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PSA 210 & PSA 300
210: Agreeing the Terms of Audit Engagement
300: Planning an Audit of Financial Statements
1. 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, TCWG to the premise on which
an audit is conducted.
A. Engagement contract
B. Preconditions for an audit
C. Audit engagement acceptance
D. Audit Planning
2. Which of the following statements
concerning audit planning is incorrect?
A. Planning is a discrete phase of an audit
B. Planning is a continual & iterative
process.
C. In a recurring audit, planning often
begins shortly after the completion of
the previous audit & continues until the
completion of the current audit
engagement.
D. In planning an audit, the auditor
considers timing.
3. 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 & the
nature of the communications
required.
III. Considering the important factors
that will determine the focus of the
engagement team’s efforts.
A. I & II
B. II & III
C. I & III
D. I, II, & III
4. 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. Both I & II
C. II only
D. Neither I nor II
5. Which of the following is least likely
procedure to be performed in planning a
F/S audit?
A. Reading current year’s interim F/S.
B. Coordinating the assistance of entity
personnel in data preparation.
C. Selecting a sample of sales invoices for
comparison with shipping documents.
D. Discussing matters that may affect the
audit with firm personnel responsible
for non-audit services.
6. Early appointment of the independent
auditor will enable:
A. A more thorough examination to be
performed
B. A more efficient examination to be
planned.
C. A proper study & evaluation of internal
control to be performed
D. Sufficient competent evidential matter
to be obtained
7. The following factors may make it
appropriate to revise the terms of the audit
engagement or to remind the entity of
existing terms, except:
A. Recent change of senior management.

B. A significant change in ownership.
C. A significant change in nature or size of
the entity’s business.
D. Geographic location of the entity or
department
8. Client strategy templates provide a means
for an auditor:
A. Acquire, evaluate and document
evidence
B. Focus on transactions likely to affect
audit risk
C. Compile the strategies and
characteristics of an entity
D. Distinguish between engagement risk
and audit risk
9. Which of the following tasks is most likely
to be performed by an audit partner?
A. Analyzing a client’s key financial ratios
B. Assessing the quality of the client’s
internal controls
C. Performing substantive tests of key
statement of financial position accounts
D. Reviewing the working papers
10. The principal reason for developing a
written audit program is to help ensure 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
11. Which of the following situations would
most likely require special audit planning by
the auditor?
A. Inventory comprises precious stones.
B. Some items of factory & office
equipment do not bear identification
numbers.
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C. Depreciation methods used on the
client’s tax return differ from those
used on the books
D. Assets costing less than P10,000 are
expensed even though the expected life
exceeds 1 year.
12. Research has indicated several factors
which affect business risk & therefore
acceptable risk. Which of the following does
not affect business risk?
A. Degree to which external users rely on
the F/S
B. The likelihood that client will have
financial difficulties after the audit
report is issued.
C. Weaknesses in client’s internal control
structure
D. The integrity of management
13. Senior auditors typically perform all of the
following tasks, except:
A. Supervise staff assistants
B. Draft the audit report
C. Review the working papers prepared by
staff assistants
D. Sign the audit report
14. An audit committee’s responsibilities
normally would not include:
A. Discussing meaning & significance of
audited F/S
B. Discussing problems & experience with
independent auditors in completing the
audit of annual financial statements.
C. Discussing the audit programs of the
independent auditors
D. Nominating the independent auditors
15. Before accepting an engagement with a
new client, the CPA firm shall assess the
following except:
A. If the client has the financial capacity
to pay

