AUDITING & ASSURANCE PRINCIPLES

AT.101-Fundamentals of Assurance and Non-assurance Engagements

LECTURE NOTES

Definition and Objective of an Assurance Engagement

An assurance engagement is an independent professional service that

improves the quality (credibility) of information for decision makers.

In an assurance engagement, 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 criteria.

Assurance services are very broad, and can be done by CPAs or by a variety
of other professionals.

Need for Unbiased Reporting and Independent Assurance (Rationale)

The demand for assurance services emanate from the following reasons:
• Complexity of the transactions, information or processing systems;
• Remoteness between a user and the organization or trading partner;
• Interest’ conflict (potential bias);
• Management of risks (need to minimize financial surprises);
• Expertise required of auditors;
• Significant consequences of relying on inaccurate information.

Hence, assurance engagements reduce information risks of the subject

matter.

Types of Assurance Engagements

1. As to level of assurance:
a. Reasonable assurance engagement – The objective of a reasonable
assurance engagement is a reduction in assurance engagement risk to
an acceptably low level in the circumstances of the engagement as the
basis for a positive form of expression of the practitioner’s conclusion. An
example of this type of engagement would be an audit of historical
financial statements.
b. Limited assurance engagement – The objective of a limited assurance
engagement is a reduction in assurance engagement risk to a level that
is acceptable in the circumstances of the engagement, but where that
risk is greater than for a reasonable assurance engagement, as the basis

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 for a negative form of expression of the practitioner’s conclusion. An
example of this type of engagement would be a review of historical
financial statements.

2. As to structure:
a. Assertion-based engagement – In this type of engagement, the
evaluation or measurement of the subject matter is performed by the
responsible party, and the subject matter information is in the form of
assertion by the responsible party that is made available to the intended
users. Independent financial statements audit normally falls under this
type.
b. Direct reporting engagement – In this type of engagements, the
practitioner either directly performs the evaluation or measurement of
the subject matter, or obtains a representation from the responsible
party that has performed the evaluation or measurement that is not
available to the intended users. The subject matter information is
provided to the intended users in the assurance report.

Elements of an Assurance Engagement

The following are the elements of an assurance engagement:
a. Relationship-A three party (Responsible, Intended User & Practitioner);
b. Appropriate-subject matter;
c. Criteria-Suitable criteria;
d. Evidential Matter-Sufficient appropriate evidence; and
e. Report-Appropriate, written assurance report (in proper form).
All of the above five elements must be present for an engagement to be
considered as an assurance engagement.

Relationship- Three-party
Assurance engagements involve three separate parties:

1. Responsible party – is the person responsible for

a. Direct reporting engagement – subject matter; or
b. Assertion-based engagement – a subject matter information (the
assertion), and may be the subject matter. The responsible party may
or may not be the party who engages the practitioner (the engaging
party).

2. Intended users – for whom the assurance report is prepared. The

responsible party can be one of the intended users, but not the only one.
3. Practitioner – the person, who performs the engagement, is broader than
the term “auditor” which relates only to practitioners performing audit or
review engagements with respect to historical financial information.

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Appropriate subject matter

The subject matter, and subject matter information, of an assurance

engagement can take many forms, such as:
a. Financial performance or conditions (for example, historical or prospective
financial statements)
b. Non-financial performance or conditions (for example, performance key
indicators of efficiency and effectiveness of an entity)
c. Physical characteristics (for example, capacity of a facility)
d. Systems and processes (for example, an entity’s internal control or IT
system)
e. Behavior (for example, corporate governance, compliance with regulation,
human resource practices)
An appropriate subject matter is:
a. Identifiable, and capable of consistent evaluation or measurement against
the identified criteria; and
b. Such that the information about it can be subjected to procedures for
gathering sufficient appropriate evidence to support a reasonable
assurance or limited assurance conclusion, as appropriate.

Suitable criteria

Benchmarks used to evaluate or measure the subject matter.

Examples of formal criteria are the following:

• In the preparation of financial statements, the criteria may be Philippine
Financial Reporting Standards;
• When reporting on internal control, the criteria may be an established
internal control framework or individual control objectives specifically
designed for the engagement; and
• When reporting on compliance, the criteria may be the applicable law,
regulation or contract.

Examples of less formal criteria are an internally developed code of conduct

or an agreed level of performance (such as the number of times a particular
committee is expected to meet in a year).

The two types of criteria are the following:

a. Established criteria – are those embodied in laws or regulations, or issued
by authorized or recognized bodies of experts that follow a transparent due
process.
b. Specifically developed criteria are those designed for the purpose of the
engagement.
Suitable criteria are required for reasonably consistent evaluation or
measurement of a subject matter within the context of professional judgment.
Without the frame of reference provided by suitable criteria, any conclusion is
open to individual interpretation and misunderstanding.

