Name:___________________________ Schedule:__________________

Score: _________________

SEMI-FINAL EXAMINATION IN ASSURANCE PRINCIPLES

1. Engagement letters are widely used in practice for professional

engagements for all types. The primary purpose of the engagement
letter is to
a. Remind management that the primary responsibility for the financial
statements rests with management.
b. Provide a written record of the agreement with the client as to the
services to be provided.
c. Satisfy the requirements of the CPA’s liability for insurance
policy.
d. Provide a starting point for the auditor’s preparation of the
preliminary audit program.

2. It is in the interest of both client and auditor that the auditor

sends an audit engagement letter preferably before
a. The performance of substantive testing.
b. The commencement of the engagement.
c. The completion of audit.
d. Before the issuance of audit report.

3. An audit engagement letter least likely includes

a. A reference to the inherent limitation of an audit that some
material misstatements may remain undiscovered.
b. Identification of specific audit procedures that the auditor needs
to undertake.
c. Description of any letters or reports that the auditor expects to
submit to the client.
d. Arrangements concerning the involvement of internal auditors and
other client’s staff.

4. The understanding between the client and the auditor as the degree of
responsibilities to be assumed by each is normally set forth in a(an)
a. representation letter
b. engagement letter
c. management letter
d. comfort letter

5. Which of the following statements is correct with respect to obtaining

an understanding with a client?
a. Auditors are not required to obtain an understanding with their
clients.
b. Auditors must obtain an understanding only if an audit is to be
conducted.
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 c. Auditors must document their understanding of the engagement.
d. Auditors must obtain an engagement letter.

6. The primary reason why an engagement letter is submitted by audit

firms prior to starting the work is that it
a. clarifies the responsibilities of the management and those of the
audit firm.
b. defines the firm’s policies and procedures regarding new clients.
c. provides an insurance policy for both the firm and its client.
d. communicates the type of opinion that will be rendered on the
engagement.

7. Which of the following is not included in an audit engagement letter?

a. Objectives of the engagement.
b. Representations that the financial statements were prepared in
accordance with PFRS.
c. Management’s responsibilities.
d. A clear explanation of the services to be performed on the
engagement.

8. The primary difference between financial statement errors and fraud

is that
a. errors are intentional misstatements by management, while fraud
involves unintentional mistakes or omissions.
b. errors unintentional mistakes or omissions, while fraud involves
intentional misstatements.
c. there is no difference as errors and fraud have the same meaning.
d. errors are more likely to provide an indication that an illegal act
may have occurred.

9. An audit plan is a
a. detailed plan of analytical procedures and all substantive tests
to be performed in the course of the audit.
b. document that provides an overview of the company and a general
plan for the audit work to be accomplished, timing of the work, and
other matters of concern to the audit.
c. generic document that auditing firms have developed to lead the
process of the audit through a systematic and logical process.
d. budget of the time that should be necessary to complete each phase
of the audit procedures.

10. The purpose of analytical procedures during the audit planning stage
is to
a. aid in planning the observation of physical inventory.
b. identify unusual circumstances that the auditor may need to
investigate further.
c. flag individual transactions for further review.
d. determine whether sales transactions are approved.

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11. The main purpose of risk assessment procedures is to
a. Obtain an understanding of the entity and its environment,
including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.
b. Test the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion
level.
c. Detect material misstatements at the assertion level.
d. All of the given choices are main purposes of risk assessment
procedures.

12. Which of the is correct concerning requirements about auditor’s

communications about fraud?
a. Fraud that involves senior management should be reported directly
to the audit committee regardless of the amounts involved.
b. All fraud with a material effect on the financial statements should
be reported directly by the auditor to the Securities and Exchange
Commission.
c. Fraud with a material effect on the financial statements should
ordinarily be disclosed by the auditor through the use of an
emphasis of a matter paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud outside the
entity under any circumstances.

13. Which of the following is not a component of audit planning?

a. Observing the client’s annual physical inventory taking and making
test counts of selected items.
b. Making arrangements with the client concerning the timing of audit
fieldwork and use of the client’s staff in completing certain
phases of the examination.
c. Obtaining an understanding of the business.
d. Developing audit programs.

14. Prior to beginning the fieldwork on a new audit engagement in which

he does not possess industry expertise, the CPA should
a. reduce audit risk by lowering the preliminary levels of
materiality.
b. design special substantive tests to compensate for the lack of
industry expertise.
c. engage financial experts who are familiar with the nature of the
industry.
d. obtain a knowledge of matters that relates to the nature of the
entity’s business and industry.

