures es of pe perf rfor orma manc ncee  b. Audit principles c. Ac pe perf rfor orme d d. Acts Audi Auts ditttojudg jube dgme ment nts s med 59. The principal reason for an independent auditor to gather and evaluate audit evidence is to: a. Form Form an opini opinion on on the the finan financia ciall statem statement entss  b. Detect fraud c. Eval Evalua uate te man manag agem emen entt d. Eval Evalua uate te inte intern rnal al cont contro rol. l.

60. An independent audit aids in the communication communication of economic data because the audit: a. Confirms Confirms the the accuracy accuracy of manageme management’ nt’ss financial financial represe representati ntations ons  b. Lends credibility to the financial statements c. Guarantee Guarantee that financial financial data are fairly fairly present presented. ed. d. Assure Assuress the readers readers of financia financiall st state atemen ments ts that any fraudul fraudulent ent activit activity y has been corrected. 61. In the preparation of an income tax return, the CP CPA A is expected to: a. To take take a posi positi tion on of client client advocac advocacy y  b. To take a position of independent neutrality c. To presen presentt the taxabl taxablee income income in the audited audited financi financial al stateme statements nts conform conform with with the taxable net income in the income tax return. d. To present the the expenses expenses in the audited audited financial financial stateme statements nts as conformi conforming ng with the the deductions in the income tax return.

 

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62. Which Which of the followin following g of audit audit is performed performed to determ determine ine whether whether an entity entity’’s financial statements are fairly stated in conformity with GAAP? a. Oper Operat atio iona nall audi auditt  b. Compliance audit c. Fi Finan nanci cial al sta state teme ment nt audi auditt d. Pe Perf rfor orma manc ncee aud audit it

63. Broadly defined, the subject matter of any audit consists of  a. Fina Financ ncia iall st stat atem emen ents ts  b. Economic data c. Assert Assertion ionss about about econom economic ic action actionss and event eventss d. Oper Operat atiing dat dataa

64. The primary reason for an audit of financial statements statements is to a. Satisf Satisfy y governme government nt regula regulator tory y requi requirem rement entss  b. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be detected. c. Provide Relieve Relieve mana ofance responsi responsibili bility financ ial statem statements ents d. Provi de management increased increagement sed assurance assur to users user styasfor to financial the fairness fair ness of the financial financial statem statements. ents.

65. What is the the essence of the the external audit function? a. To det detec ectt fr fraud aud  b. To examine individual transactions so that the auditor may certify their validit validity y c. To determine determine whether the the client’ client’s financial financial statements statements are are fairly fairly stated d. To assure the the consistent consistent applicat application ion of correct correct accountin accounting g procedures. procedures.

66. Most Most of the the indep indepen ende dent nt au audi dito tors rs work work in fo form rmul ulat atin ing g an opini opinion on on fi fina nanc ncia iall statements consist of: a.  b. c. d.

Studyi Studying ng and evalua evaluatin ting g intern internal al contr control ol Obtaining and examining evidence matter  Exam Examin inin ing g cash cash tran transa sact ctio ions ns Compar Comparing ing record recorded ed accounta accountabil bility ity wit with h assets. assets.

67. In financial statement statement audits, the audit process should should conform with a. Genera Generall lly y accepted accepted audit auditing ing stand standard ardss (GAAS) (GAAS)  b. Generally accepted accounting principles (GAAP) c. The The au audi ditt prog progra ram m d. The The audi audito tor’ r’ss jjudg udgme ment nt 68. Which of the following types types of audit uses as its criteria laws laws and regulations? a. Oper Operat atio iona nall Audi Auditt  b. Compliance audit

 

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c. Finan Financi cial al Stat Statem emen entt Aud Audit it d. Pe Perf rfor orma manc ncee Aud Audit it 69. Inte Intern rnal al Audi Auditi ting ng is an indep indepen ende dent nt ap appr prai aisa sall fu func ncti tion on es esta tabl blis ishe hed d wi with thin in an organizati orga nization on to examine examine and evaluate evaluate its activities. activities. To that end, internal auditing auditing  provides assistance to: a. Exte Extern rnal al au audi dito tors rs  b. Management and the Board of directors c. Shar Shareh ehol olde derrs d. St Stat atut utor ory y aut autho hori riti ties es 70. Which of the following types of auditing auditing is performed most commonly by CP CPAs As on a contractual basis? a. Inte Intern rnal al au audi diti ting ng  b. Income tax auditing c. Gove Govern rnme ment nt aud audit itin ing g d. Exte Extern rnal al aud audit itin ing g 71. Auditin Auditing g to determ determine ine whethe whetherr an entit entity y is managi managing ng and uti utiliz lizing ing its resource resourcess economically andaud efficiently would most appropriately be classified as: a. Comp Compli lian ance ce audit itin ing g  b. Operational auditing c. Fina Financ ncia iall Aud Audit itin ing g d. Inte Intern rnal al Aud Audit itin ing g 72. A typical typical objective of an operational audit is to determine whether an entity’s entity’s a. Internal Internal control control structure structure is is adequatel adequately y operating operating as designed designed  b. Operational information is in accordance with generally accepted governmental auditing standards c. Financial Financial stateme statements nts present present fairly fairly the results results of operations operations d. Specific Specific operating operating units units are function functioning ing efficie efficiently ntly and effecti effectively vely 73. An operational operational audit is designed designed to: a. Assess Assess the effici efficiency ency and effective effectiveness ness of management management’’s operating operating procedures procedures  b. Assess the presentation of management’s management’s financial statements in accordance with generally accepted accounting principles. c. Dete Determ rmin inee whet whethe herr mana manage geme ment nt ha hass co comp mpli lied ed wi with th ap appl plic icab able le la laws ws an and d regulations. d. Determ Determine ine whether whether the audit committ committee ee of the board board of director directorss is effect effective ively ly discharging its responsibility to oversee management’s operations. 74. An audit conducted to determine determine whether an entity entity is following specific procedures or  rules set down by some higher authority is a. Oper Operat atio iona nall audi auditt  b. Compliance audit c. Fina Financ nciial audi auditt

 

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d. Det Detail ailed aud audit it 75. The overall objective of forensic auditing auditing is to a. Attest Attest to the the efficie efficiency ncy with with which which resources resources are employed employed  b. Unearth the truth and provide evidence in legal and financial disputes; controls are costs justified. c. Provide Provide assurance assurance that financial financial data data have have been accurat accurately ely recorded recorded d. Ass Assist ist mem member bers of the the orga organi niza zattion in the ef efffec ecti tive ve di disschar charge ge of their  heir  responsibilities 76. Which of the following terms does not belong to the group a. Fina Financ nciial audi auditt  b. Internal audit c. Ext Externa ernall audi auditt d. Inde Indepe pend nden entt aud audit it end