CH12 ASSURANCE AND RELATED SERVICES

Pronouncements of Auditing and Assurance Standards Council (AASC) do not cover

A. Review engagement

B. Compilation engagement

C. Consultancy

D. Agreed-upon procedures engagement

C

Which of the following best describes "related services"?

A. Audit and Review of financial statements

B. Assurance and audit engagements

C. Compilation and agreed-upon procedures engagements

D. Review, compilation and agreed-upon procedures engagements.

C

The auditor's satisfaction as to the reliability of an assertion being made by one party is called:

A. Assurance

B. Audit risk

C. Precision

D. Materiality

A

The concept of limited assurance is provided for in which of the following engagements?

A. audit

B. review

C. compilation

D. agreed-upon procedures

B

A CPA firm can issue a review report:

A. Only if the partners are independent.

B. Only if all the partners and the staff in the office performing the engagement are independent.

C. Of the partners have no material or direct immaterial interest in client,

D. Even if the CPA firm is not independent.

B

Which of the following statements best describes a review service?

A. A review engagement focuses on providing advice in a three-party contract.

B. A review engagement focuses on providing limited assurance on financial statements of a private company.

C. A review engagement focuses on providing assurance on the internal controls of a public company.

D. A review engagement focuses on providing reasonable assurance on the assertions contained in the financial statements of a public company.

B

The objective of a review of financial statements is to

A. Express an opinion on the overall financial statements

B. State whether anything has come to the auditor's attention that indicates that the financial statements are not presented fairly.

C. Carry out audit procedures agreed on with the client and other users of report.

D. Assist the client in the preparation of the financial statements

B

When performing a review of financial statements, the CPA is required to

A. Apply analytical procedures and make inquiries from third parties by sending confirmation letters.

B. Assess the effectiveness of the client's accounting and internal control systems.

C. Obtain corroborative evidence to support management's responses to inquiries.

D. Obtain understanding of the client's business and industry.

D

Which of the following procedures is not included in a review engagement of a non-public entity?

A. inquiries of management

B. inquiries regarding subsequent events

C. a study and evaluation of internal control

D. procedures designed to identify unusual fluctuations

C

In a review engagement, the independent accountant's procedures include:

A. Examining bank reconciliation.

B. Confirming accounts receivable with debtors.

C. Reading the financial statements to consider whether they appear to conform with GAAP.

D. Obtaining a letter of audit inquiry from all attorneys of record.

C

When providing limited assurance that nothing came to the CPA's attention that would indicate that the financial statements are not in accordance with financial reporting standards, the CPA should:

A. Obtain corroborative evidence to support management responses to inquiries.

B. Understand the accounting principles of the industry in which the business entity operates.

C. Test the accounting records that identify inconsistencies with the prior years' financial statements.

D. Develop an audit program

B

Assurance provided by a review is substantially less than an audit. Which of the following statements is true regarding these services?

A. A review requites more substantive evidence than an audit.

B. An audit requires less evidence related to internal control than a review.

C. A review requires less evidence than an audit.

D. None of the above statements is true.

C

Performing inquiry and analytical review procedures is the preliminary basis for a CPA to issue

A. compilation reports

B. review report

C. management advisory services report

D. audit report

B

When performing an engagement to review a nonpublic entity's financial statements, an accountant most likely would:

A. Limit the distribution of the accountant's report.

B. Ask about actions taken at board of director's meetings.

C. Obtain an understanding of the effectiveness of entity's internal control.

D. Confirm a sample of significant accounts receivable balances.

B

Which of the following is required to be performed in an audit but not in review engagement?

A. Complying with the "Code of Professional Ethics for Certified Public Accountants" promulgated by the Board of Accountancy.

B. Planning the engagement.

C. Agreeing on the terms of engagement.

D. Studying and evaluating internal control structure.

D

Which of the following procedures is not included in a review engagement on a non-public entity?

