AUDITING & ASSURANCE PRINCIPLES

AT. 103-Preliminary Engagement Activities SYNCHRONOUS LECTURE

LECTURE NOTES

Preliminary Engagement Activities

During this phase of audit, the auditor shall undertake the following activities:
• Performing procedures regarding the acceptance of the client relationship
and the specific audit engagement;
• Establishing preconditions for an audit;
• Agreeing the terms of the engagement; and
• Communicating with the predecessor auditor, if applicable.

Client Acceptance and Continuance

As discussed in “Quality Controls”, the auditor shall only undertake or

continue audit engagement where the auditor:
• is competent to perform the engagement and has the capabilities, time and
resources to do so;
• complies with relevant ethical requirements; and
• considers the integrity of the client.

Basis of Audit Engagement

In addition, the auditor shall accept or continue an audit engagement only

when the basis of audit engagement has been agreed, through:
• Establishing preconditions for an audit; and
• Confirming common understanding between the auditor and management
and, where appropriate, those charged with governance (TCWG) on the
terms of the audit engagement.

Preconditions for an Audit

The auditor shall establish the presence of the preconditions for an audit by:
• determining that the financial reporting framework (FRF) is acceptable and
is available to intended user applied to FSs; and
• obtaining the agreement of management regarding its responsibility and,
where appropriate, TCWG to the premise on which an audit is conducted.

If the preconditions are not present, the auditor shall discuss the matter with
management, if not resolved, the auditor should not accept the engagement
unless required by law or regulation.

Acceptable Financial Reporting Framework

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A financial reporting framework is the benchmark or criteria in an audit. As
discussed under the framework of assurance engagements, criteria must be
suitable to be considered acceptable.
In an audit of historical financial statements, the FRF used is generally the
GAAP. In the Philippines, the following are the acceptable FRF depending on
the type of client:
a. The Full Philippine Financial Reporting Standards (PFRSs)
b. The PFRS for Small and Medium-sized entities (SMEs)
c. Other acceptable basis of reporting
Management’s Responsibilities
The following are the management’s responsibilities, which constitute the
premise on which the audit is conducted:
• Preparation and presentation of the financial statements
• Design, implementation and monitoring of internal control to financial
statements
• To provide the auditor with:
o Access to all information relevant to audit
o Additional information the auditor may request
o Unrestricted access to persons within the entity
Limitation on Scope Prior to Audit Engagement Acceptance
The auditor shall not accept an audit engagement, if management or those
charged with governance imposes a limitation on the scope of work that will
result to disclaimer of opinion unless required by law or regulation to do so.
Agreement on Audit Engagement Terms
After the auditor has decided to accept or continue an audit engagement, the
auditor and the client should agree the terms of the engagement, preferably
through the audit committee, if any. The agreed terms need to be recorded in
an audit engagement letter or other suitable form of contract. Audit
engagement letter is a written terms of an engagement in the form of a letter
by the auditor to the client. An engagement letter documents and confirms
the auditor’s acceptance of the appointment.
It is in the interest of both the client and the auditor that the auditor sends
the engagement letter, preferably before the commencement of the audit to
help avoid misunderstandings with respect to the engagement.
Contents of the Audit Engagement Letter
Primary Content of the Audit Engagement Letter
Engagement letter primarily includes:
• The objective and scope of the audit;
• The responsibilities of the auditor;
• The responsibilities of management;
• Identification of the applicable FRF; and

