Practice of Public Accountancy 59 Multiple Choice Questions. 1. Which of the following is false? Philippine Framework for Assurance Engagements a. describes the objective and elements of assurance engagements intended to provide either a reasonable assurance or limited assurance. b. identifies engagements to which Philippine Standards on Auditing, Philippine Standards on Review Engagements, and Philippine Standards on Assurance Engagements apply. C. establishes standards or provides procedural requirements for the performance of assurance engagements. .provides a fame of reference for the Auditing and Assurance Standards Council in its adoption of International Standards on Auditing, International Standards on Review Engagements and International Standards on Assurance Engagements for application in the Philippines. 2. Which of the following is not an assurance engagement? a. Compilation b. Financial statements audit c . Information reliability services d. Reviews of prospective financial statements 3. Nonassurance engagements include all of the following except a. agreed-upon procedures. b. management consulting. C. preparation of tax returns where no conclusion is expressed. d. compliance audit. 4.Assurance engagements should exhibit the following elements except a. a subject matter./ b. suitable criteria. C. an engagement process. d. appropriate professional fees. 5. Which of the following forms may the subject matter of an assurance engagement take? a. Historical financial information b. Systems and processes60 Chapter 2 C. Behavior d. All of the above 6. Which of the following is not a component of engagement risk? a. Control risk b. Inherent risk C. Business risk d. Detection risk 7. Engagement risk is influenced by the risks associated with the following except a. nature and form of the subject matter. b. nature and form of the criteria applied to the subject matter. C. nature and extent of the process used to collect and evaluate evidence. d. unreasonably low professional fee. 8. An assurance engagement that provides a high level of assurance that the financial statements are free of material misstatement is known as a. review. b. compilation. c. . agreed-upon procedures. d. independent financial statements audit. 9. Which of the following is not an assurance engagement? a. Information System Reliability Service b. Business Performance Measurement C. Risk Assessment Service d. Management Consulting Service 10. When the professional accountant has obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria, he/she can provide a. limited level of assurance. b. absolute assurance. c. reasonable level of assurance. d. no assurance.Regulation of the Practice of Public ACC Multiple Choice Questions 1. Canada Corp. orally engaged Cookie & Co., CPAs, to audit its financial statements. Canada management informed Cookie that it suspected that the accounts receivable were materially overstated. Although the financial statements that Cookie audited did, in fact, include a materially overstated accounts receivable balance, Cookie issued a standard unqualified report. If Canada sues Cookie for negligence in failing to discover the overstatement, Cookie's best defense would be that Cookie had signed no engagement letter. b. Cookie performed the audit in accordance with Standards on Auditing. c. Cookie was not in privity of contract with Canada. d. Cookie did not perform the audit recklessly or with an intent to deceive. 2. One of the elements necessary to hold a CPA liable to a client for conducting an audit negligently is that the CPA a. acted with scienter or intent to deceive, b. was a fiduciary of the client. c. failed to exercise due care. d. executed an engagement letter. 3. JC Corp. wishes to acquire the stock of PJ, Inc. In conjunction with its acquisition plan, JC hired Rain, CPA, to audit the financial statements of PJ. Based on the audited financial statements and Rain's standard unqualified report, JC acquired PJ. Within six months JC discovered that PJ's inventory had been overstated by P500,000. JC believes that Rain failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality. However, JC is not able to prove that Rain either intentionally deceived JC or showed a reckless disregard for the truth. JC is also unable to prove that Rain had any knowledge that the inventory was overstated. Identify the two complaints listed below that JC could successfully support. a. Negligence and breach of contract b. Negligence and gross negligence C. Negligence and fraud d. Gross negligence and breach of contract132 Chapter 4 4. If a CPA recklessly departs from the standards of due care when conducting an audit, she or he will be liable to unknown third parties based on a. strict liability. negligence. b. gross negligence. d . breach of contract. 5. Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA? a. Gross negligence in applying auditing standards b. Ordinary negligence in applying financial reporting standards c. Identified third-party users d. Scienter 6. Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? a. The CPA is liable only to third parties in privity of contract with the CPA. b. The CPA is liable only to known users of the financial statements. c. The CPA probably is liable to any person who suffered a loss as a result of the fraud. d. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion. 7. While performing services for their clients, professionals have always had a duty to provide a level of care which is a. reasonable. b. greater than average. c. superior. d. guaranteed to be free from error. 8. In rare cases auditors have been held liable for criminal acts. A criminal conviction against an auditor can result only when it is demonstrated that the auditor a. was negligent. b. was grossly negligent. c. intended to deceive or harm others. d. caused a financial loss to an innocent third party.Regulation of the Practice of Public Accountancy 133 9. When a business is unable to repay its lenders because of economic conditions, such as recession, it suffers from a. business failure. C. audit risk. b. audit failure. d. all of these. 10. When the auditor issues an erroneous opinion as the result of an underlying failure to comply with the requirements of auditing standards, it results in a. business failure. c. audit risk. b. audit failure. d. all of the above. 11. The auditor's responsibility for failure to detect fraud arises a. when such failure clearly results from failure to comply with auditing standards. b. whenever the amounts involved are material. c. only when the examination was specifically designed to detect fraud. d. only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor. 12. The risk that the audit will fail to uncover a material misstatement is eliminated a. if client has good internal control. b. if client follows Financial Reporting Standards. c. when the auditor has complied with Standards on Auditing. d. . under no circumstances. 13. Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the wrong type of audit opinion is issued, the audit firm a. has failed to follow Standards on Auditing. b. deserves to lose the lawsuit. c. should be asked to defend the quality of the audit. d. should not be held responsible for the financial loss suffered by others. 14. Conflict between financial statement users and auditors often arises because or the a. high cost of performing an audit. b. extremely technical vocabulary which the auditor uses in the report