A. Inquiries of management.

B. Inquiries regarding events subsequent to the balance sheet date.

C. Any procedures designed to identify relationships among data that appear to be unusual.

D. Communicating any material weaknesses discovered during the study and evaluation of internal

accounting control.

D

A review does not provide assurance that the CPA will become aware of all significant matters that would be disclosed in an audit. However, if the CPA becomes aware that information coming to his

attention is incorrect, incomplete, or otherwise unsatisfactory, he should

A. Withdraw immediately from the engagement

B. Perform the additional procedures he deems necessary to achieve limited assurance

C. Performa complete audit and issue a standard audit report with appropriate qualifications

D. Downgrade the engagement to a compilation and issue the appropriate report

B

If the CPA has reason to believe that the information subject to review may be materially misstated, the CPA should

A. Express a qualified negative assurance.

B. Express and adverse opinion.

C. Withdraw from the engagement.

D. Carry out additional or more extensive procedures.

A

The review of a company's financial statements by a CPA firm

A. Requires detailed analysis of the major accounts.

B. Has similar scope as an audit and adds similar credibility to the statements.

C. Is substantially less in scope of procedures than an audit.

D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.

C

A practitioner's unmodified report on a review of the financial statements of a nonpublic entity should state that

A. The practitioner does not express an opinion or any form of assurance on the financial statements.

B. Nothing has come to the practitioner's attention that causes the practitioner to believe that the financial statements are not presented fairly, in all material respects in accordance with PFRS.

C. The practitioner obtained reasonable assurance about whether the financial statements are free of material misstatements.

D. The practitioner examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.

B

If there had been a material scope limitation on a review engagement, the CPA may

A. Express either qualified opinion or disclaim an opinion on the financial statements.

B. Not provide any assurance on the financial statements

C. Issue the unmodified review report.

D. Issue an audit report that contains an unmodified opinion about the financial statements.

B

If the financial statements reviewed contain material misstatements, the practitioner's review report should:

A. Express a qualification of the negative assurance.

B. Give an adverse statement.

C. Not provide any assurance.

D. Either a or b.

D

The statement that "nothing came to our attention which would indicate that these statements are not fairly presented" expresses which of the following?

A. Disclaimer of opinion

B. Negative assurance

C. Negative confirmation

D. Piecemeal opinion

B

A practitioner has accepted an engagement in which the audit procedures of inquiry and analytical procedures will be employed. These procedures will form the basis for issuance of:

A. A compilation report.

B. Audit report on supplemental information issued by the client.

C. A management advisory report requested by the audit committee.

D. A review report on comparative financial statements for a non-public company.

D

In a review service where the client has failed to follow PFRS, the auditor is:

A. not required to determine the effect of a departure if management has not done so, but that fact must be disclosed in the report.

B. required to determine the effect of a departure if management has not done so, and that fact must be disclosed in the report.

C. not required to determine the effect of a departure if management has not done so, and that fact need not be disclosed in the report.

D. required to determine the effect of a departure if management has not done so, and that fact need not be disclosed in the report.

A

A report on factual findings is the end product of the auditor when performing

A. Examination

B. Audit

C. Review

D. Agreed-upon procedures

D

Which of the following is true of the report based on agreed-upon procedures?

A. The report is restricted to those parties who have agreed to the procedures to be performed

B. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in the financial information

C. The report states that the auditor has not recognized any basis that requires revision of financial statements

D. The report should state that the procedures performed are limited to analytical procedures and

inquiry

A

Engagement to apply agreed-upon procedures on certain accounts within a financial statement may be accepted provided

A. The CPA has expressed opinion on the financial statements taken as a whole.

B. The CPA takes full responsibility for the adequacy of the procedures to be performed.

C. The CPA provides only a limited assurance about the reliability of the financial statements.

D. The distribution of the report is limited only to specified parties involved.

D

An engagement to apply agreed-upon procedure engagement may be accepted, provided

A. The CPA has audited the financial statements of the client

B. The CPA is independent with respect to the client

C. The client takes full responsibility for the adequacy of procedures to be performed.

D. The adequacy of the procedures to be performed will be determined by the CPA.

C

Which of the following ethical principles does not apply to an agreed-upon procedure engagement?

