Auditing and Assurance Principles 2012

Solutions Manual

ANSWER KEY – CHAPTER 1

1-1
1 FALSE Assurance refers to the practitioner’s satisfaction...
2 TRUE
3 FALSE
4 TRUE
5 FALSE All five elements of assurance engagements must be met in order for an engagement to be
called an assurance engagement.
6 FALSE The responsible party and the intended user need not be from separate organizations.
7 FALSE The term practitioner is broader in scope compared to the term auditor.
8 FALSE A professional accountant may not agree to perform an assurance engagement which they
are not competent to carry out.
9 TRUE
10 FALSE The intended user may be the one who engages the professional accountant.
11 FALSE See note in number 10. The intended user is the person or class of persons for whom the
practitioner prepares the report.
12 TRUE
13 TRUE
14 TRUE
15 FALSE The criteria in an FS audit is PFRS or GAAP.
16 FALSE Appropriateness refers to quality, while sufficiency refers to quantity...
17 FALSE Evidence obtained directly by the practitioner is more reliable...
18 FALSE The practitioner expresses a conclusion that provides a level of assurance...
19 FALSE This statement describes a direct reporting assurance engagement.
20 TRUE
21 FALSE Absolute assurance is generally not attainable...
22 FALSE CPAs may perform non-assurance engagements.
23 FALSE Agreed-upon procedures lack a written assurance report or conclusion. It is a non-
assurance engagement.
24 FALSE Compliance audits are classified as assurance engagements.
25 TRUE

1-2
1 A
2 C
3 B Engagement process is an element according to the superseded PSA 100.
4 A
5 B
6 C
7 D Subject matter may include financial or non-financial information, physical characteristics,
systems and processes, and behavior.
8 A
9 D Sufficiency is an attribute of audit evidence.
10 A Efficiency and effectiveness may involve subjective factors.
11 C
12 C
13 D Compilations are non-assurance engagements.
14 A Choice C refers to risk assessment service. Choice B refers to health care performance
measurement service.
15 C
16 D
17 A
Auditing and Assurance Principles 2012
Solutions Manual

18 A
19 B
20 D

ANSWER KEY – CHAPTER 2

2-1
1 FALSE
2 FALSE ...complied with generally accepted accounting principles.
3 FALSE This refers to operational audits.
4 FALSE Preparation of financial statements is the responsibility of management.
5 TRUE
6 FALSE An audit aids in the communication of economic data because it provides reasonable
assurance that the financial statements are fairly stated.
7 FALSE The financial statements remain management’s responsibility.
8 TRUE
9 TRUE
10 TRUE
11 FALSE The most cost-beneficial option to reduce information risk is to have the financial
statements audited.
12 FALSE An audit does not provide assurance regarding the prevention of fraud.
13 TRUE
14 FALSE The auditor of the past focused on detecting fraud, while the auditor of today focused on
expressing an opinion on the fairness of financial statements.
15 TRUE
16 FALSE The rules and regulations are set by a higher authority (such as legislation).
17 TRUE Note however, that external auditing may also refer to operational audits and compliance
audits that are performed by independent auditors.
18 TRUE
19 FALSE Internal audits are intended to serve the needs of management, not to aid the external
auditor.
20 FALSE The major beneficiary of internal audits is management.
21 TRUE
22 FALSE Auditing requires that data should be verifiable.
23 TRUE
24 TRUE
25 FALSE The main difference between auditors and accountants is the ability to gather and evaluate
evidence.

2-2
1 D Degree of correspondence between assertions and established criteria.
2 C
3 D
4 D
5 B This refers to the completeness assertion
6 B
7 B
8 B
9 C
10 D
11 C
12 B Choice A is wrong because independent auditing is not a branch of accounting. Choice C
Auditing and Assurance Principles 2012
Solutions Manual

refers to accounting. Choice D is incorrect because auditing cannot assure the accuracy of
financial statements.
13 A
14 A Line functions are positions that exercise decision-making powers or responsibilities.
15 B
16 A
17 D
18 B
19 C
20 C
21 B
22 A Information risk is the likelihood that information presented is false or misleading.
23 B The best reason for audits is the conflict of interest between preparers and users of financial
statements.
24 B Choice B refers to the objective of a financial statement audit, not a reason for audits.
25 C
26 B Statement 1 is false because CPAs have as their primary responsibility the performance of
the audit function on published financial statements of publicly traded corporations.
27 B
28 C
29 D
30 B Some evidence supporting peso representations in the financial statements must be
obtained by oral or written representation of management.

