FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESSANDFINANCE

Department of Accountancy & Internal Auditing

ASSURANCE PRINCIPLES
2nd SEMESTER AY 2017 – 2018
Quiz 2 – Assurance Services
ANSWER KEY
No. Answer No. Answer No. Answer No. Answer
1. B 16. BC 31. B 46. A
2. C 17. D 32. B 47. A
3. A 18. C 33. C 48. B
4. D 19. D 34. D 49. B
5. DC 20. C 35. A 50. B
6. A 21. B 36. D 51. D
7. A 22. A 37. C 52. C
8. A 23. B 38. C
9. A 24. A 39. B
10. D 25. D 40. B
11. B 26. C 41. B
12. A 27. A 42. D
13. D 28. A 43. C
14. B 29. A 44. B
15. D 30. BA 45. BA

Instructions:
Choose the correct answer among the given choices. Write the letter of your choice on the Answer sheet provided. Use
CAPITAL LETTERS. Pencil, friction pen and liquid papers are not allowed.

1. In which type of service does the CPA assemble the financial statements but provide no assurance to third
parties?
a. audit
b. compilation
c. review
d. bookkeeping

Explanation:
In compilation engagement (b), the practitioner uses his accounting expertise (as opposed to auditing expertise)
to collect, classify, summarize financial information in the form of financial statements. No assurance is expressed.
This is the answer to this question.

Audit (a) or external audit engagement provides a high, but not absolute, level of assurance that the information
audited is free of material misstatements. This is expressed positively in the audit report as reasonable assurance.
In review engagement (c), the auditor provides a limited level of assurance that the information subject to review
is free of material misstatement. This is expressed in the form of negative assurance. Bookkeeping (d), on the other
hand, involves the recording of business transactions in the accounting books of the entity.

2. Which of the following would not be considered suitable criteria for an assurance engagement?
a. Understandability
b. Reliability
c. Reasonability
d. Completeness

Explanation:
The characteristics of suitable criteria for an audit engagement are reliability (b), relevance, completeness (d),
understandability (a) and neutrality. Reasonability (c) is not among them.

3. Which of the following statements is incorrect regarding assurance engagement?

a. Assurance engagements are generally voluntary but may be a requirement imposed on the entity by

1
 another party.
b. Assurance engagements are generally non-voluntary but may be a requirement imposed on the entity by
another party.
c. Assurance engagements are generally voluntary and may not be a requirement imposed on the entity by
another party.
d. Assurance engagements are generally non-voluntary and may not be a requirement imposed on the entity
by another party.

Explanation:
Assurance engagement are generally not voluntary but because other entity requires it like banks before a loan is
approved or granted, the entity is compelled to do so. This is the same scenario for financial statements that will
be filed with the BIR for tax purposes. This is the case of (b).

Assurance engagement are generally voluntary particularly if such entity will borrow money from a bank. To have
a credible financial statements, such entity voluntarily requires their financial statements to be audited by
practitioner. This is letter (c).

Assurance engagement are generally non-voluntary particular if this is not required by laws as in the case of
statutory audit. There are single proprietorship business in which the quarterly gross sales or gross receipts are
less than P 150,000. In this case, CPA certification is not required. Therefore, it is at the option of the business
owner if a practitioner will be contracted to perform financial statement audit. This is letter (d).

Generally, most entities will not volunteer for its financial statements to be audited unless third parties will
require it. This is the reason why the answer is letter (a) - Assurance engagement are generally voluntary but may
be a requirement imposed on the entity by another party.

4. During the audit of XYZ Co. client management informs the auditor that they have two bank accounts both with a
minimal balance in them. As the auditor you should
a. believe the client as a minimal balance is too small to worry about
b. tell management they are being dishonest, last year there were three accounts
c. ask the client staff that reconciles the bank accounts if they agree with management
d. prepare a bank confirmation and have the bank confirm the number of accounts

Explanation:
Letters a, b, and c lack the practice of professional skepticism by the auditor. The proper response by the auditor
in this case is to (d) prepare a bank confirmation and have the bank confirm the number of account. This is
because of professional skepticism. In addition, audit evidence from external sources is more reliable than audit
evidence internally generated.

5. Which of the following statements relating to the different types of assurance engagements is correct?
a. An auditor provides reasonable assurance for review engagement.
b. The auditor’s risk for a limited assurance engagement is lower than a reasonable assurance engagement.
c. A difference between a reasonable and limited assurance engagement is the form in which the
opinion is expressed.
d. The evidence gathering procedures are less extensive for a reasonable assurance engagement when
compared to a limited assurance engagement.

