1.

Which of the following factors most likely would influence an auditor’s determination of the
auditability of the entity’s financial statements?

a) The operating effectiveness of control procedures

b) The complexity of the accounting system
c) The adequacy of accounting records
d) The existence of related party transactions

2. The auditor should document the understanding established with a client through a(n)

a) Oral communication with the client

b) Written or oral communication with the client
c) Written communication with the client
d) Completely detailed audit plan

3. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include

a) Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management.
b) Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion.
c) Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
d) Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests.

4. Before accepting an engagement to audit a new client a CPA is required to obtain *

a) An understanding of the prospective clients industry and business

b) The prospective client signature to the engagement letter
c) A preliminary understanding of the prospective clients control environment
d) The prospective client's consent to make inquiries or the predecessor auditor if any

5. The purpose of an engagement letter is to

a) Document the terms of engagement

b) Notify the audit staff of an upcoming engagement so that personal scheduling can be facilitated
c) Document the CPA firm’s responsibility to external users of the audited financial statements
d) Emphasize management's responsibility for approving the audit program

6. If an auditor believes that an understanding with the client has not been established he or she should
ordinarily

a) Decline to accept or perform the audit

b) Assess control risk at the maximum level and perform a primary substantive audit
c) Perform the audit with increased professional skepticism
 d) Modify the scope of the auditor reflect and increase the risk of material misstatement due to
fraud

7. According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)

a) Client representation letter

b) Engagement letter
c) Memorandum to be placed in the permanent section of the auditing working papers
d) Comfort letter

8. Arrangements concerning which of the following are least likely to be included in an engagement
letter?

a) CPA investment in client securities

b) Auditor’s responsibilities
c) Other forms of reports to be issued in addition to the audit report
d) Fees and billing

9. In making client acceptance decisions, the audit firm will consider:

a) CPA firm’s potential ongoing revenue from the audit client

b) Audit risk to the CPA firm
c) The client’s business risk and the CPA firm’s engagement risk
d) Inherent and control risk of the client

10. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client

a) Before the audit report is issued

b) At the end of fieldwork
c) Before the commencement of the engagement
d) After the audit report is issued

11. In making a decision to accept or continue with a client, the auditor should consider:

Its competence Its independence Its ability to serve the client The integrity of client's
management

12. Which of the following would an auditor least likely perform as a part of the auditor’s preliminary
engagement activities?

a) Obtain understanding of the legal and regulatory framework applicable to the entity.
b) Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
c) Evaluate compliance with ethical requirements, including independence.
d) Establish and understanding of the terms of the engagement.
13. Which of the following is not one of the reasons why the auditor should perform preliminary
engagement activities?

a) To ensure that there is no misunderstanding with the client as to the terms of the engagement.
b) To ensure that the auditor maintains the necessary independence and ability to perform the
engagement.
c) To help ensure that there are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement.
d) To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion
on the financial statements.

14. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to

a) Determine whether the firm is independent with the client

b) Determine the degree of knowledge and expertise required by the engagement
c) Determine the integrity of management
d) Gather evidence about the fairness of the financial statements

15. Which of the following is not normally performed in the pre-planning or pre-engagement phase?

a) Deciding whether to accept or reject an audit engagement

b) Making a preliminary estimate of materiality
c) Inquiring from predecessor auditor
d) Preparing an engagement letter

16. Which of the following factors most likely would case an auditor not to accept a new audit
engagement?

a) An inadequate understanding of the entity’s internal control structure

b) Concluding that the entity’s management probably lacks integrity
c) The close proximity to the end of the entity’s fiscal year
d) An inability to perform preliminary analytical procedures before assessing control risk

17. Before performing any audit procedures, the auditor and the client should agree on the

a) Types of opinion to be expressed

b) Terms of the engagement

18. An engagement letter should ordinarily include information on the objectives of the engagement
and

CPA's responsibilities Client's responsibilities Limitation of engagement

19. The use of an engagement letter is the best method of documenting

I. The required communication of significant deficiencies in internal control structure

II. Significantly lower materiality levels than those used in the prior audit

III. The description of any letters or reports that the auditor expects to issue
IV. Notification of any changes in the original arrangements of the audit

20. Investigation of new clients and re-evaluation of existing ones is an essential part of deciding

a) Inherent risk
b) Whether to accept the engagement
c) Statistical risk
d) Financial risk

21. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following
qualitative factors could influence the assessment of materiality?

