Audit and Assurance Basics

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Questions and Answers

Which agency is responsible for the registration of corporations and partnerships and ensuring compliance with various laws?

Securities and Exchange Commission (SEC) (correct)

Bureau of Internal Revenue (BIR)

Philippine Stock Exchange (PSE)

Bangko Sentral ng Pilipinas (BSP)

Which of the following is NOT a function of the Bangko Sentral ng Pilipinas (BSP)?

Control public transportation regulations (correct)

Determine the exchange rate policy of the Philippines

Recommend measures to improve the efficiency of government operations

Supervise banks and non-bank institutions

Which of the following is NOT one of the principal duties of the Commission on Audit (COA)?

Promulgate financial literacy programs for the public (correct)

Submit an annual report to the president and congress

Keep the general accounts of the government

Maintain accounting and auditing rules

In the context of assurance engagements, which statement is incorrect?

Assurance engagements are only for historical financial information Signup and view all the answers

What is a primary purpose of an assurance engagement by a professional accountant?

To evaluate how well a subject matter meets identified criteria Signup and view all the answers

Which of the following accurately describes an assurance engagement?

It provides varying levels of assurance to the intended user Signup and view all the answers

The responsibilities of the Securities and Exchange Commission (SEC) do NOT include which of the following?

Regulating telecommunications industries Signup and view all the answers

Which aspect is essential to an assurance engagement's effectiveness?

Clear identification of the subject matter and criteria Signup and view all the answers

What conclusion does an auditor reach when unable to obtain sufficient appropriate audit evidence, but suspects the effects of undetected misstatements could be material but not pervasive?

The auditor issues a qualified opinion. Signup and view all the answers

Which of the following is least likely to assist in adequately planning an audit of financial statements?

Aid the auditor to develop a comprehensive marketing strategy. Signup and view all the answers

Which statement is NOT included in the 'Basis for Opinion' section of an auditor's report?

The financial statements are presented in compliance with GAAP. Signup and view all the answers

In a practitioner’s review of interim financial information, which activity is least likely to be performed?

Reading management's letters to stakeholders. Signup and view all the answers

What type of opinion does an auditor provide when they conclude that misstatements are both material and pervasive?

Adverse opinion. Signup and view all the answers

Which component is necessary to include in the 'Basis for Opinion' section regarding auditor independence?

Statement that the auditor is independent of the entity. Signup and view all the answers

What does the auditor do when they encounter significant uncertainty about the financial statements?

Conclude that effects may be material and pervasive. Signup and view all the answers

Which action is typical when the auditor seeks to understand the internal controls during the audit process?

Assess the design and implementation of controls. Signup and view all the answers

What must an auditor determine regarding prior period closing balances?

Whether the prior period’s closing balances have been correctly brought forward to the current period. Signup and view all the answers

What is the primary purpose of a management representation letter?

To reduce the possibility of misunderstandings about management’s responsibilities. Signup and view all the answers

When an auditor wants to keep the overall audit risk level consistent with the planned audit risk level and changes the assessed level of control risk, what action should be taken?

Decrease detection risk to align with increased control risk. Signup and view all the answers

In what context is a summary of findings rather than assurance most likely to be found?

In an agreed-upon procedures report. Signup and view all the answers

What type of opinion should an auditor express when misstatements are material but not pervasive?

A qualified opinion suggesting some concerns. Signup and view all the answers

What does an assurance report typically provide to a licensor regarding royalties?

An assessment of royalties due based on the license agreement. Signup and view all the answers

Which of the following actions is not typically involved in performing an audit regarding opening balances?

Conducting a comparative analysis with industry standards. Signup and view all the answers

When an auditor decides to increase control risk, which of the following must happen to maintain the same overall level of audit risk?

Increase the amount of evidence gathered from controls. Signup and view all the answers

Who is considered the intended user in an assurance engagement?

The person or class of persons for whom the report is prepared Signup and view all the answers

What does appropriate direction for assistants involve?

Informing assistants of their responsibilities and the objectives of the procedures Signup and view all the answers

Which condition during an audit is most likely to increase the auditor’s assessment of fraud risk?

Year-end adjusting journal entries Signup and view all the answers

Before reducing control risk below maximum, what assurance must an auditor obtain?

That controls are in use and operating effectively Signup and view all the answers

Which of the following actions may constitute fraud?

Alteration of financial records Signup and view all the answers

What does PSA 500 define as an expert?