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Regardless of type of the criteria used in an assurance engagement, the
criteria must have the following characteristics to be considered suitable:
a. Relevance – relevant criteria contribute to conclusions that assist decision-
making by the intended users.
b. Completeness – criteria are sufficiently complete when relevant factors that
could affect the conclusions in the context of the engagement
circumstances are not omitted. Complete criteria include, where relevant,
benchmarks for presentation and disclosure.
c. Reliability – reliable criteria allow reasonably consistent evaluation or
measurement of the subject matter including, where relevant, presentation
and disclosure, when used in similar circumstances by similarly qualified
practitioners.
d. Neutrality – neutral criteria contribute to conclusions that are free from
bias.
e. Understandability – understandable criteria contribute to conclusions that
are clear, comprehensive, and not subject to significantly different
interpretations. The evaluation or measurement of a subject matter on the
basis of the practitioner’s own expectations, judgments and individual
experience would not constitute suitable criteria.

The criteria need to be available to the intended users to allow them to

understand how the subject matter has been evaluated or measured.

Sufficient appropriate evidence

The information obtained by the practitioner in arriving at the conclusions on

which the opinion is based.

Sufficiency is the measure of the quantity of evidence. Appropriateness is the

measure of the quality of evidence; that is, its relevance and its reliability.

The practitioner plans and performs an assurance engagement with an

attitude of professional skepticism recognizing that circumstances may exist
that cause the subject matter information to be materially misstated. An
attitude of professional skepticism means a practitioner makes a critical
assessment, with questioning mind, of the validity of evidence being obtained
and is alert to evidence that contradicts or brings into question the reliability
of documents or representations by the responsible party.

Evidence is general more reliable when:

a. Obtained from independent sources;
b. The related controls are effective;
c. Obtained directly than indirectly or by inference;
d. In documentary form than oral; and
e. In original state than by photocopies or facsimiles.

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The practitioner considers materiality when determining the nature, timing
and extent of evidence-gathering procedures, and when assessing whether
the subject matter information is free of material misstatement.

In addition, the practitioner recognizes the existence of assurance

engagement risk – the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is materially misstated.

In general, assurance engagement risk can be represented by the following

components, although not all of these components will necessarily be present
or significant for all assurance engagements:
a. The risk that the subject matter information is materially misstated, which
in turn consists of:
i. Inherent risk: the susceptibility of the subject matter information to a
material misstatement, assuming that there are no related controls; and
ii. Control risk: the risk that a material misstatement that could occur will
not be prevented, or detected and corrected, on a timely basis by
related internal controls. When control risk is relevant to the subject
matter, some control risk will always exist because of the inherent
limitations of the design and operation of internal control; and
b. Detection risk: the risk that the practitioner will not detect a material
misstatement that exists.

Written assurance report

The practitioner provides a written report containing a conclusion that

conveys the assurance obtained about the subject matter information.

The practitioner’s conclusion can be worded depending on the type of

assurance engagement:

1. As to structure:
a. Assertion-based engagement, either:
i. In terms of the responsible party’s assertion (for example: “In our
opinion the responsible party’s assertion that internal control is
effective, in all material respects, based on XYZ criteria, is fairly
stated”); or
ii. Directly in terms of the subject matter and the criteria (for example:
“In our opinion internal control is effective, in all material respects,
based on XYZ criteria”).
b. Direct reporting engagement – directly in terms of the subject matter
and the criteria.

2. As to level of assurance:
a. Reasonable assurance engagement - positive form, for example: “In our
opinion internal control is effective, in all material respects, based on
XYZ criteria.”

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 b. Limited assurance engagement - negative form, for example, “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.”
The conclusions above are examples of an “unqualified conclusion” which
means that there is no categorization (no ‘ifs’) in the expression of the
practitioner’s conclusion. However, not all conclusions are unqualified
conclusions.
The following table summarizes conclusions other than unqualified conclusions
depending on the results of the engagement:
Engagement Results Significance Conclusion
Practitioner unable to obtain Material Qualified
sufficient appropriate evidence Material and Pervasive Disclaimer
Subject matter/subject matter Material Qualified
information contains material Material and Pervasive Adverse
misstatement
Limitations of Assurance Engagements
The highest level of assurance that may be provided by the practitioner is
reasonable assurance (less than absolute) as a result of the following factors:
a. Failures (Inherent limitations) of internal control (CHARMeR);
b. Evidence persuasive rather than conclusive nature;
c. Associated bias (due to judgment);
d. Random nature of testing (selective testing of evidence);
e. Subject matter’s characteristics (subjective nature).
Non-assurance Engagements
Professional accountants (practitioners) also perform non-assurance
engagements. Engagements are considered non-assurance engagements if
they lack one or more of the five elements of an assurance engagement.
Common examples of non-assurance engagements are:
a. Agreed-upon procedures engagement - in this engagement, the objective
of the auditor is to carry out those procedures of an audit nature to which
the auditor and the entity and any appropriate third parties have agreed
and to report on factual findings.;
b. Compilations engagements - in this engagement, the objective of the
practitioner is to use accounting expertise as opposed to auditing expertise
to collect, classify and summarize financial information;
c. Preparation of tax returns where no conclusion conveying assurance is
expressed;
d. Consulting (or advisory) engagements such as management and tax
consulting;
e. Engagements to testify in legal proceedings regarding accounting, auditing,
taxation or other matters; and