15. Prior to acceptance of an audit engagement with a client who has

terminated the services of the predecessor auditor, the CPA should
a. contact the predecessor auditor without advising the prospective
client and request a complete report of the circumstances leading

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 to the termination of the engagement with an understanding that
all information disclosed will be kept confidential.
b. accept the engagement without contacting the predecessor auditor
since the CPA an include audit procedures to verify the reason
given by the client for the termination of the engagement.
c. not communicate with the predecessor auditor because this would in
effect be asking the auditor to violate the confidential
relationship between an auditor and the client.
d. advise the client of the intention to contact the predecessor
auditor and request a permission for the contact.

16. Before accepting an audit engagement, a successor auditor should make

specific inquiries of the predecessor auditor regarding the
predecessor’s
a. opinion of any subsequent events occurring since the predecessor’s
audit report was issued.
b. understanding as to the reasons for the change of auditors.
c. awareness of the consistency in the application of the PFRS between
periods.
d. evaluation of all matters of continuing accounting significance.

17. Management’s integrity affects all of the following risks except:

a. enterprise risk
b. financial reporting risk
c. engagement risk
d. all of the above risks are affected.

18. Which of the following audit risk components may be assessed in non-
quantitative terms?
Inherent Risk Control Risk Detection Risk
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

19. Which of the following combinations of engagement risk, audit risk,

and materiality would lead the auditor to most audit work?
Inherent Risk Audit Risk Materiality
a. Low High High
b. Moderate Low Low
c. Low Moderate Low
d. High High High

20. An audit program provides a proof that

a. sufficient competent evidential matter is obtained.
b. the work is adequate planned.

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 c. there is compliance with generally accepted standards of
reporting.
d. there is a proper study and evaluation of internal control.

21. The principal reason for developing a written audit program is to

help assure that the
a. audit work is properly supervised.
b. audit work is properly planned and documented.
c. audit report contains only significant findings.
d. work of different auditors is properly coordinated.

22. One of the primary uses of an audit program is to

a. serve as a tool for planning, directing, and controlling the audit
work.
b. document an auditor’s understanding of the internal control.
c. provide for a standardized approach to the audit engagement.
d. delineate the audit risk accepted by the auditor.

23. An audit program is

a. the detailed plan of audit procedures to be performed in the course
of the audit.
b. an overview of the company and a general plan for the audit work
to be accomplished.
c. a generic document that auditing firms have developed to lead the
process of the audit through a systematic and logical process.
d. a budget of the time that should be necessary to complete each
phase of the audit procedures.

24. In deciding whether to use the work of internal auditors, external

auditors must evaluate the internal auditors’
a. objectivity and competence
b. independence and professionalism
c. education and certification
d. age and gender

25. Which of the following matters is generally included in an auditor’s

engagement letter?
a. Limitations of the engagement.
b. Factors to be considered in establishing preliminary judgment
about materiality.
c. Management’s liability for non-compliance to laws committed by its
employees.
d. The auditor’s responsibility to obtain negative assurance relating
to the occurrence of non-compliance to laws.

26. Which of the following conditions most likely would impose the
greatest risk in accepting a new audit engagement?
a. There will be a client-imposed scope limitation.

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 b. The client’s financial reporting system has been in place for 10
years.
c. The firm will have to hire an expert in one audit area.
d. Staff will need to be rescheduled to cover this new client.

27. The auditor may accept or continue an audit engagement only when the
basis upon which it is to be performed has been agreed, through
I. Establishing whether the preconditions for an audit are
present.
II. Confirming that there is a common understanding between the
auditor and management and, where appropriate, those charged
with governance of the terms of the audit engagement.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

28. An audit is conducted on the premise that management and, where

appropriate, those charged with governance, have acknowledged and
understand that they have responsibilities that are fundamental to
the conduct of an audit in accordance with PSAs. Which of the following
is not one of those responsibilities?
a. The preparation of financial statements in accordance with
relevant pronouncements issued by the AASC.
b. The establishment and maintenance of an adequate internal control
system that is necessary to enable the preparation of financial
statements that are free from material misstatements, whether due
to fraud or error.
c. To provide the auditor with access to all information that is
relevant to the preparation of the financial statements such as
records, documentation, and other matters.
d. To provide the auditor with unrestricted access to persons within
the entity from which the auditor determines it necessary to obtain
with evidence.