ANSWER KEY – CHAPTER 3

3-1
1 TRUE
2 FALSE PD 692 has already been superseded by Republic Act No. 9298, the Philippine Accountancy
Act of 2004
3 FALSE MAS engagements are considered as separate engagements.
4 FALSE The CPA is practicing the profession in the education sector.
5 FALSE ...has paid-up capital of at least FIVE million and/or annual revenue of at least TEN million.
6 FALSE A CPA may practice in more than one sector, provided such practice does not impair the
quality of services rendered in all sectors involved.
7 FALSE The FRSC is the official accounting standard setting body in the Philippines. For auditing
standards in the Philippines, the Auditing and Assurance Standards Council is the
responsible body.
8 TRUE
9 FALSE The BOA consists of a chairman and six members, all appointed by the Philippine President.
10 FALSE The PICPA has 15 national directors.
11 TRUE
12 FALSE Such candidate shall be required to take a refresher course of at least 24 units of subject
given in the CPA Board exams. After the refresher course, the candidate may be allowed to
take the CPA Board Exams again.
13 FALSE The CPA certificate is a one-time issuance only. The professional identification card shall be
renewed every 3 years.
14 FALSE Generally, foreign CPAs are not allowed to practice in the Philippines.
15 TRUE
16 FALSE Only the courts of law can mete out imprisonment sentences.
17 TRUE
18 FALSE This refers to integrity.
19 FALSE PSAs contain basic principles and essential procedures...
Auditing and Assurance Principles 2012
Solutions Manual

20 FALSE A CPA may depart from an AASC-issued standard if such departure shall result in a more
effective achievement of the objective of an engagement. However, the CPA must be
prepared to justify such departure.
21 FALSE Practice Statements, while having authority, serve only as providers of technical guidance in
implementing the requirements of PSAs.
22 FALSE The minimum CPE units per year is 15 units.
23 FALSE Permanent exemption shall be granted upon reaching age 65.
24 FALSE The PRC CPE Council...
25 FALSE See comments in 3-1 number 2

3-2
1 D
2 D
3 C
4 D To be considered as practicing the profession, the CPA must be using his/her knowledge or
expertise in accounting.
5 A
6 C Fundamental principles refer to ethical requirements that must be complied with in all
engagements of the CPA. Independence, while being an ethical requirement, is not
necessary in some CPA services (such as compilation of financial statements).
7 D
8 C Representation of clients before government agencies on tax and other matters must be
related to accounting.
9 B
10 C
11 B
12 D Must not have any pecuniary interest, direct or indirect...
13 B
14 D
15 D
16 C
17 A
18 B Tolerance of violations of the Philippine Accountancy Act is a ground for suspension or
removal of a member of the BOA.
19 D
20 A
21 C
22 D
23 C
24 B
25 A Naturalized Filipino citizens may take the CPA Board Exams.
26 B
27 C
28 A
29 C
30 D
31 A
32 B
Auditing and Assurance Principles 2012
Solutions Manual

ANSWER KEY – CHAPTER 4

4-1
1 TRUE
2 TRUE
3 FALSE The corporate form is not allowed for the practice of public accountancy.
4 FALSE This method of billing refers to per diem basis.
5 TRUE Note however that this is not the main determinant of the amount of professional fees. See
question number 6.
6 TRUE
7 FALSE This is a contingent fee arrangement.
8 FALSE ...should not be made to stand out... Advertising, while allowed for CPAs in public practice,
is subject to the condition that it must be dignified and in good taste.
9 FALSE This refers to solicitation.
10 FALSE ...shall be valid for a period of three years...