I. Misstatements that are otherwise immaterial may be material if they affect earnings trends.

II. Minor misstatements resulting from the consequence of contractual obligations.

22. A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued is the

a) Inherent risk
b) Acceptable audit risk
c) Statistical risk
d) Financial risk

23. The audit risk model is used primarily

a) To test the effectiveness of controls

b) For planning purposes in determining how much evidence to accumulate
c) To determine the type of opinion to express
d) To evaluate the evidence which has been gathered.

24. Which of the following us not normally performed in the planning stage of an audit?

a) Schedule engagement staff and audit specialists

b) Identify the client’s reason for the audit
c) Develop an overall audit strategy
d) Request that bank balances be confirmed

25. The relationship between materiality and risk is ordinarily

a) Direct
b) Inverse
c) Parallel
d) None

26. Unusual fluctuations occur when

a) Significant differences are not expected but do exist

b) Significant differences are expected but do not exist
c) Either A or B is true
d) Significant differences are expected and do exist
27. Auditors are responsible for determining whether financial statements are materially misstated, so
upon discovering a material misstatement they must bring it to the attention of

a) The audit firm’s managing partner

b) The client’s shareholders
c) The regulators
d) The client’s management

28. A document that details what the auditor will do to gather sufficient, appropriate evidence is the

a) Audit strategy
b) Audit program
c) Audit procedure
d) Audit risk model

29. Audit plans should

Precede actions Be flexible Be cost beneficial

30. Which of the following statements is not correct?

a) Given equal peso amounts, frauds are usually considered more important that errors.
b) Qualitative factors as well as quantitative factors affect materiality
c) The most important base used as the criterion for deciding materiality is total assets.
d) Materiality is a relative rather than an absolute concept.

31. Which of the following is the best definition of detection risk?

a) The auditor will compute audit materiality incorrectly.

b) The auditor will fail to detect material misstatements that exist.
c) The auditor will apply more audit procedures that are required in the circumstances.
d) The auditor will fail to modify the audit opinion on financial statements that re materially
misstated.

32. In which stage(s) of an audit can analytical procedures be performed?

a) During all three stages

b) In the planning stage
c) In conjunction with tests of transactions and tests of details of balances
d) In the completion stage

33. RRR Corporation has a few large accounts receivable that total one million pesos whereas RBT
Corporation has many small accounts receivables that total one million pesos. Misstatement in any one
account is more significant for RRR Corporation because of the concept of

a) Comparative analysis
b) Materiality
c) Audit risk
d) Reasonable assurance
34. Audit programs should be designed that

a) The auditor can make constructive suggestions to management.

b) The audit evidence gathered supports the auditor’s conclusions.
c) Most of the required procedures can be performed as interim work.
d) Inherent risk is assessed at a sufficiently low level.

35. When planning a financial statement audit, the auditor should assess inherent risk at the

Financial statement level Account balance or transaction level

36. Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit
risk is appropriate?

a) More evidence is accumulated

b) Less evidence is accumulated
c) Special care is required in assigning experienced staff
d) Review of audit documentation is performed by personnel not assigned to the engagement

37. The major concern when using nonfinancial date in analytical procedures is the

a) Source of nonfinancial data

b) Accuracy of nonfinancial data
c) Type of nonfinancial data
d) Presence of multiple sources of nonfinancial data

38. The risk of material misstatements refers to

a) A control risk and acceptable audit risk

b) Inherent risk
c) The combination of inherent risk and control risk
d) Inherent risk and audit risk

39. Which of the following procedures would a CPA ordinarily performs during audit planning?

a) Obtain client’s representation letter

b) Review and evaluate client’s internal control
c) Obtain understanding of the client’s business and industry
d) Review the client’s bank reconciliation

40. Early appointment of the independent auditor will enable

a) A more thorough examination to be performed

b) Sufficient competent evidential matter to be obtained
c) A more efficient examination to be planned
d) A proper study and evaluation of internal control to be performed
KEY ANSWER:

1. Which of the following factors most likely would influence an auditor’s determination of the
auditability of the entity’s financial statements?