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• Reference to form and content of audit reports and statement regarding
deviation from form and content, in certain circumstances.
Additional Contents of the Audit Engagement Letter
Engagement letter may additionally include:
• Elaboration of the scope of the audit
• The form of any other communication of results of the audit
• Audit and internal control inherent limitations
• Planning and performance of the audit, including the composition of the
audit team
• Written representations from management
• Draft financial statements from management
• Audit fees, including computation and billing
• Acknowledgement from management
• Involvement of other auditors and experts
• Involvement of internal auditors and other staff
• Arrangements with the predecessor auditor
• Any restriction of the auditor’s liability
• Further agreements between the auditor and the entity
• Any obligations to provide audit working papers to other parties
Audit Fees, Computation and Billing
The requirement for fees charged should be reflective of the fair value of the
work performed and to be performed, and should take into account the
following, among others:
a. The skill and knowledge required for the type of work involved;
b. The level of training and experience of the persons engaged on the work;
c. The time necessarily consumed by personnel engaged on the work; and
d. The degree of responsibility assumed and urgency that the work entails.
The mere fact that the fees charged to the client is lower than that of
normally quoted by another auditor is not in itself unethical.
The typical billing methods used by the auditor are:
Fixed or flat fee basis The client is billed a lump sum and all-inclusive
amount for the engagement.
Actual time charges (Per Billing is done on the basis of actual time spent
Diem) basis by the staff multiplied by the rates/hour agreed
upon.
Maximum fee basis The client is charged on a per diem basis, but
will not exceed up to a certain maximum
amount.
Retainer’s fee basis The client is billed a fixed fee periodically for
the services rendered during a designated
period of time, either on a monthly, semi-
annually or annual basis.

Audits of Components

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When the auditor of a parent entity is also the auditor of a component, the
following factors are considered whether to send a separate engagement
letter to the component:
• Who appoints the component auditor;
• Whether a separate auditor’s report is to be issued on the component;
• Legal requirements in relation to audit appointments;
• Degree of ownership by parent; and
• Degree of independence of the component management from the parent
entity.

Recurring Audits
New engagement letter may not be sent annually to the same client.
However, the auditor should consider the following factors when sending new
engagement letter:
• Misunderstanding of the objective and scope
• Any revised or special terms
• A recent change of senior management
• A significant change in ownership
• A significant change in entity’s nature or size
• A change in legal or regulatory requirements
• A change in the financial reporting framework
• A change in other reporting requirements

Acceptance of a Change in the Terms of the Audit Engagement

Request to Change the Terms of the Audit Engagement
The auditor shall not agree to a change in the terms of the audit engagement
where there is no reasonable justification for doing so.
A request from the entity for the auditor to change the terms of the audit
engagement may result from:
• a change in circumstances affecting the need for the service;
• a misunderstanding as to the nature of an audit as originally requested; or
• a restriction on the scope of the audit engagement, whether imposed by
management or caused by other circumstances.
The auditor considers the justification given for the request, particularly the
implications of a restriction on the scope of the audit engagement.
Request to Change to a Review or a Related Service
If, prior to completing the audit engagement, the auditor is requested to
change the audit engagement to an engagement that conveys a lower level of
assurance, the auditor shall determine whether there is reasonable
justification for doing so considering any legal or contractual implications of
the change.

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If the change is justifiable, record the new terms in a new engagement letter.
The new report should not include reference to:
• the original audit engagement; and
• any procedures performed in the audit engagement, except if changed to
an agreed-upon procedures

Declining a Change in Engagement

The auditor shall not agree to a change of engagement where there is no

reasonable justification for doing so. An example might be a restriction on the
scope of the audit engagement where the auditor is unable to obtain sufficient
appropriate audit evidence regarding receivables and the entity asks for the
audit engagement to be changed to a review engagement to avoid a qualified
opinion or a disclaimer of opinion.

If the auditor is unable to agree to a change of the terms of the audit

engagement and is not permitted by management to continue the original
audit engagement, the auditor shall:
• withdraw from the audit engagement (unless required by law or
regulation); and
• determine whether there is any obligation to report to other parties, such
as those charged with governance, owners or regulators.

Communication with Predecessor Auditor

For prospective clients that have previously been audited by another CPA
firm, the new (successor) auditor is required, under the code of ethics, to
communicate with the predecessor auditor is to help the successor auditor
evaluate whether to accept the engagement.