4-2
1 D
2 B
3 C
4 D
5 A
6 B
7 A
8 B
9 C
10 D
11 D
12 B If client’s written consent was obtained, choice B is acceptable.
13 D Existing clients may be invited.
14 B
15 A Choice B is incorrect because only the Board of Accountancy has the power to revoke
licenses.

ANSWER KEY – CHAPTER 5

5-1
1 TRUE
2 FALSE The firm’s partners assumes ultimate responsibility...
3 TRUE
4 FALSE A familiarity threat occurs...
5 FALSE Smaller firms may employ less formal...
6 TRUE
7 FALSE Consultation is a normal part of a CPA’s engagements, and applies in particular to
contentious or difficult matters.
8 TRUE
9 FALSE An engagement quality control review is required for all audits of listed entities.
10 FALSE The engagement partner may consult with the engagement quality control reviewer...
11 FALSE ...include at least one engagement for each engagement partner over an inspection cycle.
12 FALSE Audit working papers are the property of the auditor.
13 TRUE
14 FALSE PSA 220 follows the classification of elements of quality control mentioned in PSQC No. 1
Auditing and Assurance Principles 2012
Solutions Manual

15 FALSE PSA 220 applies to audits of historical financial information, while PSQC No. 1 applies to
assurance services in general.

5-2
1 D
2 B
3 C Engagement quality control review applies to engagements prior to issuance of the report,
while inspections apply to completed engagements.
4 B
5 D Monitoring is the responsibility of the leaders of the firm.
6 C
7 D
8 C
9 A
10 C Rotation of senior personnel (i.e., partner) is done every five years, as mandated by the
Code of Ethics.
11 D
12 D The Code of Ethics does not require continuance of the engagement.
13 C ...coaching by more experienced staff.
14 A Choice B is incorrect because supervision includes considering the capabilities and
competence of individual members of the assurance team. Choice C is incorrect because
supervision includes addressing significant issues... Choice D is incorrect because
supervision includes identifying matters for consultation or consideration by more
experienced engagement team members.
15 B
16 A
17 D
18 B
19 A
20 A
21 D
22 C
23 C
24 B
25 D

ANSWER KEY – CHAPTER 6

6-1
1 TRUE
2 TRUE
3 FALSE The auditor should ask the client to correct the error.
4 FALSE A CPA may not voluntarily...
5 TRUE
6 TRUE
7 FALSE A familiarity threat...
8 TRUE
9 FALSE A professional accountant in public practice will ordinarily need ...
10 FALSE A professional accountant in public practice may not readily...
11 TRUE
12 FALSE Network firms are also required to be independent of a financial statement audit client.
13 TRUE
14 FALSE Only legitimate aims must be furthered and supported by the CPA.
Auditing and Assurance Principles 2012
Solutions Manual

15 FALSE CPAs cannot provide assurance of infallibility.

16 FALSE The first remedy is to apply the policies of the organization on resolution of ethical conflict.
17 FALSE Objectivity is different from stubbornness. Objectivity simply refers to being neutral or
unbiased.
18 TRUE
19 FALSE See comments in number 14
20 TRUE Note that referral fees may be allowed only if the necessary safeguards are in place (to
reduce or eliminate threats to fundamental principles).

6-2
1 A
2 A
3 C
4 C
5 D
6 D
7 C
8 D
9 B
10 D
11 A
12 D A second remedy would be to engage the services of experts. In the absence of remedies,
the CPA has no choice but to decline the engagement.
13 D
14 C
15 A
16 B
17 C
18 D
19 B
20 D
21 D Contingent fees result to significant threats to compliance with fundamental principles when
allowed for assurance engagements.
22 C
23 A Note: Assume that the CPAs have not established the necessary safeguards to reduce
threats to compliance with fundamental principles.
24 D Withdrawal of fees from client’s monies require client approval.
25 A There may be times when the aims of the profession and the employer are in conflict.
26 C
27 A
28 C
29 A
30 D
31 D Clear guidelines for members of the audit personnel on issues of security and confidentiality.
32 B
33 D Correction: The choices should be numbers, not letters.
34 D
35 D
Auditing and Assurance Principles 2012
Solutions Manual