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f. Engagements that include professional opinions not intended to be an
assurance report.

Audit vs. Review vs. Related Services

Nature of Audit Review Agreed- Compilation
service upon
Objective To enable the To enable a To enable To enable
auditor obtain practitioner to the auditor the
reasonable state whether carry out accountant
assurance anything has procedures to use
about whether come to the of an audit accounting
the financial practitioner’s nature to expertise, as
statements, as attention that which the opposed to
a whole, are causes the auditor auditing
free from practitioner to and the expertise, to
material believe that the entity and collect,
misstatement, financial any classify and
whether due to statements are appropriat summarize
fraud or error, not prepared, in e third financial
and to express all material parties information.
an opinion respects, in have
thereon accordance with agreed and
the applicable to report
financial on factual
reporting findings.
framework
Level Reasonable Limited None None
Type of report Positive Negative Description Identification
assurance assurance of of
procedures information
performed compiled
and factual
findings
Basic Primarily, Primarily As agreed Reading the
procedures among others, inquiry and (Audit financial
RAP, TOC and analytical nature) statements
SP procedures for obvious
misstatemen
ts
Independence Required Required Not Not required
requirement required

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Preface to Philippine Standards on Quality Control, Auditing, Other
Assurance and Related Services

This Preface is issued to facilitate understanding of the objectives and

operating procedures of the Auditing and Assurance Standards Council
(hereinafter referred to as “AASC” or “Council”) and the scope and authority
of the documents issued by the Council.

The AASC’s mission is “the promulgation of auditing standards, practices and

procedures which shall be generally accepted by the accounting profession in
the Philippines.”

It is the stated policy of the AASC to make the International Standards and
Practice Statements issued by the IAASB the applicable standards and
practice statements in the Philippines.
There are currently no fundamental differences between the IAASB
International pronouncements and the equivalent AASC Philippine
pronouncements and no such differences are expected in the future.

The AASC replaced the Auditing Standards and Practices Council (ASPC)
which was established by the PICPA and ACPAPP.

The Authority Attaching to Philippine Standards

As set forth in the AASC’s Rules of Procedures, “pronouncements on generally

accepted auditing standards, interpretations, and opinions issued by the AASC
apply whenever an independent examination of financial statements of any
entity, whether profit-oriented or not, and irrespective of size or legal form,
when such examination is conducted for the purpose of expressing an opinion
thereon. They may also have application, as appropriate, to other related
activities of auditors.”

Standards Applicable to:

Engagement Standards:
Philippine Standards on Auditing Audit of historical financial
(PSAs) information.
Philippine Standards on Review Review of historical financial
Engagements (PSREs) information.
Philippine Standards on Assurance Assurance engagements dealing
Engagements (PSAEs) with subject matters other than
historical financial information.
Philippine Standards on Related Compilation engagements, agreed-
Services (PSRSs) upon procedures engagements and
other related services
Philippine Standards on Quality All services covered by Engagement
Control (PSQCs) Standards above

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The AASC’s Standards contain basic principles and essential procedures.
The nature of the Philippine Standards issued by the AASC requires
professional accountants to exercise professional judgment in applying them.
In exceptional circumstances, a professional accountant may judge it
necessary to depart from a basic principle or essential procedure of an
Engagement Standard to achieve more effectively the objective of the
engagement. When such a situation arises, the professional accountant
should be prepared to justify the departure.
Any limitation of the applicability of a specific Philippine Standard is made
clear in the standard.
The Authority Attaching to Practice Statements
Philippine Auditing Practice Statements (PAPSs) are issued to provide
interpretive guidance and practical assistance to professional accountants in
implementing PSAs and to promote good practice. Philippine Review
Engagement Practice Statements (PREPSs), Philippine Assurance Engagement
Practice Statements (PAEPSs), and Philippine Related Services Practice
Statements (PRSPSs) are issued to serve the same purpose for
implementation of PSREs, PSAEs and PSRSs, respectively.
Professional accountants should be aware of and consider Practice Statements
applicable to the engagement. A professional accountant who does not
consider and apply the guidance included in a relevant Practice Statement
should be prepared to explain how the basic principles and essential
procedures in the Engagement Standard(s) addressed by the Practice
Statement have been complied with.
Adoption of Auditing Standards and Statements
Philippine Engagement Standards are based on international standards issued
by International Auditing and Assurance Standards Board (IAASB).
Other PSAs or PAPSs may be issued when deemed necessary by the AASC to
address any unique requirements imposed by Philippine law or practice.
An exposure draft (ED) is widely distributed to interested organizations and
persons for comment generally within 90 days.
The comments and suggestions received are considered and the ED is revised
as appropriate.
Issuance of ED requires approval by a majority of the members of the
Council.
Issuance of final Philippine Standards and Practice Statements, as well as
interpretations, requires approval of at least ten members and submitted to
the PRC through the BOA for approval after which the pronouncements shall
be published in the Official Gazette. After publication, the AASC
pronouncement becomes operative from the effective date stated therein.
- done -

