Financial Auditing and Assurance Services

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Questions and Answers

Which one of the following is not a reason why users desire an independent assessment of financial statements?

Lack of criteria on which to base information

Remoteness of the user from the organization

All of them are potential reasons (correct)

Complexity of transactions affecting the financial statements

Independent professional services that improve the quality of decision making are referred to as what?

Internal auditing

Financial auditing

Attestation services

Assurance services (correct)

What type of audit determines whether organizational policies are being followed?

A forensic audit

An operational audit

A compliance audit (correct)

A financial audit

In a review engagement for a nonpublic entity, what must the accountant establish with the client?

An understanding in an engagement letter Signup and view all the answers

May a CPA hire a non-CPA system analyst for their public accounting firm?

Yes, if the CPA can supervise and evaluate the specialist’s work Signup and view all the answers

Which of the following services may a CPA perform as part of a consulting service for a client?

Review of the client's proposed business plan Signup and view all the answers

What does a review provide an accountant with regarding financial statements?

A basis for expressing limited assurance Signup and view all the answers

Which statement is correct concerning the accountant’s opinion in a review report?

It conveys limited assurance on assertions made by management. Signup and view all the answers

What is a primary reason for requiring disclosure in legal proceedings?

To aid in a faster resolution of legal proceedings Signup and view all the answers

What is the underlying reason for a code of professional conduct for any profession?

It ensures public confidence in the quality of service Signup and view all the answers

Which circumstance is most likely to cause a professional accountant to be associated with a misleading tax return?

Recklessly using unverifiable information Signup and view all the answers

Which fundamental principle is critical for assuring that a professional accountant's conclusion has value to users?

Objectivity Signup and view all the answers

What fundamental principle does a CPA violate by accepting shares of stock as payment from a public company client?

Objectivity Signup and view all the answers

Which scenario is least likely to indicate a violation of the Integrity principle by a CPA?

Issuing a qualified opinion due to limitations in auditing scope Signup and view all the answers

Why is professional competence essential for accountants during assurance engagements?

It provides the basis for credible conclusions Signup and view all the answers

Which action by a CPA is most likely to undermine public trust in the profession?

Providing services without proper licensing Signup and view all the answers

What is the primary goal of gathering audit evidence regarding financial statements?

To conclude that there are no material misstatements. Signup and view all the answers

What must an auditor communicate to the Audit Committee regarding noncompliance with laws?

All material items detected during the audit. Signup and view all the answers

What should an auditor do if they lack industry expertise for an audit engagement?

Engage specialists familiar with the industry. Signup and view all the answers

Where do auditors primarily concentrate their efforts during an audit?

In areas where the greatest risk of material errors exists. Signup and view all the answers

How is the amount of evidence an auditor needs to gather determined?

It requires professional judgment. Signup and view all the answers

What is the primary purpose of the Philippine Standards of Auditing?

To set definitive auditing procedures for various situations. Signup and view all the answers

What should an auditor do if they discover potential management fraud?

Inform the Audit Committee of the findings. Signup and view all the answers

Which auditing practice involves statistical analysis for decision-making?

Determining the amount of audit evidence to gather. Signup and view all the answers

Which option may not require a professional duty to disclose confidential information?

In response to a specific inquiry from a major stockholder. Signup and view all the answers

In which scenario is a professional accountant likely prohibited from disclosing confidential information?

To disclose a tax fraud committed by the client. Signup and view all the answers

What type of threat is created if audit fees remain unpaid for a long time?

Self-interest review threat Signup and view all the answers

Which circumstance may not violate confidentiality rules for a CPA?

As part of a peer review process. Signup and view all the answers

Under what condition can a CPA disclose client working papers without consent?

When a court of law subpoenas them. Signup and view all the answers

Which situation does not typically justify the disclosure of confidential information by a CPA?

To fulfill a client's tax liability. Signup and view all the answers

What could be a potential violation of confidentiality for a CPA?

Sharing information with an accountant from another firm. Signup and view all the answers

Which of the following actions is NOT aligned with a CPA's duty to maintain confidentiality?

Disclosing client information to the IRS without consent. Signup and view all the answers

Which of the following is NOT a component of competence for certified public accountants?

Warranting the infallibility of the work performed. Signup and view all the answers

What should an incoming accountant do if they are not qualified to perform the work?

Any of the given choices. Signup and view all the answers

Who ultimately decides if an auditor is independent?

Auditor Signup and view all the answers

To achieve independence, which of the following must an auditor ensure?

They must be impartial when dealing with the client. Signup and view all the answers

What does the generally accepted auditing standard regarding independence require of an auditor?

The auditor must be without bias with respect to the client entity. Signup and view all the answers

Why is independence in appearance important for a CPA conducting an audit?

To maintain public confidence in the profession. Signup and view all the answers

What is a primary reason for publicly-traded corporations to have the outside auditor appointed by the board of directors?

To emphasize the auditor's independence from the management. Signup and view all the answers

Which of the following is a requirement for auditors regarding the services they provide to an audit client?