Explanation
Option A - This is incorrect as a review engagement provides limited assurance and not reasonable assurance.
Option B - This is incorrect as the level of assurance engagement risk is higher in a limited assurance engagement
than in a reasonable assurance engagement because of differences in the nature, timing or extent of evidence that
is collected.
Option C - This is correct as reasonable assurance provides a positive form of expression while limited assurance
provides a negative form of expression. This is the answer.
Option D - This is incorrect as the evidence-gathering procedures are much more limited for a limited assurance
engagement compared with a reasonable assurance engagement.

6. An audit of financial statements is conducted to determine if the

a. Overall financial statements are stated in accordance with the applicable financial reporting
framework.
b. Management fraud
c. Organization is operating efficiently and effectively
d. Auditee is following specific procedures or rules set down by some higher authority.

Explanation
Option A – The objective of an audit of financial statements is to enable the auditor to express an opinion on
whether the financial statements are prepared, in all material respect, in accordance with an applicable
financial reporting framework. This is the answer.

Option B – Financial statement audit is not conducted to detect management fraud. This is incorrect.

2
 Option C – The description is in relation to operation audit. This is incorrect.
Option D – This is what the auditor is verifying if financial statements are prepared in accordance with
procedures or rules set down by some higher authority like IFRS by IASB. This is not the correct answer.

7. An assurance engagement is 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. Criteria
b. Auditing standards
c. Auditor’s expectations
d. Intended users’ expectations

8. An assurance report provides the following benefits to the users of financial information except:
a. Independent opinion from an external source that enhances the reliability of the information. (This is
wrong because it should be credibility and not reliability)
b. Management bias is reduced
c. The relevance of the information may be improved by the expertise and knowledge of the assurance firm.
d. None of the above

9. Which one of the following is an example of an attestation engagement?

a. An opinion by a practitioner on an integrated report prepared by management.
b. A report by the internal auditor referring to the outcome of the tests they performed.
c. An opinion provided by management related to the effectiveness of internal controls that they evaluated.
d. A report prepared by an assurer in relation to the accuracy of non-financial data that the assurer measured.

Explanation:
Option A - This is correct as the integrated report is prepared by management which would require management
to measure the information against the suitable criteria as per the specific framework used. The report would be
seen as assertions by management relating to the accuracy and completeness. The practitioner then provides an
opinion on these assertions.

Option B - This is incorrect as the internal auditor was responsible for performing the tests and then reporting on
the results of the same tests. Thus, they have directly reported on the measurement and evaluation that they have
performed themselves.

Option C - This is incorrect as management evaluated the effectiveness of internal controls and then reported on it.
They have thus directly reported on the results of their own evaluation.

Option D - This is incorrect as the assurer measured the non-financial data and they reported on it. The assurer
thus directly reported on the accuracy that was measured by him.

10. All assurance engagements, whether subjected to legal regulation such as statutory audit or a contractual
arrangement should be performed in a similar manner as follows except:
a. Agree the scope of work to be performed
b. Formalize all of the terms of the engagement in a contract (engagement letter)
c. Obtain sufficient appropriate evidence on which to base the conclusion
d. None of the above

11. To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, the auditor must fulfill several performance responsibilities, including
a. Verifying that all audit work is performed by a CPA with a minimum of three years' experience. (This refers
number of years for minimum meaningful experience of a practitioner)
b. Obtaining sufficient, appropriate audit evidence. (This is part of the audit process which must be
performed by financial statement auditor)
c. Exercising professional judgment. (This is one of the requirement during the audit particularly in
deciding what audit procedures are necessary, what audit evidence is more reliable, how audit
evidence will be evaluated, and what conclusion or opinion will be expressed regarding financial
statements)
d. Providing an opinion on the financial statements. (This is the final output after performing the necessary
steps in the audit of financial statements)

12. What is the objective of any assurance assignment?

a. To produce a conclusion in the form of a report (This is the objective of any assurance engagement)
b. To gather audit evidence (This is part of the audit process.)
c. To compare accounting data in the financial statements from source documents (This is part of the audit
process.)
d. To determine the ability of the client company to maintain its going concern status. (This is part of the audit
process.)