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 MULTIPLE CHOICE

Definition and objective of Assurance Engagements

1. Independent professional services that are provided on financial or other
information that improve the quality of decision making are known as
a. Internal auditing
b. Financial auditing
c. Assurance services
d. Attestation services

2. Which of the following services is the broadest and most inclusive?

a. Audit
b. Attestation
c. Assurance
d. Compliance

3. It refers to the level of satisfaction as to the reliability of an assertion being

made by one party for use by another party
a. Confidence level c. Reasonableness level
b. Assurance level d. Tolerable level

Demand for Assurance Engagements

4. The need for assurance services arises for all of the following reasons
except:
a. Potential bias in providing information.
b. Closeness between a user and the organization.
c. Complexity of the processing systems.
d. Remoteness between a user and the organization.

5. Which one of the following is not a provider of assurance services?

a. CPAs
b. Internal auditors
c. Governmental auditors
d. PICPA

Elements of Assurance Engagements

6. Which statement is (are) correct regarding assurance engagements?
a. It 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 criteria.
b. All engagements performed by professional accountants are assurance
engagements.
c. Whether a particular engagement is an assurance engagement will
depend upon whether it exhibits all the following elements - a three
party relationship, a subject matter and suitable criteria.
d. All of the above

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7. Which of the following is (are) correct regarding the three party
relationship element of assurance engagement?
a. The intended user is generally the addressee of the professional
accountant’s report.
b. The responsible party and the intended user will often be from separate
organizations.
c. The responsible party may also be one of the intended users.
d. All of the above
8. Which is not true of the intended user?
a. The intended user is the person or class of persons for whom the
professional accountant prepares the report for a specific use or
purpose.
b. The intended user(s) is(are) always limited to the addressee of the
professional accountant’s report
c. The responsible party may also be one of the intended users
d. The intended user(s) may not be the addressee of the professional
accountant’s report
9. Which one of the following is not a critical component of assurance
services?
a. A process on which service is provided
b. An assurance service provider
c. A user who derives value
d. A CPA
10. The subject matter of an assurance engagement may take many forms,
including:
a b c d
Nonfinancial performance or condition Yes Yes Yes No
Behavior Yes Yes Yes Yes
Financial performance or condition Yes Yes No Yes
Physical characteristics Yes No No No
Systems and Processes Yes No Yes Yes

11. The characteristics for determining whether criteria are suitable include:
a b c d
Relevance Yes Yes Yes Yes
Reliability Yes Yes Yes Yes
Completeness Yes Yes No Yes
Neutrality Yes No No Yes
Comparability Yes Yes No No
Feedback value Yes No No No
12. Which of the following is not a component of assurance services?
a. Information or a process on which the assurance services is provided.
b. Report to a third party.
c. A user or a group of users who derive value from the service provided.
d. A service provider.

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13. Which one of the following is not a key attribute needed to perform
assurance?
a. Subject matter knowledge
b. Independence
c. Established criteria or standards
d. Accounting skills

14. Which of the following statements is (are) true regarding the provision
of assurance services?
I. The third party who receives the assurance generally pays for the
assurance received.
II. Assurance services always involve a report by one person to a third
party on which an independent organization provides assurance.
III. Assurance services can be provided either on information or
processes.
a. I and III
b. I and II
c. III only
d. I, II and III

15. Which of the following services would be most likely to be structured as

an assurance engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data base system for the
revenue cycle.
c. An engagement to issue a report addressing an entity’s compliance with
requirements of specified laws.
d. The compilation of a client’s forecast information.

16. Assurance services least likely involve

a. Improving the quality of information for decision purposes.
b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of information.