B. If the client has integrity
C. If the auditor is competent to perform
the engagement, has the capabilities
including time & resources.
D. The auditor can comply with the
relevant ethical requirement.
16. Which of the following would not be a
consideration of a CPA firm in deciding
whether to accept a new client?
A. Client’s standing in the business
community
B. Client’s probability of achieving an
unmodified opinion.
C. Client’s financial ability
D. Client’s relation with previous CPA firm
17. Where client is changing auditors, PSA
requires communication between
predecessor and successor auditors. The
burden of initiating the communication
rests with:
A. Predecessor
B. Successor
C. Client
D. SEC
18. 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. Memorandum to be placed in the
permanent section of the auditing
working papers
B. Client representation letter
C. Engagement letter
D. Comfort letter
19. In making client acceptance decisions the
audit firm will consider:
A. Inherent and control risk of the client
B. Audit risk to the CPA Firm
C. CPA firm’s potential ongoing revenue
from the audit client.
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D. Client’s business risk & the CPA firm’s
engagement risk.
20. Limbaco requested permission to
communicate with the predecessor auditor
& review certain portions of the
predecessor’s work papers. The prospective
client’s refusal to permit this will bear
directly on Limbaco’s decision concerning
the:
A. Integrity of management
B. Adequacy of the preplanned audit
program
C. Apparent scope limitation
D. Ability to establish consistency in
application of accounting principles
between years.
21. Greg, an external auditor is considering to
accept a Grant New Corp., a new client.
What do you think are the necessary
information he has to obtain?
A. Preliminary understanding the Grant
New Corporation’s industry & business.
B. Grant New Corp signature &
engagement letter.
C. Understanding of Grant New
Corporation’s control environment.
D. A representation letter
22. Which of the following is not normally
performed in the pre planning audit phase?
A. Inquiring from predecessor auditor
B. Preparing an engagement letter
C. Making a preliminary estimate of
materiality
D. Deciding whether to accept or reject an
audit engagement
23. Sunshine is confused of the correct order of
steps in the audit process. Would you help
her?
I. Perform tests of control

II. Develop an overall strategy for the
expected conduct and scope of
audit
III. Obtain client’s written
representation
IV. Prepare engagement letter
V. Perform substantive tests
A. IV, I, II, V, III
B. IV, II, I, V, III
C. V, II, III, I, IV
D. V, IV, II, I, III
24. In which of the following situations would
the auditor be unlikely to send a new
engagement letter to a continuing client?
A. Change in terms of engagement
B. Significant change in the nature or size
of the client’s business
C. Recent change in the partner &/or staff
in the audit engagement
D. Recent change of client management
25. The primary purpose of engagement letter
is to:
A. Provide a written record of the
agreement with the client as to services
to be provided.
B. Provide a starting point for the auditor’s
preparation of the preliminary audit
program
C. Satisfy the requirements of the CPA’s
liability insurance policy.
D. Remind management that the primary
responsibility for the F/S rests with
management
26. Prime Corporation Inc. engages the services
of Mr. Lee, CPA, to make a project study on
the expanded food vending operations of
the corporation with the corresponding
staffing & compensation package for its
executive staff. Mr. Lee, however, has
primarily auditing expertise & only in
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general merchandising operations. Mr. Lee
may properly
A. Accept the engagement & carry it out
consistent with the standards in
auditing.
B. Accept the engagement but exercise
due professional care.
C. Accept the engagement & acquire the
necessary competence.
D. Decline the engagement for lack of
experience or competence in an
entirely new line of specialization.
27. In making arrangements for an audit, there
should be a clear understanding between
the auditor and the client as to the
following except:
A. The type of audit to be performed
B. Terms of settlement for audit services
C. Official to whom audit report shall be
addressed.
D. Assurance of auditor’s independence.
28. Mr. Tolentino, CPA, requested permission
to communicate with the predecessor
auditors of Agri Best Corporation, a
prospective client. Agri Best Corporation’s
refusal to permit will bear directly on Mr.
Tolentino’s decision concerning the:
A. Adequacy of the preplanned audit
program
B. Integrity of management
C. Apparent scope limitation
D. Ability to establish consistency in the
application of accounting principles
between years.
29. The predecessor auditor is required to
respond to the request of the successor
auditor for information, but the response
can be limited to stating that no
information will be provided when
A. Predecessor auditor has poor relations
with successor auditor.