13. Which of the following is not an example of an assurance engagement?

a. Audit engagement (assurance engagement)
b. Review engagement (assurance engagement)
c. Compliance engagement (assurance engagement)

3
 d. Agreed upon procedures engagement (non-assurance engagement)

14. The Board of Directors is required to account for the stewardship of the assets placed under their control. They
achieve this by preparing ______ which are presented to the shareholders.
a. Statement of management responsibility
b. Financial Statements
c. Annual Income Tax Return
d. All of the above

15. Financial statement audit is

a. An example of attestation. (Correct)
b. Direct engagement (Incorrect)
c. Assurance engagement (Correct)
d. Both A and C

16. ________ is an attitude that includes a questioning mind, being alert to conditions that might indicate possible
misstatements due to fraud or error, and a critical assessment of audit evidence.
a. Reasonableness
b. Diligence
c. Professional skepticism
d. Competence

17. The Board of Directors' financial statements have to be examined by an independent expert, the auditor, who is
required to give an opinion on their ____ and ____.
a. Reliability and relevance
b. Completeness and reliability
c. Credibility and fairness
d. Truth and fairness

18. The business owners engage another person to perform a service on their behalf and delegate some decision
making authority to agent which are the managers. What mechanism is usually installed by business owners to
solve the question of trust they have placed in agent?
a. Audit
b. Performance related pay
c. Both A and B
d. None

19. Which of the following assurance level is impossible to achieve?

a. No-assurance
b. Reasonable assurance
c. Limited assurance
d. Absolute assurance

20. The following statements are related to fair presentation of financial statements:

Statement 1:
Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the
Framework for the Preparation and Presentation of Financial Statements. (TRUE)

Statement 2:
The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation. (TRUE)

State whether the foregoing statements are true or false.

a. Statement 1 is true
b. Statement 2 is true
c. Both statements are true
d. Both statements are false

21. In agency theory, the Board of Directors acts as the agents of the body of _____, the principals, and they are
accountable for their stewardship of the company.
a. Auditors
b. Shareholders (Because BOD represents the shareholders of the entity)
c. Stakeholders
d. Regulatory authorities

22. Reasonable assurance expresses opinion in

a. Positive form (This is for reasonable assurance)
b. Negative form (This is for limited assurance)
c. Either positive or negative form (No such thing for reasonable assurance; only positive form)
d. Any form other than positive and negative form (No such thing for reasonable assurance; only positive
form)

23. Attestation is an example of

a. Non-assurance engagement (NO)

4
 b. Assurance engagement (YES)
c. Both an assurance and non-assurance engagement (Only assurance engagement)
d. None of the above

24. Which of the following statements is incorrect about level of assurance?

a. An auditor can give 100% assurance. (This is incorrect. This is absolute assurance and impossible
to achieve)
b. The highest level of assurance given, as in the case of statutory audit, is described as 'reasonable
assurance. (CORRECT. This is because financial statements audit are generally done on a sampling
basis)
c. Absolute assurance is impossible because of inherent limitations of assurance engagement. (CORRECT)
d. Reasonable assurance is a mandatory assurance level that an auditor should give during the audit of the
financial statements. (CORRECT. This is the usual expected level of assurance and as much as
possible must be given by auditor. But in some instances, this is not always the case.)

25. Which of the following statements is incorrect about level of assurance?

a. Reasonable assurance is less than absolute assurance. (CORRECT because absolute assurance is
100% while reasonable assurance is less than 100%)
b. Reducing assurance engagement risk to zero is very rarely attainable. (CORRECT)
c. Both A and B (Both are correct)
d. Neither A nor B (None of the statements is incorrect)

26. Which of the following is not a limitation of assurance engagement that leads to reasonable level of assurance?
a. The use of selective testing. (This is a limitation of assurance engagement)
b. The inherent limitations of internal control. (This is a limitation of assurance engagement)
c. The fact that much of the evidence available to the practitioner is conclusive rather than persuasive.
d. The use of judgement in gathering and evaluating evidence and forming conclusions based on that
evidence. (This is a limitation of assurance engagement)

27. An information is material if its omission or misstatement could

a. Influence the economic decisions of users taken on the basis of the financial statements.
b. Lead to fraud.
c. Result to company loss.
d. Require payment of higher income tax.

28. The evidence gathering procedure in this type of assurance engagement is that sufficient appropriate evidence is
obtained as part of a systematic engagement process that includes obtaining an understanding of the subject
matter and other engagement circumstances, but in which procedures are deliberately limited relative to a
reasonable assurance engagement.
a. Limited assurance engagement
b. Reasonable assurance engagement
c. Direct assurance engagement
d. Absolute assurance engagement

29. Audit evidence must be

a. Sufficient and appropriate
b. Appropriate only
c. Sufficient only
d. Reliable and relevance

30. The statement, “In our opinion internal control is effective, in all material respects, based on XYZ criteria” is
a. An example of a positive expression of opinion
b. An example of a negative expression of opinion
c. An auditor’s expression of opinion applicable to reasonable assurance engagement.
d. An expression of auditor’s opinion if the audit is a compliance audit.

31. The statement, “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.'” is
a. An example of a positive expression of opinion
b. An example of a negative expression of opinion
c. An auditor’s expression of opinion applicable to reasonable assurance engagement.
d. An expression of auditor’s opinion if the audit is an operational audit.