17. The following are assurance engagements, except

a. Reasonable assurance engagement
b. Other assurance engagements
c. Review engagement
d. Tax services

18. Engagements frequently performed by professional accountants that are

not assurance engagements include the following, except
a. Agreed upon procedures
b. Reasonable assurance engagement
c. MAS
d. Compilation of FS

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19. Any service that requires a CPA firm to issue a report about the
reliability of an assertion that is made by another party is a(n):
a. Accounting and bookkeeping service.
b. Attestation service.
c. Assurance service.
d. Tax service.
20. Which one of the following is not part of the attest process?
a. Gathering evidence about assertions
b. Proving the accuracy of the books and records
c. Evaluating evidence against objective criteria
d. Communicating the conclusions reached
21. A service that always requires that a report is provided to a third party is
a. Assurance
b. Attestation
c. Audit
d. Both B and C.
Review and Related Services
22. The objective of a review engagement
a. Is to enable the auditor to express an opinion whether the financial
statements are prepared in all material respects, in accordance with an
identified financial reporting framework
b. Is to enable the auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an audit,
anything has come to the auditor’s attention that causes the auditor to
believe that the financial statements are not prepared in all material
respects, in accordance with an identified financial reporting framework.
c. Is to carry out those procedures of an audit nature to which the auditor
and the entity and any appropriate third parties have agreed and to
report on factual findings.
d. Is to use accounting expertise as opposed to auditing expertise to
collect, classify and summarize financial information.
23. In an agreed upon procedures engagement, the CPA provides what level
of assurance?
a. Moderate c. Limited
b. None d. High, but not absolute
24. In an audit engagement, the CPA provides what level of assurance?
a. Moderate c. Limited
b. None d. High, but not absolute
25. Which statement is incorrect regarding audit, review and related
services?
a. Related services comprise agreed-upon procedures and compilation.
b. Audits and reviews are designed to enable the auditor to provide
reasonable assurance and limited assurance, respectively.

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 c. Engagement to undertake agreed-upon procedures is not intended to
enable the auditor to express assurance.
d. In a consultancy engagement, the accountant is engaged to use
accounting expertise as opposed to auditing expertise to collect, classify
and summarize financial information.

26. Which of the following services provides the lowest level of assurance on
a financial statement?
a. A review.
b. An audit.
c. Neither service provides assurance on financial statements.
d. Each service provides the same level of assurance on financial
statements.

27. Assurance services may include which of the following, except?

a. Attesting to financial statements
b. Examination of the economy and efficiency of governmental operations
c. Evaluation of a division's performance for management
d. Tax preparation services

28. Unlike consulting services, assurance services

a. Make recommendations to management
b. Report on how to use information
c. Report on the quality of information
d. Are two-party contracts

Preface to Philippine Standards

29. Auditing and Assurance Standards Council (AASC) is the successor of
a. Financial Reporting Standards Council (FRSC)
b. Accounting Standards Council (ASC)
c. Auditing Standards and Practices Council (ASPC)
d. International Accounting Standards Council (IASC)

30. Auditing and Assurance Standards Council (AASC) has

a. 14 members with a Chairman
b. 17 members with a Chairman
c. 16 members with a Chairman
d. 8 members with a Chairman

31. The following sectors represented by the PICPA to the membership of

AASC have one representative, except
a. Government
b. Public Practice
c. Commerce and Industry
d. Academe

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32. The term of office of each members of AASC is
a. 2 years, renewable
b. 4 years, non renewable
c. 3 years, non renewable
d. 3 years, renewable

33. Which of the following is not represented in the Auditing and Assurance
Standards Council?
a. Board of Accountancy
b. PICPA
c. FINEX
d. Securities and Exchange Commission

34. Which statement is incorrect regarding AASC?

a. The AASC shall be composed of 14 members plus a chairman
b. The chairman and members of the AASC shall be appointed by PRC
upon the recommendation of BOA
c. The chairman and members of the AASC shall have a non-renewable
term of 3 years
d. The chairman should have been or presently a senior practitioner in
public accountancy

35. The standards of the Auditing and Assurance Standards Council include
Philippine Standards and Practice Statements on:
I. Quality control.
II. Tax Engagements.
III. Review Engagements.
IV. Other Assurance Engagements.
V. Consulting Engagements
VI. Audit Engagements
a. I, II, III and VI only; c. I, III IV and VI only;
b. I, II, IV and VI only; d. I, II, III, IV and V only.

36. Which statement is correct regarding the pronouncements of AASC?

a. The exposure period allowed for each exposure draft of auditing and
other pronouncements to be considered by the organizations and
persons to whom it is sent for comment is generally 60 days.
b. Each final standard and statement shall be submitted to the PRC
through the BOA for approval after which the pronouncements become
operative 6 months from publication in the official gazette.
c. Practice Statements will have the same authority as the Engagement
Standards.
d. PSAs issued by AASC are not the only authoritative source of
engagement standards for members of the accountancy profession in the
Philippines.