The burden of initiating the communication rests with the successor auditor.
However, confidentiality requires that the predecessor auditor obtain
permission from the client before the communication can be made.

The successor auditor normally inquires the following from the predecessor
auditor about the prospective client:
• Integrity of management
• Disagreements with management about audit procedures or accounting
principles
• Communication with Audit Committee about fraud, illegal acts, or internal
control
• Reason for change in auditor

If a client will not permit the communication or the predecessor will not
provide a comprehensive response, the successor should seriously consider
the acceptability of a prospective engagement, without considerable other
investigation.

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Example of an Audit Engagement Letter

To the appropriate representative of management or those charged with

governance of ABC Company

[The objective and scope of the audit]

You have requested that we audit the financial statements of ABC Company,
which comprise the balance sheet as at December 31, 2013, and the income
statement, statement of changes in equity and cash flow statement for the
year then ended, and a summary of significant accounting policies and other
explanatory information. We are pleased to confirm our acceptance and our
understanding of this audit engagement by means of this letter. Our audit will
be conducted with the objective of our expressing an opinion on the financial
statements.

[The responsibilities of the auditor]

We will conduct our audit in accordance with Philippine Standards on Auditing

(PSAs). Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free from material misstatement. An audit
involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend
on the auditor’s judgment, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. An
audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.

Because of the inherent limitations of an audit, together with the inherent

limitations of internal control, there is an unavoidable risk that some material
misstatements may not be detected, even though the audit is properly
planned and performed in accordance with PSAs.

In making our risk assessments, we consider internal control relevant to the

entity’s preparation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal control.
However, we will communicate to you in writing concerning any significant
deficiencies in internal control relevant to the audit of the financial statements
that we have identified during the audit.

Our audit will be conducted on the basis that [management and, where
appropriate, those charged with governance] acknowledge and understand
that they have responsibility:

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(a) For the preparation and fair presentation of the financial statements in
accordance with Philippine Financial Reporting Standards;
(b) For such internal control as [management] determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error; and
(c) To provide us with:
(i) Access to all information of which [management] is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;
(ii) Additional information that we may request from [management] for
the purpose of the audit; and
(iii) Unrestricted access to persons within the entity from whom we
determine it necessary to obtain audit evidence.

As part of our audit process, we will request from [management and, where
appropriate, those charged with governance], written confirmation concerning
representations made to us in connection with the audit.

We look forward to full cooperation from your staff during our audit.

[Other relevant information]

[Insert other information, such as fee arrangements, billings and other
specific terms, as appropriate.]

[Reporting]
[Insert appropriate reference to the expected form and content of the
auditor’s report.]

The form and content of our report may need to be amended in the light of
our audit findings.

Please sign and return the attached copy of this letter to indicate your
acknowledgement of, and agreement with, the arrangements for our audit of
the financial statements including our respective responsibilities.

XYZ & Co.

Acknowledged and agreed on behalf of ABC Company by

(signed)
......................
Name and Title
Date
- done -

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 MULTIPLE CHOICE QUESTIONS
1. Which of the following would an auditor least likely perform as part of the
auditor’s preliminary engagement activities or pre-planning or pre-
engagement phase?
a. Perform procedures regarding the continuance of the client relationship
and specific engagement.
b. Evaluate compliance with ethical requirements, including independence.
c. Establish an understanding of the terms of the engagement.
d. Obtain understanding of the legal and regulatory framework applicable
to the entity.
2. In making a decision to accept or continue with a client, the auditor should
consider:
a. b. c. d.
Its competence Yes Yes Yes Yes
Its independence Yes No Yes No
Its ability to serve the client properly Yes Yes Yes No
The integrity of client’s management Yes Yes No Yes
That understanding of the terms of Yes No Yes No
engagement has been obtained with the
management
3. The use by management of an acceptable financial reporting framework in
the preparation of the financial statements and the agreement of
management and, where appropriate, those charged with governance to
the premise on which an audit is conducted.
a. Terms of audit engagement
b. Preconditions for the audit
c. Scope of the audit
d. FS Audit
4. If management or those charged with governance impose a limitation on
the scope of the auditor’s work in the terms of a proposed audit
engagement such that the auditor believes the limitation will result in the
auditor disclaiming an opinion on the financial statements, the auditor shall
not accept such a limited engagement as an audit engagement, unless
required by law or regulation to do so.
The auditor shall agree the terms of the audit engagement with
management or those charged with governance, as appropriate.
a. True, True
b. True, False
c. False, False
d. False, True
5. Preliminary arrangements agreed to by the auditor and the audit client
should be reduced to writing by the auditor. The best place to set forth
these arrangements is in

