Page 1 of 13 | AT Pre-recorded Handout 04 REO CPA REVIEW INTRODUCTION To AUDITING REAL EXCELLENCE ONLINE RAYMUND FRANCIS A. ESCALA, CPA; MBA Vaan ‘ REO.CPA.ACADEMICS.F2.01.00 INTRODUCTION TO AUDITING RAYMUND FRANCIS A. ESCALA, CPA, MBA TOPIC OUTLINE 4. Introduction to auditing a. Nature, philosophy, and objectives b. Types of audit ¥ As to nature of assertion/data (financial statements audit, operational audit, and compliance audit) ¥_Asto types of auditor (external independent financial statements audit, internal audit, and government audit) 2. Financial Statements Audit a. Objective and elements of FS Audit) b. The demand for FS Audit Value of FS Audit 4. e. General Principles of FS Audit ‘Theoretical Framework of Fs Audit 3. Overview of the Audit Process ¥ Ageneral approach ¥ Amore detailed approach AUDITING Definition The American Accounting Association defines an audit as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results thereof, ‘The following are key concepts obtained from the definition of an audit a. Asystematic process b. It involves objectively obtaining and evaluating evidence about assertions. c. It ascertains the degree of correspondence between assertions and established criteria, d. It includes communication of the results to interested users Types of audit In compliance with the syllabus in Auditing of the Philippine CPA Licensure Examination, the following are the types of audits. 4. Nature of assertion or data a. Financial statement (FS) audit b. Operational audit c. Compliance audit 2. Types of auditor a. External audit b. Internal audit Government audit i iokel MSM Aeel ea Sy aia a er Tarr y Samer eMas eee 1 (074) 665 6774° @ 0919093 8620 © suppor@reocpareview phee /REO CPA REVIEW EEE REAL EXCELLENCE ONLINE INTRODUCTION REO.CPA.ACADEMICS.F29) Comparison of the different types of audit A B. c. D. 4. Identify the following as financial au Financial Statements Audit ‘Operational Audit ‘Compliance Audit ‘Assertions Financial statements are fairly | Operations are conducted | Activities complied with presented efficiently and effectively | applicable laws, rules, regulations, contracts, or management poli ‘Suitable Criteria | GAAP or any other identified | Objective set by the ‘Applicable contracts, rules, financial reporting framework | management regulations, laws, or management polic Report ‘An opinion on whether the Report on efficiency and Degree of compliance with financial statements are fairly | effectiveness. This will also | applicable laws, rules, presented in conformity with an_| include recommendations to | regulations, or management identified financial reporting improve operations. policy, framework. Generally External auditors internal auditors Government auditors performed by. ‘(QUICK KNOWLEDGE CHECK 01 1. Which of the following statements refers to the definition of auditing? ‘A service activity whose function is to provide quantitative information primarily financial in nature about economic entities that is intended to be useful in making economic decisions. The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions ‘and events which are in part at léast of a financial character and interpreting the results thereof. ‘The process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of the information. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results thereof. 2. Which of the following is not among the characteristics of auciting? A. Asystematic process B._Itinvolves objectively obtaining and evaluating evidence about assertions. C._ It ascertains the degree of correspondence between assertions and established criteria D. Itincludes communication of the results to the management 3. The "hallmark" of auditing is A. Available audit technology. C. Professional judgment. B. Generally accepted auditing standards D. Materiaity and audit risk (FA), compliance audit (CA), and operational audit (OA), ’A supervisor is not carrying out his assigned responsibilities. ‘A company's tax return does not conform to income tax laws and regulations. ‘A municipality's financial statements correctly show actual cash receipts and disbursements, ‘A company's receiving department is inefficient. CA, CA, FA, OA ©.OA, CA, CA, OA OA, CA, FA, OA D.CA, CA. FA.CA 6. An objective of operational audit is to assess whether ‘A. Specific units of the entity are functioning effectively and efficiently B. Financial statements fairly reflect the results of operations C. An organization's procedures adhere to specific procedures, rules or regulations set by an authoritative body D. Internal contro! structure is designed and Implemented REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience yewrw.seocpareview.ph REO CPA REVIEW © (074) 668.6774 @ 0016 840.0001 © [email protected]© sR i) g Oo ge Page 3 of 13 AT Pre-ecorded Handout 04 8 REO CPA REVIEW RAYMUND FRANCIS A. ESCALA, CPA, MBA Bf A REAL EXCELLENCE ONLINE INTRODUCTION TO AUOMTING ‘REO.CPA.ACADEMICS.F2.01.00 ‘Which of the following activities is typically associated with operational auditing? ‘A. Determining whether the financial statements are an accurate representation of the entity's operations. B. Evaluating the feasibility of attaining the entity's operational objectives. C. Making recommendations for improving performance. D. Reporting on the entity's relative success in meeting profitability goals. 