They must ensure their services do not conflict with their independence. Signup and view all the answers

An auditor may disregard the Philippines Standard on Auditing if the auditor believes that:

All of the given choices are correct. Signup and view all the answers

Which of the following best describes auditing standards?

General guidelines to assist auditors. Signup and view all the answers

How do Philippine Standards on Auditing (PSAs) allow auditors to exercise judgment?

By using adequate professional judgment when applying the standards. Signup and view all the answers

Between auditing standards and procedures, how are they applied from one audit engagement to the next?

Auditing standards are applied uniformly, but procedures may vary. Signup and view all the answers

What differentiates Philippine Financial Reporting Standards (PFRS) from Generally Accepted Auditing Standards (GAAS)?

PFRS outlines the principles for presentation of financial statements, while GAAS specifies auditor standards. Signup and view all the answers

Philippine Standards on Auditing issued by the Auditing and Assurance Standards Council (AASC) can be described as:

Laws equivalent to regulatory frameworks for auditors. Signup and view all the answers

In conducting an audit, what is the role of the auditor concerning PSAs?

To evaluate which standards are applicable to the engagement. Signup and view all the answers

Which statement is true regarding the adjustments that auditors must consider?

Auditors must adjust procedures based on each client’s unique conditions. Signup and view all the answers

Study Notes

Evaluating Evidence Against Objective Criteria

Evaluating evidence requires objective criteria.

Independent Assessment of Financial Statements

Users desire independent assessments due to:
- Transaction complexity affecting statements.
- Lack of criteria for information.
- Remoteness of user from the organization.

Assurance Services

Independent professional services improving decision-making quality are assurance services.
Financial auditing is a type of assurance service.
Attestation services are also assurance services.

Audit Types

Compliance audit: Determines if policies and external mandates are met.

Review Engagements (Nonpublic Entities)

Understanding with the client in an engagement letter is required.
Understanding of internal control is needed during review.
Review provides limited assurance on financial statements.
Review report doesn't express an opinion on the fairness of the statements.

CPA Firm Staff

CPAs can hire non-CPA specialists (e.g., system analysts).
CPAs must supervise and evaluate the specialist’s work.

Consulting Services

CPAs can analyze accounting systems, review business plans, and prepare financing information.

Auditor Communication

Audit committee communication about noncompliance with laws/regulations must include all material items.

Auditor Industry Expertise

CPAs lacking industry expertise must engage experts or gain knowledge of the entity's business.

Audit Focus

Auditors focus on areas with greatest risk of material errors/irregularities.

Audit Evidence Accumulation

Determining evidence amount requires professional judgment.

Philippine Standards on Auditing (PSAs)

PSAs provide guidelines, not hard and fast rules.
Auditors use professional judgment when applying PSAs.
PSAs are not statutory or enforced by security exhanges.
They are general guides for auditors.
PSAs are generally applicable, adaptable to various circumstances and should not be used in place of professional judgment.

Exceptions to PSA Compliance

Auditors can bypass PSAs if the requirement is impractical or impossible to perform.
Reasonable judgment is required to determine if a requirement should be bypassed

Auditing Standards

Auditing standards are general guidelines helping auditors.

Application of Auditing Standards and Procedures

Standards are applied consistently and may change from one audit to the next.
Audit procedures can vary across engagements.

PFRS vs. GAAS

PFRS pertain to financial statement presentation, while GAAS guide auditors.

Philippine Standards on Auditing (PSAs) Authority

PSAs issued by AASC are guidelines, not laws.
Auditors must follow PSAs.

CPA Competence

CPAs need technical qualifications, supervisory skills, and a willingness to seek expertise from others.
CPAs are not expected to be infallible.

Insufficient Qualification

If not qualified, accountants must acquire skills or recommend a qualified person.

Auditor Independence

Public opinion determines auditor independence.
Auditors must maintain impartiality.
Auditors cannot have material direct ownership in a client's business.

Appearance of Independence

CPAs strive for independence in appearance to build public trust.

Auditor Appointment

Public companies generally have the board of directors appoint or shareholders elect auditors to emphasize independence from management.

Disclosure of Confidential Information

Confidentiality is a core professional principle.
Disclosure occurs under specific circumstances, not for personal motivations

Professional Conduct

Professional conduct codes are essential for public trust.
Professional accountants can be associated with tax returns that meet certain criteria.

Assurance Engagement Principles

Objectivity is crucial in assurance engagements for user value.

Conflicts of Interest

Violations occur when professional fees remain unpaid or shares of stock are accepted as payment.

Integrity Violations

Integrity violations might include qualified opinions due to scope limitations or inaccurate or misleading statements.

Confidential Information Disclosure

CPAs protect confidential client information unless required to disclose.

Threats to Noncompliance

Unpaid fees create a self-interest threat.

Client Confidentiality

CPAs cannot disclose client information without consent, except through subpoenas, peer reviews, legal complaints or investigations.

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Description

This quiz covers key concepts in financial auditing and assurance services, including the evaluation of evidence, independent assessments, and various audit types. Explore the importance of assurance services in enhancing decision-making and the nuances involved in review engagements for nonpublic entities.