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 a. A memorandum to be placed in the permanent section of the auditing
working papers.
b. An audit engagement letter.
c. A client representation letter.
d. A confirmation letter attached to the constructive services letter.

6. Engagement letters are widely used in practice for professional

engagements for all types. The primary purpose of the engagement letters
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

7. When should an auditor obtain an engagement letter?

a. Whenever a prospective client offers to hire the audit firm
b. During the interim audit period, after the auditor has evaluated the
client’s internal control and estimated the amount of time required for
the audit
c. When a new client is accepted by the auditor
d. At the conclusion of the field work, just prior to signing the audit report

8. 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.

9. Which of the following normally signs the engagement letter for an audit of
a public company?
a. Corporate treasurer.
b. Chief financial officer.
c. Chairman of the board of directors.
d. Audit committee.

10. The form and content of audit engagement letters may vary for each
client, but they would generally include reference to the following, except
a. The objective of the audit of financial statements.
b. Auditor’s responsibility for the financial statements.
c. The form of any reports or other communication of results of the
engagement.
d. Unrestricted access to whatever records, documentation and other
information requested in connection with the audit.

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11. Which of the following is not included in an engagement letter?
a. Restriction on cash balances, lines of credit by similar arrangements
b. Accessibility to all financial records
c. Client imposed limitation in the scope
d. Limitation in the scope of examination as imposed by circumstances

12. Before performing any audit procedures. The auditor and the client
should agree on the
Type of opinion to Terms of the
be expressed engagement
a. Yes Yes
b. No Yes
c. No Yes
d. Yes Yes

13. In determining audit fees, an auditor may take into account each of the
following except
a. Volume and intricacy of work involved.
b. Degree of responsibility assumed.
c. Number and cost of manhours needed.
d. Size and amount of capital of client.

14. Retainer’s fee basis is when

a. Billing is done on the basis of actual time spent at the agreed rates/hour.
b. The client is charged on a per diem basis with a cap or ceiling amount.
c. The client is billed a fixed fee periodically for the services rendered
during a designated period of time.
d. The client is billed at a single amount for the entire engagement.

15. A type of billing audit client which combines lump sum and per diem
methods is known as
a. Retainer’s fee basis
b. Maximum fee basis
c. Either (a) and (b) above
d. None of the above

16. Which of the following factors do not influence the decision of the auditor
to send a separate engagement letter to the parent entity and its
component (subsidiary, branch or division) assuming the same auditor
handles both entities?
a. legal requirements
b. degree of ownership by parent
c. ethical requirements
d. whether a separate audit report is to be issued on the component