A. Independence

B. Confidentiality

C. Professional behavior.

D. Professional competence and due care

A

An agreed-upon procedures engagement is one in which:

A. the auditor and management agree that procedures will be applied to all accounts and circumstances.

B. the auditor and management agree that procedures will not be applied to all accounts and circumstances.

C. the auditor and management or a 3rd party agree that the engagement will be limited to certain specific procedures.

D. the auditor and management or a 3rd party agree that the auditor will apply his or her judgment to determine procedures to be performed.

C

Which of the following is true of the report based on agreed upon procedures?

A. The report is restricted to those parties who have agreed to the procedures to be performed

B. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in the financial information

C. The report states that the auditor has not recognized any basis that requires revision of financial statements

D. The report should state that the procedures performed are limited to analytical procedures and inquiry

A

Which statement is incorrect regarding agreed-upon procedures?

A. Users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor's work.

B. 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.

C. The auditor should conduct an agreed-upon procedures engagement in accordance with PSRS and the terms of the engagement.

D. Where the auditor is not independent, a statement to that effect need not be made in the report of factual findings.

D

Distribution of which of the following types of reports is limited?

A. audit

B. review

C. agreed-upon procedures

D. examination

C

A CPA is not required to comply with the "Code of Professional Ethics for Certified Public Accountants" promulgated by the Board of Accountancy when performing

A. Review

B. Agreed-upon procedures.

C. Compilation

D. None of the above

D

What level of assurance does an accountant give on compilation report?

A. None

B. Moderate

C. Low

D. High

A

The term "accountant" has been used by AASC to refer to a CPA in public practice who is engaged to

A. Audit financial statements

B. Review financial statements

C. Apply agreed-upon procedures

D. Compile financial statements

D

Which of the following procedures would an accountant most likely perform in a compilation engagement?

A. collect, classify and summarize financial information.

B. apply analytical procedures

C. assess risk components

D. test the accounting records

A

Ethical principles governing compilation of financial statements include

Independence

Competence

Technical standards

A. Yes Yes Yes

B. Yes Yes No

C. Yes No No

D. No Yes Yes

D

The procedures employed in doing compilation are:

A. Designed to enable the accountant to express a limited assurance

B. Designed to enable the accountant to express a negative assurance

C. Not designed to enable the accountant to express any form of assurance

D. Less extensive than review procedures but more extensive than agreed-upon procedures

C

Which of the following is incorrect about a compilation engagement?

A. The CPA uses his auditing expertise to collect, classify and summarize financial information.

B. The engagement ordinarily entails reducing detailed data to a manageable and understandable form.

C. The CPA should exercise due care when engaged to compile financial statements.

D. The procedures performed do not enable the accountant to express any form of assurance.

A

Which of the following procedures is normally performed in connection with a compilation engagement?

A. Inquire of management about subsequent events

B. Making inquiries of management concerning actions taken at board meeting

C. Applying analytical review procedures

D. Assemble financial information

D

What level of assurance does the CPA provide under the following engagements?

Audit

Review

Agreed upon procedure

Compilation

A. High Moderate None None

B. Reasonable Limited Low None

C. Moderate Moderate None None

D. High Negative None Low

A

The use of negative assurance in audit reports on financial statements is

A. A violation of the professional standards.

B. Encouraged by PICPA.

C. A help in clarifying the degree of responsibility being assumed by the auditor.

D. Properly located in the opinion paragraph of the unmodified report.

A

Which of the following statements is not true about the reports provided by a CPA?

A. In the audit engagement, the auditor provides high level of assurance that the financial information is free of material misstatement.