An individual with expertise unrelated to accounting or auditing Signup and view all the answers

Which of the following is NOT involved in fraud according to the outlined definitions?

Mathematical mistakes in data Signup and view all the answers

What should an auditor primarily look for to obtain assurance that effective controls are in place?

Performing substantive tests and reviewing documentation Signup and view all the answers

What is NOT a purpose of analytical procedures according to PSA 520?

As tests of control to determine the effectiveness of internal controls. Signup and view all the answers

Which statement about the auditor’s use of an expert is FALSE?

If the expert’s work is inconsistent with other evidence, the auditor can ignore it. Signup and view all the answers

The primary goal of an operational audit is to assess what?

The efficiency and effectiveness of management’s operating procedures. Signup and view all the answers

In the context of a financial statement audit, what does audit risk represent?

The probability that internal control fails and the failure goes undetected. Signup and view all the answers

Which of the following is a characteristic of analytical procedures?

They involve comparing financial information against predetermined expectations. Signup and view all the answers

Statement 2 about the auditor’s use of an expert indicates what action must be taken when expert results are inconsistent?

The auditor must seek additional evidence to resolve the inconsistency. Signup and view all the answers

What does an operational audit NOT assess?

Overall accuracy of the financial statements. Signup and view all the answers

During which stage of the audit are analytical procedures usually applied?

At the planning stage to assess risk. Signup and view all the answers

Study Notes

### Audit and Assurance

Audit is the process of examining financial records to ensure they are accurate and comply with accounting standards.
Assurance is the process of providing a level of confidence about the reliability of information.
Auditors can provide different levels of assurance depending on the type of engagement, such as auditing, review, and Agreed-upon Procedures reports.
Compilation reports are the least likely to include a summary of findings rather than assurance.
Management representation letters aim to clarify management’s responsibility for financial statements and reduce the possibility of misunderstandings.
Control risk is the risk that a misstatement that could occur will not be prevented or detected by internal controls.
Detection risk refers to the risk that the auditor's procedures will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
Substantive testing are procedures designed to detect material misstatements at the assertion level.
Materiality is the magnitude of a misstatement that, individually or in the aggregate, could reasonably be expected to influence the decisions of users.
Inherent risk is the susceptibility of an assertion about a financial statement item to a misstatement, before considering any related controls.

Auditor's Opinion

Unmodified opinion is issued when the auditor concludes that the financial statements are free from material misstatement.
Qualified opinion is issued when the auditor concludes that the financial statements are materially misstated, but these misstatements are not pervasive.
Adverse opinion is issued when the auditor concludes that the financial statements are materially misstated and the misstatements are pervasive throughout the financial statements.
Disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements.
The Basis for Opinion section of the auditor’s report should include a statement about the auditor’s independence and ethical responsibilities.

Other Audit Activities

Operational Audits assess the efficiency and effectiveness of management's operations.
Review Engagements are less comprehensive than audits but provide a level of assurance.
Agreed-Upon Procedures involve the performance of specific procedures agreed upon by the auditor and the client.
Analytical Procedures include the analysis of significant ratios and trends, and are used for planning, substantive testing, and overall review of financial statements.

Financial Statement Audit

Audit Risk is the risk that the auditor unknowingly fails to modify an opinion on materially misstated financial statements.
Fraud and Error are both potential threats to the accuracy of financial statements.
Fraud is intentional, while error is unintentional.
Internal Controls
Experts - During audits, expert's work should be carefully assessed.

Government Agencies

The Bangko Sentral ng Pilipinas (BSP) regulates banks and non-bank institutions, and determines the exchange rate policy.
The Securities and Exchange Commission (SEC) is responsible for registering corporations and partnerships.
The Commission on Audit (COA) is responsible for auditing government agencies.
The Bureau of Internal Revenue (BIR) is responsible for collecting taxes.
The Philippine Stock Exchange (PSE) is a stock exchange where companies can list their shares for trading.

Ethical Considerations

Independence is a fundamental principle of auditing and is necessary for the auditor to provide objective assurance.
Due professional care requires auditors to plan and perform audits with professional skepticism and professional judgment.
Professional skepticism is a questioning mind and a critical assessment of audit evidence obtained.
Professional judgment is the application of relevant training, knowledge, and experience.
Delegation is an important part of auditing but auditors must ensure that assistants are appropriately directed and supervised.

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Description

This quiz covers fundamental concepts of audit and assurance, including definitions and the roles of auditors. You'll learn about different levels of assurance, control risk, and detection risk, plus the importance of management representation letters.