17. Assuming a recurring audit, in which of the following situations would the
auditor be unlikely to send a new engagement letter to the client?
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 a. A recent change in partner and/or staff involved in the audit engagement.
b. A change in the terms of engagement.
c. A recent change of client management.
d. A significant change in the nature or size of the client's business.
18. On recurring audits, the auditor may decide not to send a new
engagement letter each year. However, he might decide to send a new
letter when:
a. Any indication that the entity misunderstands the objective and scope of
the audit.
B A change in the financial reporting framework adopted in the preparation
of the financial statements or other reporting requirements
c. A significant change in ownership
d. All of the above
19. When a change in the type of engagement from higher to lower level of
assurance is reasonably justified, the report based on the revised
engagement
a. Should not contain a separate paragraph that refers to the original
engagement.
b. Should not refer to any procedures that may have been performed in the
original engagement.
c. Omits reference to the original engagement.
d. All of the above
20. Which of the following would ordinarily be considered a reasonable basis
for requesting a change in the engagement
a. a change in circumstances.
b. a misunderstanding as to the nature of the audit.
c. a restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.
d. Both a and b
21. The auditor should not agree for a change of engagement when there is
no reasonable justification for doing so.
If the auditor is unable to agree to a change of the engagement and is not
permitted to continue the original engagement, this will have an effect on
the auditor’s report.
a. True, False c. True, True
b. False, False d. False, True
22. Which of the following actions may be appropriate if the auditor is unable
to agree to a change of the engagement and is not permitted to continue
the original engagement?
I. Auditor should withdraw from the engagement
II. Consider whether there is any obligation to report to the board of
directors or shareholders the circumstances necessitating withdrawal
a. I c. II
b. I, II d. Neither I nor II

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23. In audit situation, communication between successor and predecessor
auditors should be
a. authorized in an engagement letter
b. acknowledged in a representation letter
c. either written or oral
d. written and included in the working papers
24. Pedro, CPA, is succeeding Maria, CPA, on the audit of Peta
Manufacturing, Inc. Pedro plans to consult Maria and to review Maria’s prior
year working papers. Pedro may do so if
a. Maria consents
b. Peta Manufacturing, Inc. consents
c. Maria and Peta Manufacturing, Inc. consent
d. Maria and Pedro consent
25. Prior to the 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 with the understanding that all information disclosed will be
kept confidential.
b. Accept the engagement without contacting the predecessor auditor since
the CPA will include procedures to verify the reason given by the client
for termination.
c. Not communicate with the predecessor auditor because this would in
effect be asking the auditor to provide the confidential relationship
between the auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and
request permission for the contact.
26. Which of the following will an auditor most likely discuss with the former
auditors of a potential client prior to acceptance?
a. Integrity of management.
b. Reasons for changing audit firms.
c. Disagreements with management regarding accounting principles.
d. All of the above must be discussed.
27. Janie Jones, CPA is proposing on a prospective audit engagement for
White Mountain Enterprises. After obtaining written permission of White
Mountain, Janie is required to perform what procedure prior to accepting it
as a new client?
a. Provide full disclosure of fees that will be billed to White Mountain.
b. Contact the former auditor to ensure all disagreements have been
resolved.
c. Contact the former auditor about certain matters of interest in Janie’s
decision to accept White Mountain as a client.
d. Contact the former auditor to determine if all fees have been paid, the
change in auditors have been approved and integrity issues have been
overcome.

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28. An incoming auditor should request the new client to authorize the
predecessor auditor to allow a review of the predecessor ‘s
Engagement letter Working paper
a. Yes Yes
b. Yes No
c. No Yes
d. No No
29. Which of the following factors most likely would cause an auditor not to
accept a new audit engagement?
a. An inadequate understanding of the entity’s internal control structure.
b. The close proximity to the end of the entity’s fiscal year.
c. Concluding that the entity’s management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before
assessing control risk.
30. The auditor will utilize many resources to assess management integrity
in the client acceptance process. Which of the following will an auditor
most likely refrain from using in this search?
a. Predecessor auditor.
b. Other professionals in the business community.
c. Public databases.
d. All of the above will typically be used by an auditor in the search.
- now do the DIY drill -
DO-IT-YOURSELF (DIY) DRILL
1. Before accepting an engagement to audit a new client, a CPA is required to
obtain
a. A preliminary understanding of the prospective client’s industry and
business.
b. The prospective client’s signature to the engagement letter.
c. An understanding of the prospective client’s control environment.
d. A representation letter from the prospective client.
2. On recurring audits, the auditor may decide not to send a new engagement
letter each year. However, he might decide to send a new letter when:
a. There is a change in the auditors who will assist in the conduct of the
audit.
b. There is a legal requirement
c. There is a change in the client's accounting policy for inventories.
d. There is a change in the estimated life of the client's property and
equipment.
3. Which of the following is not included in an engagement letter?
a. Limitation in the scope of examination as imposed by client
b. Limitation in the scope of examination as imposed by circumstances
c. Restrictions on auditor’s liability, when such possibility exists
d. Satisfactory title to assets, liens on assets and assets pledged