B. In a review engagement, the CPA's moderate assurance is expressed in the form of negative assurance

C. For agreed-upon procedures, the CPA provided a report on factual findings and no assurance is expressed.

D. In a compilation engagement, no assurance is expressed and the users of the financial information do not derive any benefit from the CPA's involvement.

D

A summary of findings rather than assurance is most likely to be issued on which engagement?

A. Review

B. Compilation

C. Examination

D. Agreed-upon procedures

D

An auditor is associated with the financial information when he:

Attaches report to the financial

information

Consents to the use of his name in a

professional connection

A. Yes No

B. Yes Yes

C. No Yes

D. No No

B

A CPA who is not independent may issue a

A. Review report

B. Special report

C. Report expressing a qualified opinion

D. Compilation report

D

A CPA should perform analytical procedures during engagement to

Audit

Review

Compile

A. Yes Yes Yes

B. Yes Yes No

C. No Yes No

D. Yes No No

B

In a compilation engagement, if the accountant becomes aware of material misstatements, the accountant should try to agree appropriate amendments with the entity. If such amendments are not made and the financial information is considered to be misleading, the accountant should

A. Do nothing.

B. Withdraw from the engagement.

C. Issue a qualified or adverse opinion.

D. Issue a negative assurance.

B

Your accounting firm has accepted a compilation engagement from a client in which your firm is not independent. In that case you:

A. may not accept the engagement.

B. may accept the engagement and disclose the lack of independence.

C. may accept the engagement and not disclose the lack of independence.

D. may accept the engagement and disclose the lack of independence and the reason for the lack

of independence.

B

The concept of reasonable assurance is provided for in which one of the following engagements?

A. review

B. compilation

C. audit

D. agreed upon procedures

C

Which of the following results in a conclusion that represents positive assurance?

A. review

B. compilation

C. examination

D. agreed upon procedure engagement

C

The distribution of which of the following types of reports is unrestricted?

A. reviews and agreed-upon procedures

B. examinations and agreed-upon procedures

C. examinations, reviews, and agreed-upon procedures

D. examinations and reviews

D

When an independent CPA is associated with the financial statements of a publicly held company but has not audited or reviewed the financial statements, the appropriate form of report that must be

issued must include a(n)

A. negative assurance

B. compilation opinion

C. disclaimer of opinion

D. adverse opinion

C

Which of the following statements about assurance engagements is not correct?

A. Assurance engagements are intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria.

B. The subject matter of an assurance engagement may take many forms such as data, systems and processes or behavior.

C. Not all engagements performed by professional accountants are assurance engagements.

D. The Philippine Standards on Assurance Engagements issued by AASC describe the objectives and elements of assurance engagements to provide high, moderate or low level of assurance.

D

Which of the following is an example of an assurance engagement?

A. management advisory services

B. reporting on financial statements prepared using other comprehensive basis of accounting

C. compilation of financial information

D. preparation of tax returns

B

Which of the following services provides a moderate level of assurance about the client's financial statements?

A. Forecasts and projections

B. Compliance with contractual agreement

C. Review

D. Compilation

C

Which of the following is not one of the elements of an assurance engagement?

A. Sufficient appropriate evidence

B. A subject matter

C. Suitable criteria

D. An opinion about whether the subject matter conform, in all material respects, with identified criteria.

D

According to PSA 3000, assurance engagement should exhibit five elements including

A. financial information

B. a two-party relationship

C. financial reporting framework

D. a written assurance report

D

Subject matter of an assurance engagement may take many forms including

Data

Systems

Behavior

A. Yes Yes Yes

B. Yes No Yes

C. Yes Yes No

D. No Yes Yes

A

Which of the following is not one of the requirements before accepting an assurance engagement?

A. The practitioner should be competent and independent.

B. The practitioner should accept the engagement only if the subject matter is the responsibility of another party.

C. The practitioner should accept the engagement only if the subject matter is identifiable and in the form that can be subjected to evidence gathering procedures.