7. Which of the following terms best describe the audit of a taxpayer's retum by a BIR auditor? A. Operational audit C. Intemal audit B. Compliance audit D. Government audit 8. Auditors of the Commission on Audit perform the role of A. Internal auditors. C. Independent auditors. B. Management accountants. D. Financial consultants, 9. To provide for the greatest degree of independence in performing intemal auditing functions, an intemal auditor most likely should report to A. Board of Directors, . Corporate Controller. B. Vice-President for Finance. D. Corporate Stockholders, 4 40. Which statement is correct regarding the relationship between intemal auditing and the extemal auditor? ‘A. Some judgments relating to the audit of the financial statements are those of the internal auditor. B. The extemal audit function's objectives vary according to management's requirements. C. Gertain aspects of internal auditing may be useful in determining the nature, timing and extent of external audit D procedures. The external auditor is responsible for the audit opi any use made of internal auditing expressed, however that responsibilty may be reduced by FINANCIAL STATEMENT AUDIT Objective of financial statement audit PSA 120 dictates that 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 respects, in accordance with generally accepted accounting principles or other identified financial reporting framework. PSA 200 (Revised and Redrafted) further supported the above objective by stating that "in conducting an audit of financi statements, the overall objectives of the auditor are: a. To oblain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and b. To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor's findings.” From these statements, the following key phrases were emphasized: Expression of an opinion Financial statements are taken as a whole Reasonable assurance In all material respects Presence of criteria ‘Communication of the results vvvvyy REO CPA‘ IPPINES Effectiveness. Efficiency. Convenience wnreoureee REO CPA REVIEW. © (074) 665 674 © 0910 240.0061 © suppon@reocpareview phEO CPA REVIEW ‘ EAL EXCELLENCE ONLINE ~ Review of elements of FS audit A. Athree-party relationship ‘The table below summarizes the parties, with their respective responsibilities, involved in a financial statement aucit. s. Respon: ‘Auditor (represents the | ~ formation and expression of an opinion on the financial statements practitioner) Y compliance with ethical requirements (e.g. independence and competence) ¥ determining the scope of audit in accordance with PSAs and other applicable ‘equlations of professional bodies Management and those | “preparation and presentation of the financial statements in accordance with the charged with governance | applicable financial reporting framework {represents the responsible | prevention and detection of fraud and error party) adoption of implementation of adequate accounting and internal contro! systems, Users of FS (represent the | ~use the audit report which contains the opinion expressed by the auditor intended users B. An appropriate subject matter For the financial statements to be appropriate subject matter of an audit engagement, adequate supporting records and documents should be available. ©. Suitable criteria Criteria used in an audit of financial statements generally include the PFRS, GAAP, and other applicable financial reporting framework D. Sufficient appropriate evidence Concepts discussed in assurance engagements apply to audit engagements. Terms are revised to specifically retate to audit engagements (e.g. assurance engagement risk is changed to audit risk) E. Awritten assurance report or conclusion. The auditor provides a written report called an “audit report" which contains the conclusion or opinion conveying the ‘assurance obtained about the financial statements. In addition, the auditor considers other reporting responsibilities, including communicating with those charged with governance. “The opinion to be expressed by the auditor depending on the evidence obtained may include either of the following: ‘Type ‘Common phrase used Unmodified or unqualified | 7 Presents fairy, in all material respect ‘Qualified Except for ‘Adverse ‘7 Do nol present faify, n all material respect Disclaimer of opinion ‘7 We do not express a conclusion ‘To warrant the issuance of an unmodified opinion, the auditor determines whether there is a. a limitation on the scope of the auditor's work (Qualified or Disclaimer of Opinion); or b. a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures. (Qualified or Adverse Opinion) Assurance provided by