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37. Which statement is(are) incorrect regarding the pronouncements of
AASC?
a. Engagement Standards contain basic principles and essential
procedures (identified in bold type black lettering) together with related
guidance in the form of explanatory and other material.
b. Engagement Standards need only be applied to material matters.
c. In exceptional circumstances, an auditor may judge it necessary to
depart from a standard in order to more effectively achieve the
objective of an audit. When such situation arises, the auditor is not
required to justify the departure.
d. All of the above
38. Which of the following is true of Practice Statements?
a. These statements are intended to replace standards
b. These statements are intended to have the authority of the standards
c. These statements are issued to provide practical assistance to auditors
in implementing the standards
d. These are form of interpretation issued by the AASC
39. A professional accountant who does not consider and apply the guidance
included in a relevant practice statement should be prepared to
a. Explain how the basic principles and essential procedures in the
engagement standards addressed by the practice statements have
been complied with
b. Explain to the Board of Accountancy why the practice statement was
not complied with
c. Bear the consequences of such non-compliance, such as suspension or
revocation of license plus imprisonment of jot more than two(2) years
d. Face the stockholders of the entity and explain in the meeting why such
practice statement was not complied with provided that the explanation
is also put in writing, and signed in the presence of the Chairperson of
AASC.
40. Which statement is(are) correct regarding the pronouncements of AASC?
I. The exposure period allowed for each exposure draft of a standard or
statement to be considered by the organizations and persons to whom
it is sent for comment is generally 90 days.
II. Each final standard, interpretation and statement shall be submitted to
the PRC through the BOA for approval after which the pronouncements
become operative from the effective date stated therein.
III. Practice Statements will have the same authority as the Engagement
Standards.
a. I and II only
b. II and III only
c. I and III only
d. I, II and III
- now do the DIY drill -

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 DO-IT-YOURSELF (DIY) DRILL
1. It 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 criteria.
a. Audit engagement
b. Non-assurance engagement
c. Assurance engagement
d. Review engagement
2. Engagements frequently performed by professional accountants that are
not assurance engagements include the following, except
a. Agreed upon procedures
b. Review engagement
c. MAS
d. Compilation of FS
3. The subject matter of an assurance engagement may take many forms,
including
a. Financial performance or conditions
b. Behavior
c. Systems and processes
d. All of the above
4. Most of the large national CPA firms
a. Offer audit, tax, and management advisory services.
b. Emphasize auditing to a lesser degree than do smaller local and regional
firms.
c. Are organized as corporations to obtain the benefit of limited liability.
d. Expect professional staff members to be accounting generalists as
opposed to the specialization of CPAs in smaller firms.
5. Indicate the level of assurance provided by audit, review and related
services
a. b. c. d.
Audit High High Low Reasonable
Review High Low Low Reasonable
Agreed-upon Procedures None None None Low
Compilation None None None None
6. Which is not true of the intended user?
a. The intended user is the person or class of persons for whom the
professional accountant prepares the report for a specific use or
purpose.
b. The intended user(s) is(are) always limited to the addressee of the
professional accountant’s report
c. The responsible party may also be one of the intended users
d. The intended user(s) may not be the addressee of the professional
accountant’s report
Page 17 of 26 AT.501
7. In an agreed upon procedures engagement, the CPA provides what level of
assurance?
a. Moderate
b. None
c. Limited
d. High, but not absolute

8. Which of the following mostly describes the function of AASC?

a. To monitor full compliance by auditors to PSAs
b. To promulgate engagement standards, practices and procedures that
shall be generally accepted by the accounting profession in the
Philippines
c. To assist the Board of Accountancy in conducting administrative
proceedings on erring CPAs in public practice
d. To undertake continuing research on both auditing and financial
accounting in order to make them responsive to the needs of the public

9. PFRSs are distinguished from PSAs in that

a. PFRSs are the principles for presentation of FS and underlying
transactions, while PSAs are the standards that the auditors should
follow when conducting an audit.
b. PFRSs are the standards that the auditors should follow when
conducting an audit while PSAs are the principles for presentation of FS
and underlying transactions.
c. PFRSs are promulgated by the SEC while PSAs are promulgated by
FRSC.
d. When PFRSs are violated, sufficiently strong PSAs may make up for
most PFRSs deficiencies.