ANSWER KEY – CHAPTER 7

7-1
1 FALSE Professional competence and due care is obtained through a combination of education and
experience. It cannot be obtained through education alone.
2 FALSE Sufficiency refers to the quantity of evidence.
3 FALSE Materiality is one of the major factors considered in determining transactions that would be
reviewed.
4 TRUE Accounting estimates involve a level of uncertainty, thus increasing the risk of
misstatement.
5 TRUE
6 TRUE
7 TRUE
8 TRUE
9 TRUE
10 FALSE The successor auditor has the duty to initiate communication with the predecessor auditor,
since the latter is bound by the duty of confidentiality.
11 FALSE Planning involves developing a general audit strategy and detailed audit plan…
12 FALSE The primary objective of the study and evaluation of internal control is to determine the
nature, extent and timing of substantive tests to be performed.
13 FALSE Constructive suggestions for the improvement of internal control is only a secondary
objective. The primary objective is the establishment of a basis for reliance on controls.
14 FALSE Tests of controls are not performed if the preliminary risk assessment is High.
15 TRUE
16 FALSE Substantive tests cannot be eliminated.
17 TRUE
18 TRUE
19 TRUE This assumes that the very material misstatements have not been corrected.
20 TRUE

7-2
1 A Please change choice A to Fairness and reliability of accounting data.
2 C
3 B
4 A
5 A
6 C
7 C
8 D
9 C
10 A
11 A
12 B
13 B An auditor considers materiality in terms of the smallest level of misstatements…
14 C
15 A
16 D If the financial interest is direct, the auditor’s independence is automatically impaired.
17 D
18 B
19 C
20 C
21 D
22 D
23 A
Auditing and Assurance Principles 2012
Solutions Manual

24 A
25 C
26 C Choice B refers to the secondary purpose of considering internal controls.
27 A
28 A
29 D Merely obtaining more evidence does not compensate for its poor quality.
30 C Choice A refers to Existence. Choice B refers to Completeness. Choice D refers to rights
and obligations.
31 C Choice A refers to Completeness. Choice B refers to Accuracy. Choice D refers to
Classification.
32 C Choice A refers to risk assessment procedures. Choice B refers to Tests of controls.
33 D

ANSWER KEY – CHAPTER 8

8-1
1 FALSE Planning assists in proper assignment of work to assistants.
2 FALSE The type of opinion to be expressed is not a consideration in determining the extent of
planning.
3 TRUE
4 TRUE
5 TRUE
6 FALSE The objective of performing analytical procedures in planning an audit is to obtain an
understanding of the transactions and events that are reflected in the financial statements,
and determining unusual items which could indicate possible misstatements in the financial
statements.
7 TRUE
8 TRUE
9 TRUE
10 FALSE An audit does not normally include audit procedures specifically designed to detect illegal
acts that have an indirect but material effect on the financial statements.
11 TRUE
12 TRUE
13 FALSE An auditor should design the written audit program so that the specific audit objectives of
the engagement are achieved.
14 TRUE
15 FALSE The client’s management is expected to have a deeper understanding of the entity and its
environment.
16 FALSE Risk assessment procedures are audit procedures designed to obtain an understanding of
the entity and its environment.
17 FALSE It is not necessary for all team members to have a comprehensive knowledge of all aspects
of the audit. What is important is that collectively, they possess the needed knowledge.
18 TRUE
19 FALSE Strategies are operational approaches by which management intends to achieve its
objectives. Objectives are the overall plans for the entity.
20 FALSE Business risk is broader in scope as compared to the risk of material misstatement.
21 TRUE
22 TRUE
23 TRUE
24 FALSE Materiality is inversely related to audit risk.
25 TRUE
Auditing and Assurance Principles 2012
Solutions Manual