the auditor The auditors opinion is intended to enhance the credibility of financial statements by providing @ high, but not absolute, level of assurance. Reasonable assurance and the Inherent limitations of an audit 2. Use of selective testing Inherent limitations of intemal control REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience “ werw/ reacpareview.ph REO CPA REVIEW ©1074) 005.0774 @ 0910 640.0001 © [email protected]5 2B 2 3g 8 = ae. 7 5 oak Page 5 of 13 | AT Prevrecorded Handout 04 n ) ' ' 8 REO CPA REVIEW RAYMUND FRANCIS A. ESCALA, CPA, MBA af REAL EXCELLENCE ONLINE AF RO OUSTIPN Fa MUON - REO.CPA.ACADEMICS.F2.01.00 c. Fact that most of audit evidence is persuasive rather than conclusive d. Work undertaken by the auditor to form an opinion is permeated by judgment e. Nature/characteristics of assertions THE DEMAND FOR FS AUDIT A Menegement of the following Business risk Countless number of decisions are made every day by businesses to appropriately manage business risk, which is any event or activity that will prevent the entity from meeting its business objectives such as wealth and profit maximization. If an entity is exposed to significant business risk, such risk may ultimately lead to failure. This is the primary reason why decisions to be made must be carefully evaluated and should be founded on a suitable basis Furthermore, investors, creditors, and other users of financial information demand high-quality, relevant, and reliable information in order to come up with educated financial decisions. 2. Information risk . Information risk is the risk that the information prepared and presented by the entity contains misstatements. Information risk is the mathematical complement of reliability level. This means that as information risk increases (from 5% to 10%), reliability level decreases (from 95% to 90%). Factors contributing to information risk > Voluminous 4: > Complexity of transactions Remoteness of information Conflicts of interest between the provider and users of information Ways of reducing information risk > Verify the information > Have the financial statements be audited > Share information risk with the management vv B. Additional conditions creating the need for FS Audit * Conflict of interest between the responsible party and the intended users of the financial statements, © Expertise, Complexity of accounting and auditing requires expertise * Remoteness of users. Users of information frequently are prevented from directly assessing the quality of information + Financial consequence. Misleading financial information could have substantial economic consequences for a decision-maker. VALUE OF FS AUDIT Based on the discussions of the demand for FS audit, the following may be construed as the value of an FS audit, ‘© Audit reduces information risk that may lead to lower cost of capital. “ '* Audit may be used to deter inefficiency and fraud GENERAL PRINCIPLES OF FS AUDIT ‘Whenever FS audits are conducted, the following principles must be observed (CPP PJ SAE) The auditor should comply with relevant ethical requirements (Code of Ethics) itor should conduct an audit in accordance with Philippine Standards on Auditing. auditor should plan and perform the audit with an attitude of Professional skepticism 4. The auditor should exercise Professional Judgment REO CPA PHILIPPINES Effectiveness. Efficiency. Convenience www, REO CPA REVIEW # ern acer @ 0916 0400501 © supponreocpereview phREO.CPA.ACADEMICS, zy Page 0 of 13 a1 | POC i ul INLINE " The ausitor should obtain Sufficient Appropriate audit Evidence, THEORETICAL FRAMEWORK OF FS AUDIT Eftorts had been made to formally create a conceptual structure for auditing financial statements. The conceptual structure would include conditions that should exist whenever an FS Audit is conducted to have a favorable result The following are some of the assumptions, postulates, or concepts included in this conceptual structure (VIC BIG T) ‘Ail financial data are Verifiable through the existence of supporting documents and records ‘Auditor should always maintain Independence with respect to the financial statements under audit No tong-term Conflict between the auditor and the client's management Audit Benefits the public Effective Internal control system reduces the possibility of errors and fraud Consistent application of Generally accepted accounting principles Wakes held True in the past, shall continue to hold true in the future, in the absence of any evidence to the con nC LEDGE CHECK 02 ‘The overall objectives of the auditor in conducting an audit of financial statements are 1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether caused by fraud or error. To report on the financial statements. Ill. To obtain conclusive rather than persuasive evidence. IV. To detect all misstatements, whether due to fraud or error. A. land tony C.1, Mand Ml only B. Wand tVonly D.L I titand iv 2. Which of the following best describes the objective of an audit of financial