10. The following are represented both to the Financial Reporting Standards
Council (FRSC) and Auditing and Assurance Standards Council (AASC)
I. Commission on Audit
II. FINEX
III. Bureau of Internal Revenue
IV. Board of Accountancy
a. I, II and III only
b. I, II and IV only
c. I and II only
d. I and IV only

11. The least likely form of pronouncement of the AASC on engagement

standards, practices and procedures is
a. Philippine Auditing Practice Statements (PAPSs)
b. Philippine Standards on Auditing (PSAs)
c. Philippine Standards on Related Services (PSRSs)
d. Financial reporting framework

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12. The standards of the Auditing and Assurance Standards Council include
Philippine standards on:
I. Quality control.
II. Tax Engagements.
III. Review Engagements.
IV. Assurance Engagements.
V. Consulting Engagements
a. I, II and III only;
b. I, II and IV only;
c. I, III and IV only;
d. I, II, III and IV and V.
13. Which statement is(are) correct regarding the pronouncements of AASC?
I. The exposure period allowed for each exposure draft of Engagement
Standards and Statements to be considered by the organizations and
persons to whom it is sent for comment is generally 60 days.
II. Each final standard and statement shall be submitted to the PRC
through the BOA for approval after which the pronouncements become
operative from the effective date stated therein.
III. PAPSs will have the same authority as the PSAs.
a. I only
b. II and III only
c. II only
d. I, II and III
☺ - end of AT.501 - ☺

CLASSROOM DRILL

Page 19 of 26 AT.501
1. Which one of the following is not a critical component of assurance
services?
a. A process on which service is provided
b. An assurance service provider
c. A user who derives value
d. A CPA
2. An assurance engagement should exhibit the following elements except
a. A three party relationship
b. A conclusion
c. Appropriate professional fee
d. A subject matter
3. In an audit engagement, the CPA provides what level of assurance?
c. Moderate c. Limited
d. None d. High, but not absolute
4. The subject matter of an assurance engagement may take many forms,
including
a. Data c. Behavior
b. Systems and processes d. All of these
5. Which is not true of the intended user?
a. The intended user is the person or class of persons for whom the
professional accountant prepares the report for a specific use or
purpose.
b. The intended user(s) is(are) always limited to the addressee of the
professional accountant’s report
c. The responsible party may also be one of the intended users
d. The intended user(s) may not be the addressee of the professional
accountant’s report
6. The Framework of PSA (PSA 120) applies to
a. Taxation c. Review
b. Consultancy d. Accounting advice
7. The characteristics for determining whether criteria are suitable include:
a b c d
Relevance Yes Yes Yes Yes
Reliability Yes Yes Yes Yes
Completeness Yes Yes No Yes
Neutrality Yes No No Yes
Comparability Yes Yes No No

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 Understandability Yes No No Yes
8. Any service that requires a CPA firm to issue a report about the reliability
of an assertion that is made by another party is a(n):
a. Accounting and bookkeeping service.
b. Attestation service.
c. Assurance service.
d. Tax service.
9. Which one of the following is not part of the attest process?
a. Gathering evidence about assertions
b. Proving the accuracy of the books and records
c. Evaluating evidence against objective criteria
d. Communicating the conclusions reached
10. Engagements frequently performed by professional accountants that are
not assurance engagements include the following except
a. Agreed-upon procedures.
b. Compliance audit
c. Compilation
d. Management consulting.
11. The least important evidence of a public accounting firm's evaluation of
its system of quality controls would concern the firm's policies and
procedures with respect to
a. Employment (hiring).
b. Confidentiality of audit engagements.
c. Assigning personnel to audit engagements.
d. Determination of audit fees.
12. Reviewing and coaching the work of less experienced team members
should be performed by ______ experienced engagement team members.
a. Less
b. More
c. Equally
d. None of the above
13. An engagement quality control review is normally done by the:
a. The engagement partner
b. The chief technical partner of the office conducting the audit
c. A partner not otherwise assigned to the engagement
d. The engagement manager

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14. Written confirmation of compliance with relevant ethical requirements,
including independence, shall be obtained:
a. Annually
b. Every six months
c. Every two years
d. Every five years
15. PFRSs are distinguished from PSAs in that
a. PFRSs are the principles for presentation of FS and underlying
transactions, while PSAs are the standards that the auditors should
follow when conducting an audit.
b. PFRSs are the standards that the auditors should follow when
conducting an audit while PSAs are the principles for presentation of FS
and underlying transactions.
c. PFRSs are promulgated by the SEC while PSAs are promulgated by
FRSC.
d. When PFRSs are violated, sufficiently strong PSAs may make up for
most PFRSs deficiencies.
16. The following are represented both to the Financial Reporting Standards
Council (FRSC) and Auditing and Assurance Standards Council (AASC)
I. Commission on Audit
II. FINEX
III. Bureau of Internal Revenue
IV. Board of Accountancy
a. I, II and III only c. I and II only
b. I, II and IV only d. I and IV only
17. Which statement is(are) correct regarding the pronouncements of AASC?
I. The exposure period allowed for each exposure draft of
Engagement Standards and Statements to be considered by the
organizations and persons to whom it is sent for comment is
generally 60 days.
II. Each final standard and statement shall be submitted to the PRC
through the BOA for approval after which the pronouncements
become operative from the effective date stated therein.
III. PAPSs will have the same authority as the PSAs.
a. I only c. II only
b. II and III only d. I, II and III