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4. The following matters are generally included in an auditor’s engagement
letter, except
a. Management’s responsibility for the financial statements
b. The scope of the audit
c. The fact that because of the test nature and other inherent limitations of
the audit, together with the inherent limitations of internal control, there
is an unavoidable risk that even some material misstatements may
remain undiscovered.
d. The factors to be considered in setting preliminary judgments about
materiality
5. Which of the following matters is generally included in auditor's
engagement letter?
a. Management's responsibility for the entity's compliance with laws and
regulations.
b. The factors to be considered in setting preliminary judgments about
materiality.
c. Management's liability for illegal acts committed by its employees.
d. The auditor's responsibility to search for significant internal control
deficiencies.
6. 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. d. Arrangements concerning the involvement of internal auditors and
other client’s staff.
7. The following are the reasons why the auditor will send a new engagement
letter each period, except
a. Any revised or special terms of the engagement
b. A recent change in the audit team
c. A significant change in nature or size of the client’s business
d. Legal requirements
8. 1st statement – Where the terms of the engagement are changed, the
auditor and the client should agree on the new terms.
2nd statement – The auditor should not agree to a change of engagement
when there is no reasonable justification for doing so.
3rd statement – If management or those charged with governance impose
a limitation on the scope of the auditor’s work in the terms of a proposed
audit engagement such that the auditor believes the limitation will result in
the auditor disclaiming an opinion on the financial statements, the auditor
shall not accept such a limited engagement as an audit engagement,
unless required by law or regulation to do so.

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 a. 1st and 2nd statements are correct; 3rd statement is incorrect.
b. 1st and 3rd statements are correct; 2nd statement is incorrect.
c. 2nd and 3rd statements are correct; 1st statement is incorrect.
d. All statements are correct.
9. Which of the following is(are) proper when a change of auditors has taken
place or is in process?
a. The successor auditor should advise the client of his intention to contact
the predecessor auditor and request permission for the contact
b. The integrity of management should not be subject of communication
between the predecessor and successor auditors
c. Communication between the predecessor and successor auditors should
take place only after the successor auditor has accepted the engagement
d. All of the above
10. 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 GAAP between periods
d. evaluation of all matters of continuing accounting significance
11. Before accepting an audit engagement, a successor auditor should make
specific inquiries of the predecessor auditor regarding
a. disagreements the predecessor had with the client concerning auditing
procedures and accounting principles
b. the predecessor’s evaluation of matters of continuing accounting
significance
c. the degree of cooperation the predecessor received concerning the
inquiry of client’s lawyer
d. the predecessor auditor’s assessment of inherent risk and judgments
about materiality
12. The successor auditor requested permission to communicate with the
predecessor auditor and review certain portions of the predecessor
auditor’s working papers. The prospective client’s refusal to permit this will
bear directly on the successor auditor’s decision concerning the
a. adequacy of the preplanned audit program
b. ability to establish consistency in application of accounting principles
between years
c. apparent scope limitation
d. integrity of management
13. Kool Connections, Inc. requests that Wreath and Greenworth Auditors
make a proposal to provide audit services for the company. Which of the
following is a correct assumption surrounding the result of the proposal?
a. Greenworth is required to accept Kool Connections if selected as its
auditors.

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 b. Greenworth should interview the prior audit firm prior to releasing the
proposal to Kool Connections.
c. Greenworth may decide not to accept Kool Connections based upon the
perceived risk of being associated with Kool.
d. Greenworth will contact the BOA or the PICPA and ask for a review of the
proposal prior to acceptance.