statements? ‘To express an opinion whether the financial statements are prepared in accordance with prescribed criteria. ‘To express an assurance as to the future viabiliy of the entity whose financial statements are being audited To express an assurance about the management's efficiency or effectiveness in conducting the operations of entit JO express an opinion whether the nancial statements are prepared, in all material respects, in accordance with an identified financial reporting framework, ‘Third-party users of the audit report expect the auditor to do all ofthe following, except: A. To evaluate measurements and disclosures made by management B. To provide a biased evaluation of the FSs C. To determine whether financial statements are presented in accordance with GAAP D. To gather sufficient evidence to support their opinion if the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor: ‘A. should withdraw from the engagement. ss 8. should request an increase in audit fees so that more resources can be used to conduct the audit, C__has the responsibility of notifying financial statement users through the auditor's report. ©. should notify regulators of the circumstances. {Absolute assurance cannot be provided in an audit because of: (Choose the exception) ‘A Human errors in judgment C. The need to obtain conclusive evidence B The employment of test procedures D. Limitations inherent in the client's internal controls 6 The need for an independent audit arises due to the following reasons. (Choose the expectation) ‘A. Expertise of auditors C. Remoteness of users B_ Competing imervets D. Complexity of decision-making NOwsupe ° ODD Y . REO CPA REVIEW PHILIPPINES Effectiveness, Efficiency. Convenience were reocpateview ph REO CPA REVIEW © 1974) 0060774 @ 0010 040 0001 © suppond@reocpareview ph/\00°T0'7F'SIIN: Page 7 of 13 | AT Pre-recorded Handout 04 /REO CPA REVIEW (RAYMOND FRANCIS A. ESCALA, CPA, MBA Samm REAL EXCELLENCE ONLINE : © INTRODUCTION 76 AUDITING ‘ REO.CPA.ACADEMICS.F2.01.00 7. Which of the following is incorrect regarding the general principles of an audit? A. The auditor should comply with the "Code of Ethics for Professional Ethics for Certified Public Accountants" promulgated by the Philippine Professional Regulation Commission. B. The auditor should conduct an audit in accordance with PSAs. C. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated, D. The auditor would ordinarily expect to find evidence to support management representations and assume they are necessarily correct. & Which is not a theoretical postulate framing an audit? A. Financial data can be subjected to verification. B. Long-term conflict between the auditor and client may exist. C. An audit benefits the public D. The auditor is independent of the client. 8. financial statement audit ‘A. Confirms that financial statement assertions are accurate. B. Lends credibility to the financial statements. C. Guarantees that financial statements are presented fairly D. Assures that fraud has been detected 10. The independent audit is important to readers of financial statements because it ‘A. Determines the future stewardship of the management of the company whose financial statements are audited B. Measures and communicates financial and business data included in financial statements C. Involves the objective examination of and reporting on management-prepared statements D._ Reports on the accuracy of all information in the financial statements, AUDIT PROCESS: A GENERAL APPROACH A general overview of the audit process may be best represented by the following diagram: Entity prepares ‘The auditor ‘The auditor ‘The auditor and presents performs audit |g] gathersaudit expresses an financial Procedures evidence) auditopinion statements 4, Entity prepares and presents financial statements The financial statements ate considered as assertions or representations made by the entity, through its management and those charged with governance, as appropriate. These assertions may be explicitly or implicitly included in the financial statements and may fall nto the following categories: OLD CATEGORIES (TAP) ‘A. Assertions about classes of Transactions and events for the period under aut (TOCCAC) Occurrence - transactions, and events that have been recorded have occurred and pertain to the entity. ‘Completeness - all transactions and events that should have been recorded have been recorded. Cutoff - transactions, and events have been recorded in the correct accounting period. Accuracy - amounts and other data relating to recorded transactions and eveits have been recorded appropriately. Y Classification - transactions, and events have been recorded in the proper accounts. S488 PHILIPPINES: Effectiveness. Efficiency. Convenience ph REO CPA REVIEW | © 0616 5400981 © [email protected] Oro: Nate HesB. Assertions about Account balances at the period end (ACERV) REO.CPA ACADEMICS F2, 7, emplaenmes - ol sabia, Nabe, ait saiiy Faeteate iat vioatd nike Hin feratdi (ed ews recorde ¥ Existence - assets, liabilities, and equity interests exist 2 Ruane ang obtains teeny hak cok 1 ost ees, nl bios aol of she enti ¥ Valuation and allocation - assets, labilties, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded, C. Assertions about Presentation and disciosure (POCAC) ¥ Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity. ¥ Completeness ~ all disclosures that should have been included in the financial statemehts have been include ¥ Accuracy and valuation - financial and other information are disclosed fairy and at appropriate amounts. Y Classification and understandabilty - financial information is appropriately presented and described, and disclosures are clearly expressed, NEW CATEGORIES A. Classes of Transactions and events and related disclosures (POCCAC) y SRK Presentation - transactions, and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework. ‘Occurrence — transactions, and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity. Completeness - all transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included, Cutoff - transactions, and events have been recorded in the correct accounting period. ‘Accuracy - amounts and other data relating to recorded transactions and events have been recorded ‘appropriately, and related disclosures have been appropriately measured and described. Classification - transactions, and events have been recorded in the proper accounts. B. Account balances and related disclosures (PACER C) v aN Presentation - assets, liablities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements (of the applicable financial reporting framework. ‘Accuracy, valuation, and allocation - assets, labilties, and equity interests have been included in the financial statements at appropriate amounts, any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described, Completeness - all assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included Existence - assets, liabilties, and equity interests exist Rage ‘and obligations - the entity holds or controls the rights to assets, and liabilties are the obligations of the ent Classification - assets, liabilities, and equity interests have been recorded.in the proper accounts. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience wwew.seocpareview ph REO CPA REVIEW © (074) 065.6774 @ 09168400601 © suppont@reocpareview ph.00°L0'4'SIWI 28 as 33 Page 9 of 13 |AT Pre-tecorded Handout 04 2 REO CPA REVIEW RAYMUND FRANCIS A. ESCALA, CPA, MBA yea REAL EXCELLENCE ONLINE INTRODUCTION TO AUDITING REO.CPA.ACADEMICS.F2.01.00 2, The auditor performs audit procedures In conducting an audit of financial statements, the overall objectives of the auditor are: a. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and To report on te nancial statements, and communicate as required by the PSAS, in accordance with the auditor's indings. To achieve the overall objectives of the audit, the auditor shall design and perform ai gathering of audit evidence. Procedures to be performed may be categorized into (1) major audit procedures specific audit procedures. wudit procedures that enable the and (2) Major audit procedures k assessment procedures. The audit procedures are performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, 2. Test of controls. An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level 3. Substantive procedure. An audit procedure designed to detect material misstatements at the assertion level. ‘Substantive procedures comprise: i, Tests of details (of classes of transactions, account balances, and disclosures), and ii. Substantive analytical procedures. Specific audit procedures 4. Inspection of Records or Documents. It consists of examining records or documents, whether internal or external, in paper form, electronic form, or other media. Inspection of Tangible Assets. It consists of physical examination of the assets. ‘Observation. It consists of looking at a process or procedure being performed by others. Inquiry. It consists of seeking information from knowledgeable persons, both financial and non-financial, throughout the entity of outside the entity. This provedure may be used extensively throughout the audit as a complement to other audit procedures. 5. Confirmation. A specific type of inquiry that is the process of obtaining a representation of information or of an existing condition directly from a third party. Recalculation. It consists of checking the mathematical accuracy of documents or records. This procedure may be performed manually or electronically 7. Reperformance. It involves the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control 8, Analytical Procedures. Procedures consist of evaluations of financial information made by a study of plausible felationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. 3. The auditor gathers audit evidence Through the procedures performed, the auditor obtains sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. 