29. The auditor shall not agree to a request from the entity to change
the terms of the audit engagement or to change the audit engagement
to an engagement that conveys a lower level of assurance when there
is no reasonable justification for doing so. Which of the following
may be considered reasonable justifications for the change in the
audit engagement?
I. A change in circumstances affecting the need for the service.
II. A misunderstanding as to the nature of an audit as originally
requested.
III. A restriction on the scope of the engagement, whether imposed
by management or caused by other circumstances.

a. I and II only

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 b. I and III only
c. II and III only
d. I, II, and III

30. If the auditor is unable to agree to a change of the engagement and

is not permitted to continue the original engagement, the auditor
should
a. Insist on continuing the original engagement.
b. Express a qualified opinion.
c. Express an adverse opinion.
d. Withdraw from the engagement.

31. Which of the following activities should be performed by the auditor

at the beginning of the current audit engagement?
I. Perform procedures regarding the continuance of the client
relationship and the specific audit engagement.
II. Evaluate compliance with relevant ethical requirements,
including independence.
III. Establish an understanding of the terms of the engagement.

a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

32. Adequate planning helps to ensure that

A B C D
Appropriate attention is
devoted to important NO YES YES NO
areas of the audit.
Potential problems are
identified and resolved YES YES NO NO
on a timely basis.
The audit engagement is
properly organized and YES YES NO NO
managed.

33. In performing an audit of financial statements, the auditor should

obtain a sufficient knowledge of a client’s business and industry to
a. Develop an attitude of professional skepticism concerning
management’s financial statement assertions.
b. Make constructive suggestions concerning improvements to the
client’s internal control.
c. Evaluate whether the aggregation of known misstatements causes the
financial statements taken as a whole to be materially misstated.
d. Understood the events and transactions that may have an effect on
the client’s financial statements.

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34. The establishment of an overall audit strategy involves
I. Determining the characteristics of the engagement that define
its scope.
II. Ascertaining the reporting objectives of the engagement to plan
the timing of the audit and the nature of the communications
required.
III. Considering the important factors that will determine the focus
of the engagement team’s efforts.

a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

35. Which of the following should be included in the audit plan?

I. The nature, timing and extent of planned risk assessment
procedures.
II. The nature, timing and extent of planned further audit
procedures at the assertion level.

a. I only
b. II only
c. Neither I nor II
d. Both I and II

36. In the planning stage of an audit engagement, the auditor is required

to perform audit procedures to obtain an understanding of the entity
and its environment, including its internal control. These procedures
are called
a. Risk assessment procedures
b. Substantive tests
c. Test of controls
d. Dual-purpose tests

37. Before accepting an engagement to audit a new client, an auditor is

required to
a. Obtain a copy of the client’s financial statements.
b. Prepare a memorandum setting forth the staffing requirements and
documenting the preliminary audit plan.
c. Make inquiries of the predecessor auditor after obtaining the
consent of the prospective client.
d. Discuss the management representation letter with the client’s
audit committee.

38. A predecessor withdrew from the engagement after discovering that a

client’s financial statements are materially misstated that it would
not revise. If asked by the successor auditor about the termination
of the engagement, the predecessor should

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 a. Suggest that the successor auditor should obtain the client’s
consent to discuss the reasons.
b. Indicate that there was a misunderstanding.
c. State that the audit revealed material misstatement that the client
would not revise.
d. Suggest that the successor auditor ask the client.

39. An auditor is required to establish an understanding with a client

regarding the services to be performed for each engagement. This
understanding generally includes
a. The auditor’s responsibility to apply the concept of materiality
in planning and performing the audit.
b. Management’s responsibility for providing the audit with an
assessment of the risk of material misstatement due to fraud.
c. The auditor’s responsibility for ensuring that those charged with
governance are aware of any significant deficiencies in internal
control that may come to the auditor’s attention.
d. Management’s responsibility for errors and the illegal activities
of employees that may cause material misstatement.

40. Prior to acceptance of an audit engagement with a client who has

terminated the services of the predecessor auditor, the CPA should
a. contact the predecessor auditor without advising the prospective
client and request a complete report of the circumstances leading
to the termination of the engagement with an understanding that
all information disclosed will be kept confidential.
b. accept the engagement without contacting the predecessor auditor
since the CPA an include audit procedures to verify the reason
given by the client for the termination of the engagement.
c. not communicate with the predecessor auditor because this would in
effect be asking the auditor to violate the confidential
relationship between an auditor and the client.
d. advise the client of the intention to contact the predecessor
auditor and request a permission for the contact.

END OF EXAMINATION

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