D. The responsible party and the intended user of assurance report should be from different organizations.

D

Which of the following generalizations is incorrect about the reliability of evidence gathered by practitioners?

A. Evidence from external sources is more reliable than that generated internally.

B. Evidence generated internally is more reliable when subject to appropriate controls within the entity.

C. Evidence obtained indirectly by the practitioner is more likely reliable than that obtained directly.

D. Evidence in the form of documents and written representation is more likely to be reliable.

C

Which of the following is false? PSAE 3000

A. Describes the objective and elements of assurance engagements intended to provide either a high or moderate level of assurance

B. Establishes standards for and provides guidance to professional accountants in public practice for the performance of engagements intended to provide a high level of assurance

C. Specifies the procedures that the professional accountant should adopt in the performance of all assurance engagements

D. Acts as a framework for the development by the Auditing and Assurance Standards Council of specific standards for particular type of assurance engagement

C

When a CPA is associated with the Preparation of forecast all of the following should be disclosed except:

A. Sources of information

B. Character of work performed

C. Major assumptions used

D. Probability of achieving the forecast

D

Given one or more hypothetical assumptions, a responsible patty may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations, and cash flows. This prospective financial information is known as

A. Pro-forma financial statements

B. Partial presentation

C. Financial projection

D. Financial forecast

C

In an engagement to examine prospective financial information, the auditor should obtain sufficient appropriate evidence as to whether:

I. Management's best-estimate assumptions on which the prospective financial information is based are not unreasonable and, in the case of hypothetical assumptions, such assumptions are

consistent with the purpose of the information;

II. The prospective financial information is properly prepared on the basis of the assumptions;

III. The prospective financial information is properly presented and all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions;

IV. The prospective financial information is prepared on a consistent basis with historical financial statements, using appropriate accounting principles.

A. I, II, III and IV

B. I, II and III

C. I and II

D. I, II and IV

A

Financial forecast is a

A. Financial information based on assumptions about events that may occur in the future and possible actions by an entity.

B. Prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the information is prepared.

C. Prospective financial information prepared on the basis of hypothetical assumptions about future events and management actions which are not necessarily expected to take place.

D. Prospective financial information prepared on the basis of a mixture of best-estimate and hypothetical assumptions.

B

An examination of a financial forecast is a professional service that involves

A. Assembling a financial forecast that is based on management's assumptions.

B. Limiting the distribution of the accountant's report to management and board of directors.

C. Assuming responsibility on the financial forecast.

D. Evaluating the preparation of a financial forecast and the support underlying management's

assumptions.

D

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a report that contains a(n):

A. qualified opinion

B. unmodified opinion with emphasis of matter paragraph

C. adverse opinion

D. disclaimer of opinion

C

Which of the following is correct concerning prospective, financial statements?

A. Only financial forecast would normally be appropriate for limited use.

B. Only financial projection would normally be appropriate for limited use.

C. Any type of prospective financial statements would normally be appropriate for limited use.

D. Any type of prospective financial statements would normally be appropriate for general use.

C

Accepting an engagement to examine financial projection most likely would be appropriate if the projection will be distributed to

A. all employees who work for the entity

B. investing public

C. a bank with which the entity is negotiating for a loan

D. all stockholders of record as of the report date

C

Financial forecasts are based on:

Hypothetical assumptions

Best estimates

A mixture of hypothetical assumptions and best estimates

A. Yes Yes No

B. No Yes Yes

C. No Yes No

D. No No Yes

C

The party responsible for assumptions identified in the preparation of prospective financial statements is usually

A. A third-party lending institution

B. The client's management

C. The reporting accountant

D. The independent auditor

B

When the auditor believes that the presentation and disclosure of the prospective financial information is not adequate, the auditor should

A. Express a qualified opinion on the prospective financial information.

B. Express an adverse opinion on the prospective financial information.

C. Disclaim an opinion on the prospective financial information.

D. Either a or b

D