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18. Quality control for a CPA firm, as referred to in Philippine Standards on
Quality Control, applies to
a. Auditing services only.
b. Auditing and management advisory services.
c. Auditing and tax services.
d. Auditing and accounting and review services.
19. A CPA firm studies its personnel advancement experience to ascertain
whether individuals meeting stated criteria are assigned increased degrees
of responsibility. This is evidence of the firm's adherence to prescribed
standards of
a. Supervision and review.
b. Continuing professional education.
c. Professional development.
d. Quality control.
20. In exceptional circumstances, an auditor may judge it necessary to
depart from a standard in order to more effectively achieve the objective of
an audit. When such situation arises, the auditor is required to justify the
departure.
Engagement standards need only be applied to material matters
a. False, False c. True, False
b. True, True d. False, True
21. Which of the following best describes what is meant by generally
accepted auditing standards?
a. Acts to be performed by the auditor.
b. Measures of the quality of an auditor's performance.
c. Procedures used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements.
22. Which statement is incorrect regarding AASC?
a. The AASC shall be composed of 14 members plus a chairman
b. The chairman and members of the AASC shall be appointed by PRC
upon the recommendation of BOA
c. The chairman and members of the AASC shall have a renewable term
of 3 years
d. The chairman should have been or presently a senior accounting
practitioner in any scope of accounting practice
23. Auditors need not abide by a PSA if they believe that

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 I. The matter is insignificant
II. The requirement of the PSA is impractical to perform
III. The requirement of the PSA is impossible to perform
a. I only c. I and III only
b. II only d. I, II and III
24. The term of office of each members of AASC is
a. 2 years, renewable
b. 4 years, non renewable
c. 3 years, non renewable
d. 3 years, renewable
25. Which statement is(are) correct regarding the pronouncements of AASC?
IV. The exposure period allowed for each exposure draft of a standard or
statement to be considered by the organizations and persons to
whom it is sent for comment is generally 90 days.
II. Each final standard, interpretation and statement shall be submitted
to the PRC through the BOA for approval after which the
pronouncements become operative from the effective date stated
therein.
III. Practice Statements will have the same authority as the
Engagement Standards.
a. I and II only c. I and III only
b. II and III only d. I, II and III
26. Which of the following is not an element of quality control?
a. Acceptance and continuance of client relationships and specific
engagements
b. Human resources
c. Internal control
d. Monitoring
27. The pronouncements of the AASC on auditing standards, practices and
procedures shall be in the form of the following, except
a. Philippine Standards on Auditing (PSAs)
b. Phlippine Financial Reporting Standards (PFRSs)
c. Philippine Auditing Practices Statements (PAPSs)
d. Philippine Standard on Quality Controls (PSQCs)
28. A service that includes the determination of the tax consequences of
planned or potential transactions, followed by making suggestions on the

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 most desirable course of action (to legally minimize the tax liability while
achieving the client’s objectives):
a. Tax evasion.
b. Tax planning.
c. Tax shelter.
d. Tax compliance.
29. Which of the following best describes risk assessment services?
a. An engagement which provides assurance about whether financial and
non-financial information being reported from the entity’s performance
measurement system (‘business performance’) is reliable.
b. An engagement which involves the evaluation of the quality of health
care, medical services and looks into the health care delivery system
(‘health care performance’).
c. An engagement which identifies a set of risks that affect the client
organization. It involves the study of the link between risks and the
organization’s vision, mission, objectives and strategies and the
development of new and relevant measures.
d. None of these.
30. This refers to the threat that a financial or other interest will
inappropriately influence the professional accountant’s judgment or
behavior;
a. Self- interest threat c. Advocacy threat
b. Self-review threat d. Familiarity threat
☺ - done - ☺

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 cut here -----------------------------------------------------------------------

ANSWER SHEET FOR SELF-TEST DRILLS

=============================================

NAME: _______________________________ SCORE: ____ RATING _____%

EMAIL ADDRESS: _______________________ Cell/: _________________
ANSWERS

01. 11. 21.

02. 12. 22.
03. 13. 23.
04. 14. 24.
05. 15. 25.
06. 16. 26.
07. 17. 27.
08. 18. 28.
09. 19. 29.
10. 20. 30.

Note: Please pass/submit this answer sheet, with your best answers,
individually to [email protected]. Convert file into pdf format.

THANK YOU!

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