14. Which of the following factors most likely would influence an auditor’s
determination of the auditability of the entity’s financial statements
a. The complexity of the accounting system.
b. The existence of related party transactions.
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures.

15. If the auditor believes that an understanding with the client has not been
established, he or she should ordinarily
a. Perform the audit with increased professional skepticism
b. Assess the control risk at the maximum level and perform a primarily
substantive audit
c. Decline to accept or perform the audit
d. Modify the scope of the audit to reflect an increased risk of material
misstatement due to fraud

☺ - end of AT.103 - ☺

SYNCHRONOUS CLASS DRILL

1. Before performing any audit procedures. The auditor and the client should
agree on the
Type of opinion to be expressed Terms of the engagement
a. Yes Yes
b. No Yes
c. No Yes
d. Yes Yes

2. The following are the reasons why the auditor will send a new engagement
letter each period, except
a. Any revised or special terms of the engagement
b. A recent change in the audit team
c. A significant change in nature or size of the client’s business
d. Legal requirements

3. Janie Jones, CPA is proposing on a prospective audit engagement for White

Mountain Enterprises. After obtaining written permission of White
Mountain, Janie is required to perform what procedure prior to accepting it
as a new client?

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 a. Provide full disclosure of fees that will be billed to White Mountain.
b. Contact the former auditor to ensure all disagreements have been
resolved.
c. Contact the former auditor about certain matters of interest in Janie’s
decision to accept White Mountain as a client.
d. Contact the former auditor to determine if all fees have been paid, the
change in auditors have been approved and integrity issues have been
overcome.

4. Pedro, CPA, is succeeding Maria, CPA, on the audit of Peta Manufacturing,

Inc. Pedro plans to consult Maria and to review Maria’s prior year working
papers. Pedro may do so if
a. Maria consents
b. Peta Manufacturing, Inc. consents
c. Maria and Peta Manufacturing, Inc. consent
d. Maria and Pedro consent

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

a. Limitation in the scope of examination as imposed by client
b. Limitation in the scope of examination as imposed by circumstances
c. Restrictions on auditor’s liability, when such possibility exists
d. Satisfactory title to assets, liens on assets and assets pledged

6. Before accepting an engagement to audit a new client, a CPA is required to

obtain
a. A preliminary understanding of the prospective client’s industry and
business.
b. The prospective client’s signature to the engagement letter.
c. An understanding of the prospective client’s control environment.
d. A representation letter from the prospective client.

7. 1st statement – Where the terms of the engagement are changed, the
auditor and the client should agree on the new terms.

2nd statement – The auditor should not agree to a change of engagement

when there is no reasonable justification for doing so.

3rd statement – If management or those charged with governance impose

a limitation on the scope of the auditor’s work in the terms of a proposed
audit engagement such that the auditor believes the limitation will result in
the auditor disclaiming an opinion on the financial statements, the auditor
shall not accept such a limited engagement as an audit engagement,
unless required by law or regulation to do so.
a. 1st and 2nd statements are correct; 3rd statement is incorrect.
b. 1st and 3rd statements are correct; 2nd statement is incorrect.
c. 2nd and 3rd statements are correct; 1st statement is incorrect.
d. All statements are correct.

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8. 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 GAAP between periods
d. evaluation of all matters of continuing accounting significance

9. Which of the following factors most likely would influence an auditor’s

determination of the auditability of the entity’s financial statements
a. The complexity of the accounting system.
b. The existence of related party transactions.
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures.

10. If the auditor believes that an understanding with the client has not been
established, he or she should ordinarily
a. Perform the audit with increased professional skepticism
b. Assess the control risk at the maximum level and perform a primarily
substantive audit
c. Decline to accept or perform the audit
d. Modify the scope of the audit to reflect an increased risk of material
misstatement due to fraud

11. Before an operational audit for effectiveness can be performed, there

must be:
a. a financial audit by an independent auditor.
b. a financial audit by an internal auditor.
c. a review performed by either an auditor.
d. specific criteria developed to define effectiveness.