8-2
1 D
2 D Planning continues until the issuance of the audit report.
3 C
4 A This requires the services of experts.
5 A
6 D
7 A Representation letters are considered at audit completion.
8 A The most costly procedure is test of balances.
9 C
10 D
11 C
12 A
13 C This is already a further audit procedure (performed after planning).
14 C
15 B Note that the client under consideration is a continuing audit client.
16 B Comparison of actual results versus budgeted figures is known as variance analysis.
17 B
18 C
19 C
20 D PSA 570 covers going concern.
21 C PSA 550 covers related parties. Related parties are indicated by transactions which have
abnormal terms of trade.
22 B
23 A
24 D
25 C Client management is expected to have a deeper understanding of the entity’s operations.
The auditor is expected to obtain an understanding of the entity sufficient for him/her to
perform the audit effectively, but not so much as to be comparable to the level of
operational knowledge possessed by management.
26 B This procedure is a substantive test.
27 D
28 A
29 B Most business risks do have financial consequences.
30 D

ANSWER KEY – CHAPTER 9

9-1
1 TRUE
2 FALSE Internal control does not address all business risks (only those risks which have been
identified by management).
3 TRUE
4 FALSE Smaller entities use less formal means and simpler processes.
5 TRUE
6 FALSE The effectiveness of controls cannot rise above the integrity and ethical values of the people
who create, administer, and monitor them. Controls are only as good as those who enforce
them.
7 TRUE
8 TRUE
9 TRUE
10 TRUE
11 FALSE Control activities may also be applied in a computerized environment.
Auditing and Assurance Principles 2012
Solutions Manual

12 TRUE
13 FALSE Internal control is the responsibility of management.
14 TRUE Note however that monitoring is mainly performed for the purpose of determining the
adequacy and effectiveness of internal controls.
15 FALSE There is a direct relationship between an entity’s objectives and the controls it implements.
16 FALSE See number 1. Not all controls are relevant to the audit.
17 TRUE
18 FALSE Obtaining an understanding of internal controls involves evaluating the design and
implementation (or operation) of controls.
19 FALSE A weakness in internal control that could have a material effect on the financial statements
is known as a material weakness in internal control.
20 TRUE
21 FALSE If controls are not effective, control risk is assessed at HIGH.
22 FALSE Tests of controls may be eliminated (for example, if preliminary control risk assessment is
HIGH), while substantive tests cannot be eliminated.
23 TRUE PSA 315, par. 108
24 FALSE Further audit procedures include tests of controls and substantive tests only.
25 TRUE
26 FALSE Tests of controls are performed only when the preliminary control risk assessment is HIGH.
27 TRUE
28 FALSE Assessment of control risk is subject to possible revision in light of subsequent
developments during the audit.
29 TRUE
30 FALSE Lack of segregation of duties is not an inherent limitation of internal control.

9-2
1 A
2 C Choice A is incorrect because the auditor must still obtain an understanding of the
accounting system and control procedures of an entity. Choice B is incorrect because
control procedures (relevant to the audit) also require the auditor’s consideration. Choice D
is incorrect because not all control procedures are considered by the auditor (only those
relevant to the audit).
3 C
4 D
5 C The internal control system of a company is broader in scope compared to the accounting
system of the entity.
6 B
7 C
8 B Not all controls are relevant to the auditor’s risk assessment (only those which may affect
the entity’s ability to produce fairly stated financial statements).
9 A
10 D Choice A refers to risk assessment process. Choice B refers to the information system.
Choice C refers to control activities.
11 C
12 B Specific authorization is required for non-routine transactions, while general authorization is
required for routine transactions.
13 D Risk arises from change. Choice D shows stability (no change).
14 D
15 B
16 B
17 A See 9-1 number 18
18 A The understanding of internal control is used to determine the control risk, not inherent risk.
19 B
Auditing and Assurance Principles 2012
Solutions Manual

20 D See number 17.

21 B
22 A
23 B
24 B
25 C Correction: The question should be “Which of the following is not a possible reason for
this preliminary assessment?”
26 A The basis for the control risk assessment is documented only when the control risk
assessment is Less than High.
27 A Choice B is incorrect because the preliminary assessment of control risk is done before tests
of controls. Choice C is incorrect because the preliminary assessment of control risk for a
financial statement assertion is normally HIGH, unless the auditor is able to identify controls
that are potentially reliable.
28 D Choice A is incorrect (see comment in number 26). Choice B is incorrect because
substantive tests cannot be eliminated, regardless of the control risk assessment. Choice C
is incorrect because evidence regarding the operation of controls in a prior period may be
considered during the current audit.
29 C Choice A is incorrect because tests of controls are used to verify effectiveness of controls
not management assertions. Choice B is incorrect because analytical procedures cannot be
used to validate control risk, and substantive tests are not used to validate control risk.
Choice D is incorrect because the assessment of control risk has already been performed
(see question).
30 D Tests of controls will not be performed since there are missing controls.
31 A Choices B, C and D are substantive tests.
32 A
33 B Choice B is evidence obtained during the performance of substantive tests.
34 C
35 C See comment for Choice B in number 29.
36 D
37 C
38 C As the acceptable level of detection risk decreases, the auditor relies on more stringent
substantive testing.
39 B
40 A
Auditing and Assurance Principles 2012
Solutions Manual