4. The auditor expresses an audit opinion “The auditor provides a written audit report containing @ conclusion or an opinion regarding the fairness of preparation and presentation of financial statements in accordance with the applicable financial reporting framework. REO GPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.reocpareview.ph REO CPA REVIEW © (074 605.6774 @ 0016 8400961 © [email protected]VIE : bamem REAL EXCELLENCE ONLINE wis REO.CPA.ACADEMICS Fy Opinion to be expressed by the auditor may include either of the following a. Unmodified opinion. b. Modified opinion. The auditor modifies the opinion in the auditor's report when 1. Acchoice between Qualified and Adverse. The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not frée from material misstatement; or 2. Acchoice between Qualified and Disclaimer of opinion. The auditor is unable to obtain sufficient appropriate ‘audit evidence to conclude that the financial statements, as a whole, are free from material misstatement. AUDIT PROCESS: A MORE DETAILED APPROACH ‘The specific sequence or order of activities in performing financial statements audit may vary from firm to fim depending ‘on their policies and procedures. However, such a sequence of different activities normally will include the following steps: PHASE DESCRIPTION 1. Preliminary This phase will require a decision from the auditor on whether or not to accept @ new client or engagement continue a relationship with an existing one. This process would require evaluation not only ofthe activities auditor's qualification, but also of the integrity and auaitabiliy of the client's financial statements. Z Planning an audit | Audit planning Involves the development of an overall audit strategy, audit plan, and audit of financial program. The auditor usually obtains more detailed knowledge about the client's business and statements industry in order to understand the transactions and events affecting the financial statements. Preliminary assessment of risk and materiality is also made during this phase. 73. Study and Since an entity's intemal control directly affects the reliabiity of the financial statements, i is evaluation of ‘appropriate to study and evaluate these controls. intemal control 7 ZEvidence-gathering | Using the information obtained in audit planning and consideration of intemal control, the auditor (Substantive performs substantive tests to determine whether entity's financial statements are presented faily testing) ‘accordance with financial reporting standards. Substantive procedures could either be analytical procedures or tests of delails of transactions and balances This phase will always be performed by the auditor. i jewed, and an overall Comploinathe | Wrapping-up procedures are performed; conclusions reached are reviewed, Pee opinion is formed during this phase. Glssuance ofthe In this stage, auditor prepares and issues an audit report which describes the scope of the audit audit report ‘and states the auditor's conclusion regarding the fairness of the financial statements, 7, Post-audit ‘Affer completion of the audit engagement, auditor performs procedures that will enable himiher to responsibil identify areas for improvement in the current and future engagements. EDGE CHECK 5 ‘Which of the following is/are the appropriate categories of assertions? 1. Assertions about classes of transactions and events for the period under audit II, Assertions about financial statements and correspondence to GAAP. IN. Assertions about account balances at period end 1V. Assertions about presentation and disclosure A. land Ill C.J and IV. B. |, Ill, and IV DLA 1M, and Iv REO CPA REVIEW PHILIPPINES Effectiveness, Efficiency. Convenience www eocpareview.ph REO CPA REVIEW © (074) 0666774 @ 0916 6400061 © support@reocparoview ph_ BEY = abt Page 1 o 18 [AT Pr recorded Handout 4 8 REO CPA REVIEW RAYMUND FRANCIS A. ESCALA, CPA, MBA 3 ey REVIEW © ee Ee See Eon Yl EECA, cP on fe Wo ‘short-term note payable is included in the accounts payable balance on the financial statement, there is a violation ne A. completeness assertion. C. existence assertion. B. cutoff assertion. D. classification assertion, 3 Which of the following is not an assertion that is made in the financial statements by management concerning each ‘major account balance? A. Completeness ©. Legality, B. Rights and obligations. . Valuation, 4. Set the following phases in proper order: Pre-Engagement Internal Controls li, Evidence-Gathering lv. Planning v. Post-Audit Responsibilities vi. Reporting Cui ivi ti, vv Dei iv ii, v, vi 5. Ifa company’s external auditor expresses an unqualified opinion as a result of the audit of the company's financial statements, readers of the audit report can assume that The external auditor found no fraud ‘The company is financially sound and the financial statements are accurate Internal control is effective All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor. pop> LEDGE CHECK — OVERALL 4. The predominant type of attestation