The adequacy of accounting records

2. The auditor should document the understanding established with a client through a(n)

Written communication with the client

3. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include

Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information
regarding the prospective client and its management.

4. Before accepting an engagement to audit a new client a CPA is required to obtain *

The prospective client's consent to make inquiries or the predecessor auditor if any

5. The purpose of an engagement letter is to

Document the terms of engagement

6. If an auditor believes that an understanding with the client has not been established he or she should
ordinarily

Decline to accept or perform the audit

7. According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)

Engagement letter

8. Arrangements concerning which of the following are least likely to be included in an engagement
letter?

CPA investment in client securities

9. In making client acceptance decisions, the audit firm will consider:

The client’s business risk and the CPA firm’s engagement risk

10. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client

Before the commencement of the engagement

11. In making a decision to accept or continue with a client, the auditor should consider:

Its competence Its independence Its ability to serve the client The integrity of client's
management
12. Which of the following would an auditor least likely perform as a part of the auditor’s preliminary
engagement activities?

Obtain understanding of the legal and regulatory framework applicable to the entity.

13. Which of the following is not one of the reasons why the auditor should perform preliminary
engagement activities?

To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion on the
financial statements.

14. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to

Determine the degree of knowledge and expertise required by the engagement

15. Which of the following is not normally performed in the pre-planning or pre-engagement phase?

Making a preliminary estimate of materiality

16. Which of the following factors most likely would case an auditor not to accept a new audit
engagement?

Concluding that the entity’s management probably lacks integrity

17. Before performing any audit procedures, the auditor and the client should agree on the

Terms of the engagement

18. An engagement letter should ordinarily include information on the objectives of the engagement
and

CPA's responsibilities Client's responsibilities Limitation of engagement

19. The use of an engagement letter is the best method of documenting

III. The description of any letters or reports that the auditor expects to issue

IV. Notification of any changes in the original arrangements of the audit

20. Investigation of new clients and re-evaluation of existing ones is an essential part of deciding

Whether to accept the engagement

21. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following
qualitative factors could influence the assessment of materiality?

I. Misstatements that are otherwise immaterial may be material if they affect earnings trends.

II. Minor misstatements resulting from the consequence of contractual obligations.

22. A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued is the

Acceptable audit risk

23. The audit risk model is used primarily

For planning purposes in determining how much evidence to accumulate

24. Which of the following us not normally performed in the planning stage of an audit?

Request that bank balances be confirmed

25. The relationship between materiality and risk is ordinarily

Inverse

26. Unusual fluctuations occur when

Significant differences are not expected but do exist

Significant differences are expected but do not exist

27. Auditors are responsible for determining whether financial statements are materially misstated, so
upon discovering a material misstatement they must bring it to the attention of

The client’s management

28. A document that details what the auditor will do to gather sufficient, appropriate evidence is the

Audit program

29. Audit plans should

Precede actions Be flexible Be cost beneficial

30. Which of the following statements is not correct?

The most important base used as the criterion for deciding materiality is total assets.

31. Which of the following is the best definition of detection risk?

The auditor will fail to detect material misstatements that exist.

32. In which stage(s) of an audit can analytical procedures be performed?

During all three stages

33. RRR Corporation has a few large accounts receivable that total one million pesos whereas RBT
Corporation has many small accounts receivables that total one million pesos. Misstatement in any one
account is more significant for RRR Corporation because of the concept of

Materiality

34. Audit programs should be designed that

The audit evidence gathered supports the auditor’s conclusions.

35. When planning a financial statement audit, the auditor should assess inherent risk at the

Financial statement level Account balance or transaction level

36. Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit
risk is appropriate?

Less evidence is accumulated

37. The major concern when using nonfinancial date in analytical procedures is the

Accuracy of nonfinancial data

38. The risk of material misstatements refers to

The combination of inherent risk and control risk

39. Which of the following procedures would a CPA ordinarily performs during audit planning?

Obtain understanding of the client’s business and industry

40. Early appointment of the independent auditor will enable

A more efficient examination to be planned