ANSWER KEY – CHAPTER 10

10-1
1 TRUE
2 FALSE Audit evidence includes only the information used by the auditor as a basis for his opinion.
3 FALSE The client management is responsible...
4 FALSE Accounting records need to be tested...
5 FALSE Accounting records, on their own, do not constitute sufficient, appropriate audit evidence.
6 FALSE The higher the quality of audit evidence, the less evidence is required.
7 FALSE Obtaining audit evidence relating to a particular assertion is not a substitute for obtaining
audit evidence regarding another assertion.
8 TRUE
9 TRUE
10 FALSE Audit procedures classified according to purpose include risk assessment procedures, tests
of controls, and substantive tests.
11 FALSE This statement refers to substantive tests.
12 FALSE This statement refers to Reperformance.
13 FALSE Inquiry is considered as insufficient unless corroborated by evidence from other audit
procedures.
14 TRUE
15 FALSE The auditor ordinarily increases...
16 FALSE Substantive tests are never eliminated in an audit engagement.
17 FALSE Audit objectives establish broad general goals, while audit procedures specify the detailed
work to be performed.
18 FALSE Analytical procedures are required as a planning procedure and a completion procedure, but
not as a substantive test.
19 TRUE
20 FALSE Tests of details can be used for verifying existence and valuation.
21 FALSE Working papers do not serve as a substitute for the client’s financial records.
22 TRUE
23 FALSE Working papers should not be kept in the client’s premises.
24 FALSE Working papers which contain information relating primarily to the audit of a single period
are known as current files.
25 FALSE The primary purpose of indexing is to increase efficiency in the rechecking and review of
work performed.

10-2
1 A Correction: Choice A should read: “The information obtained by the auditor...”
2 C
3 B
4 D Some audit procedures address two or more audit objectives.
5 C See notes in 10-1 number 7
6 D
7 B
8 C
9 C The question demands for examples of assets which are inspected. Choice A is incomplete.
Choice B includes cancelled checks and sales documents (both of which are not assets).
Choice D includes cancelled checks (again, not an asset).
10 D
11 D
12 D
13 C
14 B
15 C
Auditing and Assurance Principles 2012
Solutions Manual

16 D Sampling affects the sufficiency of audit evidence.

17 C
18 D
19 A The difficulty and expense involved in testing a particular item is not a valid basis for an
auditor to decide to omit a test.
20 D The higher the auditor’s assessments of inherent and control risks, the more reliable and
relevant is the audit evidence sought by the auditor.
21 C
22 C Choice A is incorrect (see 10-1 number 16). Choice B is incorrect because substantive tests
are used to discover significant misstatements. Choice D is incorrect because substantive
tests are inversely related to the auditor’s reliance on internal controls.
23 D Correction: Remove the phrase select the exception.
24 C
25 C
26 A
27 B
28 A
29 C
30 B Choices A, C and D warrant the use of positive confirmation requests.
31 A
32 C
33 D
34 C A copy of the external auditor’s audit program should be included in the working papers.
35 D
36 A
37 B
38 B
39 D
40 B