32. This is an assurance level applicable to assurance level engagement.

a. Absolute assurance
b. Reasonable assurance
c. Limited assurance
d. No assurance

33. The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the
financial statements are prepared in all _____ respects, with an identified financial reporting framework.
a. Attainable
b. Reliable
c. Material
d. Credible

5
34. Which of the following statements is correct regarding suitable criteria?
a. It must be reliable but may not be relevant.
b. It must be neutral and relevant but may not be reliable.
c. It must have the characteristics of completeness and understandability but may not be relevant.
d. It must be reliable, relevant, complete and with characteristics of neutrality and understandability.

35. Juan dela Rosa, CPA, is engaged by Manuel Builders Corporation as management consultant. This professional
service provided by Juan dela Rosa is an example of
a. Non-assurance engagement
b. Assurance engagement
c. Agreed upon procedures
d. Compliance audit

36. Antonio Miguel, CPA, is engaged by the Bureau of Internal Revenue to verify the correctness of taxes paid by
one of its tax payers in Bulacan. This professional service by Antonion Miguel is an example of
a. Assurance engagement
b. Compilation services
c. Operations audit
d. Agreed upon procedures

Notes:
In 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 parties have agreed and to report on actual
findings.

37. Broadly defined, the subject matter of any audit consist of

a. Financial statements
b. Economic data
c. Assertions (The subject matter in the financial statement audit are the financial statements in which
management claims that everything in the financial statements are true and fair.)
d. Operating data

38. An audit of financial statements is conducted to determine if the

a. Organization is operating efficiency and effectively.
b. Auditee is following specific procedures or rules set down by some higher authority.
c. Overall financial statement statements are stated in accordance with the applicable financial
reporting framework.
d. Client’s internal control is functioning as intended.

39. The P 100,000,000 inventory is reported in the statement of financial position of Mayon Corporation as of
December 31, 2017. If the financial statement auditor performs the physical counting of inventory at year end, it
means the auditor is verifying what management assertion?
a. Valuation
b. Existence
c. Rights
d. Disclosure

40. In financial statement audits, the audit process should be conducted in accordance with
a. The audit program
b. Philippine standard on auditing
c. Philippine accounting standards
d. Philippine Financial Reporting Standards

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

42. Which of the following types of auditing is performed most commonly by CPA’s on a contractual basis?
a. Internal Auditing
b. Income tax auditing
c. Government auditing
d. External auditing (This is synonymous to financial statement audit or independent audit)

43. Independent auditing can best be describe as a

a. Professional activity that measures and communicates financial accounting data
b. subset accounting
c. Professional activity that attest to the fair presentation of financial statement (Independent audit is
the same as financial statement audit which is an example of an attestation)
d. Regulatory activity that prevents the issuance of improper financial information

44. Which of the following statements is not a distinction between independent auditors and internal auditors?
a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors
report directly to management. (This is a distinction between the two)

6
 b. Although independent auditors strive for both validity and relevance of evidence, internal auditors
are concerned almost exclusively with validity. (This is incorrect. Both are after with validity and
relevance of evidence)
c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors.
(This is a distinction between the two)
d. The internal auditor’s span of coverage goes beyond financial auditing to encompass operational and
performance auditing. (This is a distinction between the two)

45. Which of the following has the primary responsibility for the fairness of the representations made in the financial
statements?
a. Client’s management
b. Audit Committee
c. Independent auditor
d. Board of Accountancy

46. An audit of the financial statements of KIA Corporation is being conducted by an external auditor. The external
auditor is expected to
a. Express an opinion as to the fairness of KIA’s financial statements.
b. Express an opinion as to the attractiveness of KIA for investment purposes.
c. Certify the correctness of KIA’s Financial Statements.
d. Examine all evidence supporting KIA’s financial statements.

47. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management
d. Evaluate internal controls

48. An attitude that includes a questioning mind and critical assessment of audit evidence is referred to as
a. Due professional care
b. Professional skepticism
c. Reasonable assurance
d. Supervision

49. Jack has been retained as auditor of EVC Company. The function of Jack’s opinion on financial statements of
EVC Company is to
a. Improve financial decisions of company management
b. Lend Credibility to management’s representation
c. Detect fraud and abuse in management operations
d. Serve requirements of BIR, SEC, or Central Bank

50. Which of the following is not one of the limitations of an audit?

a. The use of testing
b. Limitations imposed by client
c. Human error
d. Nature of evidence that the auditor obtains

51. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Conflict between an information preparer and a user can result in biased information
b. Information can have substantial economic consequence for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.

52. Which of the following statements does not properly describe an element of theoretical framework of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between mangers who prepare the data and auditors who examine the data.
c. Auditors act on behalf of the management.
d. An audit benefits the public