service performed by CPAs is A. Audit . Compilation B. Review D. Management consulting“ 2. The word auditing comes from the Latin audire, which means: A Tosee ©. To hear B. To detect D.Totest 3. The scope and objectives of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal auditing activities include one or more of the following: A B. g OD. Review of the accounting and internal control Yes Yes Yes Yes systems Examination of financial and operating Yes Yes Yes No information Review of the economy, efficiency and Yes Yes No No effectiveness of operations Review of compliance with laws, regulations and Yes No No No other external requirements ‘4. These audits are similar in most respects. ‘A. Operational and compliance C. Operational and government B. Financial and compliance D. Financial and operational REO GPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www-reocpareview.ph REO CPA REVIEW © (074) 666.6774 @ 0016 840.0661 © suppor@reocpareview ph4 7 REO IEW RAYMUND 4 REAL EXCELLENCE ONLINE ‘ '&. Operational auditing Is primarily oriented toward ‘A. Future improvements to accomplish the goals of management. B. The accuracy of data reflected in management's financial records. . The verification that a company's financial statements are fairly presented. D. Past protection provided by existing internal control & In“auditing" accounting data, the concern is with ‘A. Determining whether recorded information properly reflects the economic events that occurred duting the accounting period ~ B. Determining if fraud has occurred. C._Determining if taxable income has been calculated correctiy 1D. Analyzing the financial information to be sure that it complies with government requirements. 7. The best statement of the responsibilty of the auditor with respect to audited financial statements is: A. The audit of the financial statements relieves management ofits responsibilities B. The auditor's responsibility is confined to his expression of opinion about the audited financial statements. C. The responsibility over the financial statements rests with the management and the auditor assumes responsibilty with respect to the notes of financial statements. D. The auditor is responsible only for his unqualified opinion but not for any other type of opinion. 8. _ In the context of an audit of financial statements, the management of a company is responsible for A. Hiring the auditor CC. Preparing the financial statements B. The audit workpapers D. Independence and obtaining evidence 9. An audit can have a significant effect on A. Information Risk . The risk-free interest rate B. Business Risk D. Allofthese 10. Which of the following statements does not desoribe 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 consequences for a decision maker. C. Expertise is often required for information preparation and verification D. Users can directly assess the quality of information. 41. Auditing is based on the assumption that the financial data are verifiable. Data are verifiable when two of more qualified individuals, ‘A. Working together, can prove, beyond doubt, the accuracy of the data, B. Working independently, each reaches essentially similar conclusions. C. Working independently, can prove, beyond reasonable doubt, the truthfulness of the data, D. Working together, can agree upon the accuracy of the data, 42. Because an extemal auditor is paid a fee by a client company, he or she A. Is absolutely independent and may conduct an audit B. May be sufficiently independent to conduct an aucit C. Is never considered to be independent D. Must receive approval from the Securities and Exchange Commission before conducting an audit 43, Results of the financial statement audit are communicated to users through A. Financial statements C. Audit report B. Written management assertion D. Written assurance report 44. Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, ‘and to assess the risks of material misstatements at the financial statement and assertion levels. A. Risk assessment procedures . Tests of control B. Substantive procedures D. Analytical procedures REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience ‘wwew.reocpareview.ph REO CPA REVIEW © (074) 065.6774 @ 0916 840.0061 © [email protected]Page 13 of 13 | AT Pre-recorded Handout 04 10°24 SINT REO CPA REVIEW RAYMUND FRANCIS A. ESCALA, CPA, MBA REAL EXCELLENCE ONLINE INTRODUCTION TO AUDITING REO.CPA.ACADEMICS.F2.01.00 75. Which one of the following best describes the attest process? ‘A. Proving the accuracy of the books and records B. Gathering evidence about specific and known assertions. C. Assisting management in the successful operations of the company. D. Assembling and filing tax returns and related supplemental information. “You may only succeed if you desire succeeding; you may only fail if you do not mind failing.” Philippos END REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.reocpareview.ph REO CPA REVIEW © (074) 665.6774 @ 0916 840.0661 © [email protected]