ANSWER KEY – CHAPTER 11

11-1
1 TRUE
2 FALSE Tests performed on 100% of the items within a population does not constitute sampling.
3 TRUE
4 TRUE
5 FALSE Sampling risk arises from the possibility that the auditor’s conclusion...
6 TRUE
7 TRUE
8 TRUE
9 TRUE
10 FALSE The lower the risk the auditor is willing to accept, the higher the sample size will need to be.
11 TRUE
12 FALSE In tests of controls, the tolerable deviation rate is the maximum...
13 TRUE
14 TRUE
15 FALSE This statement refers to random selection.
16 FALSE Stratification may be appropriate to assist in the efficient and effective deisgn of the sample.
17 FALSE The risk of over-reliance and the risk of incorrect acceptance...
18 TRUE
19 TRUE
20 FALSE There is an inverse relationship...
Auditing and Assurance Principles 2012
Solutions Manual

21 FALSE Non-statistical sampling does not use statistical formulas.

22 FALSE Sampling for variables is generally used in substantive testing.
23 TRUE
24 TRUE
25 FALSE If the population is expected to be error-free, this warrants a reduction of, but not
elimination of, the sample size.

11-2
1 B
2 D
3 D
4 A Selecting specific items involve selecting high value or key items.
5 A
6 C
7 B
8 C
9 A
10 D
11 A Misstatements refer to errors found during substantive testing.
12 C
13 A
14 A Sampling risk is inversely related to sample size. Note also that sampling risk can be
eliminated by 100% testing.
15 A
16 B
17 A Choice B is incorrect because the question is talking about tests of controls, not substantive
tests. Choice C is incorrect because tests of controls and substantive tests have been
combined in this statement. Choice D refers to the likelihood of assessing control risk too
low.
18 B
19 A
20 B
21 C
22 C The interval is computed as population size divided by sample size.
23 D The disadvantage can be rectified by the use of random starts.
24 D
25 B
26 C
27 B
28 D This rate is developed in light of the auditor’s understanding of the entity and its
environment.
29 A This rate is developed based on the auditor’s professional judgment.
30 B
31 C
32 C
33 D Refer to PSA 530, Appendix
34 B
35 C
36 A
37 A
38 B 4/100 = 4% sample deviation rate + 2% allowance for sampling risk = 6% upper deviation
rate versus tolerable deviation rate of 5%
39 D
40 D
Auditing and Assurance Principles 2012
Solutions Manual

41 C
42 B
43 C
44 D Tolerable misstatement is inversely related to sample size
45 C
46 A
47 B
48 C Note that the sample deviation rate (in tests of controls) need not be projected; only the
sample misstatement (in substantive tests) need to be projected to the population.
49 A
50 D
51 B
52 B

ANSWER KEY – CHAPTER 12

12-1
1 TRUE
2 TRUE
3 FALSE A provision is not uncertain as to existence.
4 TRUE
5 FALSE Not all subsequent events need adjustment; some require disclosure only.
6 TRUE
7 TRUE
8 FALSE The period of assessment is at least 12 months from the reporting date.
9 TRUE
10 FALSE The auditor in this case should issue a qualified or disclaimer of opinion.
11 FALSE When other sufficient appropriate evidence can be reasonably expected to exist, such
evidence is obtained, rather than simply getting written representations from management.
12 FALSE PSA 580 requires written representation letters.
13 TRUE
14 TRUE
15 FALSE Flowcharts of internal control do not constitute a form of internal communication.

12-2
1 C
2 D
3 A
4 B
5 A Subsequent events that pertain to conditions that did not exist as of balance sheet date are
normally disclosed.
6 D
7 A
8 A This accomplishes no purpose related to subsequent events.
9 B
10 B
11 D
12 D Choices A, B and C involve increasing expenditures which could aggravate the already
precarious condition of Hill Co.
13 A Non-compliance with terms of debt agreements normally raise a doubts about going
concern.
14 B
Auditing and Assurance Principles 2012
Solutions Manual

15 B
16 C
17 A
18 C
19 C See comments under 12-1 number 11
20 C
21 A The minutes of meetings must all be made available to the auditor. Materiality is not
applicable here – all minutes must be provided to the auditor.
22 B
23 C
24 C
25 C
26 A
27 B
28 C
29 C
30 D Related parties sometimes account for their transactions in a way that substance differs
from the form.
31 C
32 A
33 A