12. The independent auditor lends credibility to client financial statements by

a. Stating in the auditor’s management letter that the examination was
made in accordance with PSAs
b. Maintaining a clear-cut distinction between the management’s and the
auditor’s representations
c. Attaching an auditor’s opinion to the client’s FSs
d. Testifying under oath about client financial information

13. Third-party users of the audit report expect the auditor to do all of the
following except:
a. To evaluate measurements and disclosures made by management
b. To provide a biased evaluation of the FSs
c. To determine whether financial statements are presented in accordance
with GAAP
d. To gather sufficient evidence to support their opinion

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14. Management of a company is responsible for
a. Hiring the auditor
b. Preparing the financial statements
c. The audit workpapers
d. Independence and obtaining evidence

15. The auditor’s responsibility in an audit engagement is limited to:

a. Expression of an opinion on the FSs
b. Expression of an opinion on the FSs and adequacy of the notes to FSs
c. Opinion issued and fairness of presentation of FSs
d. Expression of opinion and inclusion of supplementary information, if
necessary

16. Which of the following statements about theoretical framework of

auditing is(are) incorrect?
I. The data to be audited can be verified
II. Long-term conflicts may exist between managers who prepare the data
and auditors who examine the data
III. Auditors act on behalf of management
IV. An audit benefits the public
a. II and III only c. II only
b. II, III and IV only d. III only

17. The overall objectives of the auditor in conducting an audit of financial

statements are
I. To obtain reasonable assurance about whether the FSs as a whole are
free from material misstatements, whether caused by fraud or error
II. To report on the financial statements
III. To obtain conclusive rather than persuasive evidence
IV. To detect all misstatements, whether due to fraud or error
a. I and II only c. I, II and III only
b. II and IV only d. I, II, III and IV

18. Which of the following statements does not describe a condition that
creates a demand for auditing?
a. Conflict between an information preparer and a user can result in biased
information.
b. Information can have substantial economic consequences for a decision
maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.

19. According to PSAs, because there are inherent limitations in an audit

that affect the auditor’s ability to detect material misstatements, the
auditor is
a. A guarantor but not an insurer of the FSs
b. An insurer but not a guarantor of the FSs

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 c. Both a guarantor and an insurer of the FSs
d. Neither a guarantor nor an insurer of the FSs

20. The main objective of operations auditing is

a. To verify fulfillment of plans and sound business requirements.
b. To evaluate the integrity of accounting information.
c. To measure and evaluate the effectiveness of controls.
d. To produce results as desired or directed.

21. What is the criteria used in a compliance audit?

a. Effectiveness and efficiency c. Company policies
b. Rules and regulations d. Both B and C

22. A financial statement audit is designed to

a. Provide assurance on internal control and to identify reportable
conditions.
b. Detect error or fraud in the FSs, regardless of whether or not the error
or fraud is material.
c. Obtain reasonable assurance about whether the FSs are free of
material misstatement, whether caused by error or fraud.
d. Obtain absolute assurance on the FSs and express an opinion on the
FSs.
23. After conducting an audit and release of the auditor’s report, the primary
responsibility on the fairness of the financial statements is shifted to the
auditor.
The essence of the audit function applies only to financial statements that
are substantially accurate.
a. True, True c. True, False
b. False, False d. False, True
24. Which of the following best describes why an independent auditor
reports on the financial statements?
a. Independent auditors are likely to detect fraud
b. Conflicting interests may exist between management and the users of
the statements
c. Misstated account balances are generally corrected by an independent
audit
d. Ineffective internal controls may exist

25. Which of the following elements ultimately determines the specific

auditing procedures necessary under circumstances to afford reasonable
basis for an opinion?
a. Auditor judgment c. Relative risk
b. Materiality d. Reasonable assurance
-end of quizzer-

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