ANSWER KEY – CHAPTER 13

13-1
1 TRUE
2 FALSE This situation results to a disagreement with management, not a limitation on scope.
3 TRUE
4 FALSE Chua’s report need not contain an emphasis of a matter paragraph.
5 FALSE This situation would require the use of a qualified or adverse opinion, depending on
materiality.
6 FALSE This situation would require the use of a qualified opinion or disclaimer of opinion due to a
scope limitation.
7 TRUE
8 FALSE Emphasis of a matter paragraphs are always placed before a modified opinion.
9 TRUE
10 FALSE An emphasis of a matter paragraph does not negate the unqualified opinion.
11 TRUE
12 TRUE
13 FALSE If the principal auditor is satisfied with the independence and reputation of the other
auditor, the principal auditor need not indicate a division of responsibility.
14 TRUE
15 FALSE A material departure from GAAP would require the issuance of a qualified or adverse
opinion.
16 TRUE
17 TRUE
18 TRUE
19 FALSE See comments under number 13.
20 TRUE
Auditing and Assurance Principles 2012
Solutions Manual

13-2
1 A
2 A
3 D
4 C Selecting and applying appropriate or reasonable accounting policies are part of
management’s responsibilities.
5 C
6 B/D Refer to the standard audit report.
7 A GAAS in the Philippines are known as PSAs.
8 A
9 D
10 D
11 -- Correction: None of the choices apply. answer is “unless information comes to the
attention of the auditor which pertains to conditions existing as of the audit report date.”
12 A
13 B
14 C
15 D
16 C This situation includes an adverse opinion.
17 D There is uniform wording for the audit report (See PSA 700/701 and 705/706)
18 A The “subject to” opinion format is no longer used.
19 A
20 A
21 C
22 D
23 A
24 D In choice D, the auditor must disclaim an opinion.
25 D
26 A
27 B
28 B
29 C
30 A
31 D
32 A
33 A
34 D
35 C
36 A
37 A
38 C
39 A Since the condition is adequately disclosed, there is no disagreement between the auditor
and Kitchen King Company’s management.
40 D
41 A
42 D
43 C
44 A
45 C
Auditing and Assurance Principles 2012
Solutions Manual

ANSWER KEY – CHAPTER 14

14-1
1 TRUE
2 FALSE The requirements of PSA 800 shall prevail.
3 TRUE
4 FALSE The special report on modified cash basis statements needs to indicate the basis of
accounting used.
5 FALSE Audit of components results in a report on a particular part of the financial statements.
6 FALSE Audit of components result to a more extensive examination of that component.
7 FALSE When an adverse opinion or disclaimer of opinion on the entire financial statements has
been expressed, the auditor should report on components of the financial statements only if
those components are not so extensive....
8 TRUE
9 TRUE
10 TRUE

14-2
1 A
2 C
3 B
4 C If statements are prepared using the accrual basis, the standard audit report applies.
5 A
6 A
7 D
8 B
9 C
10 C
11 B
12 C
13 NONE This is a repeat question.
14 A
15 B
16 C
17 A
18 D Special reports on compliance with contractual agreements are still audit reports; hence
they require independence.
19 A
20 C
Auditing and Assurance Principles 2012
Solutions Manual

ANSWER KEY – CHAPTER 15

15-1
1 FALSE Review of interim financial statements are based on PSREs.
2 FALSE Audits are not part of related services.
3 TRUE
4 FALSE Inquiry of management is part of review procedures.
5 TRUE
6 FALSE Review services require auditor independence.
7 TRUE
8 FALSE Confirmation and verification of significant account balances are part of audits, not reviews.
9 TRUE
10 FALSE A CPA may not provide assurance as to the achievability of a forecast.
11 TRUE
12 FALSE Agreed-upon procedures engagements do not require independence.

15-2
1 A
2 B
3 B
4 B
5 D Choice D is part of a standard audit engagement.
6 A
7 B/C
8 A
9 C
10 A
11 B
12 A
13 B
14 C
15 D
16 C
17 A
18 B
19 D
20 C A CPA is always required to exercise due professional care.
21 D
22 C Compilations require accounting expertise, not audit expertise.
23 D
24 D
25 A
26 D See 15-1 number 12
27 D

-END-