B. Client is dissatisfied with predecessor’s
work
C. There are legal problems between
client & predecessor
D. Predecessor believes that client lacks
integrity.
30. Engagement letter will do one, some or all
of the following:
1. State whether the CPA will perform audit,
review or compilation services
2. State whether the CPA will perform tax or
MAS or other services
3. State any restriction to be imposed on
the CPA’s work
4. Identify deadlines for completing the
work
5. State the amount & type of work to be
done
6. State the CPA’s fees for engagement
7. Inform the client that the CPA does not
have responsibility for detecting fraud.
A. 1, 2, 4, 6
B. 1, 2, 3, 4, 6
C. 1, 3, 5, 7
D. All of the above
31. The following are usually included in an
auditor’s engagement letter, except:
A. List of audit procedures to be used in
inventory observation.
B. The financial statements are the
responsibility of the company’s
management.
C. A reference to PFRS.
D. A reference to PSA.
32. An audit is conducted on the premise that
management &, where appropriate, TCWG,
have acknowledged & understood 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?
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A. Preparation of F/S in accordance with
relevant pronouncements issued by the
AASC.
B. Establishment & maintenance of an
adequate internal control.
C. Provide the auditor with access to all
information that is relevant to the
preparation of F/S such as records,
documentation, etc.
D. Provide auditor with unrestricted access
to persons & records.
33. Which of the following circumstances would
permit an independent auditor to accept an
engagement after the end of the reporting
period?
A. Expectation of the operating
effectiveness of controls.
B. Remedy the limitations resulting from
accepting the engagement after the
end of the reporting period, such as
those relating to the existence of
physical inventory.
C. Receipt of an assertion from the
predecessor auditor that the entity will
be able to continue as a going concern.
D. Issuance of a disclaimer of opinion as a
result of inability to conduct certain
tests required by Philippine Standards
of Auditing due to the timing of the
acceptance of the engagement.
34. Which of the following conditions most
likely would pose the greatest risk in
accepting a new audit engagement?
A. The client’s financial reporting system
has been in place for 10 years.
B. The firm will have to hire an in one
audit area.
C. There will be a client-imposed scope
limitation.
D. Staff need to be rescheduled to cover
this new client.

35. Mar Co, CPA, was offered the engagement
to audit the F/S of Grace Key Corp for the
year ended, Dec. 31, 2017. Mar Co had
served as a director of Grace Key Corp until
Dec. 31, 2015, and her wife currently owns
1,000 of the 200,000 outstanding shares of
Grace Key Corp. Mar Co disassociated from
Grace Key Corp prior to being offered the
engagement. Moreover, the engagement
does not cover any period that includes Mar
Co’s employment with Grace Key Corp.
Under the Code of Ethics, Mar Co should:
A. Accept the engagement
B. Decline the engagement because he
had served as director.
C. Accept the engagement because her
wife’s stock ownership is an indirect
financial interest.
D. Decline the engagement because of
her wife’s stock ownership.
36. The engagement letter documents and
confirms the
A. Auditor’s acceptance of the appointment – YES
Objective and scope of an audit – YES
Extent of the auditor’s responsibilities to
the client – NO
Form of any reports – YES
B. Auditor’s acceptance of the appointment – YES
Objective and scope of an audit – NO
Extent of the auditor’s responsibilities to
the client – YES
Form of any reports – NO
C. Auditor’s acceptance of the appointment – YES
Objective and scope of an audit – YES
Extent of the auditor’s responsibilities to
the client – NO
Form of any reports – NO
D. Auditor’s acceptance of the appointment – YES
Objective and scope of an audit – YES
Extent of the auditor’s responsibilities to
the client – YES
Form of any reports – YES
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37. An auditor’s document includes the
following:
“We will conduct our audit in accordance
with PSA. Those standards require that we
comply with ethical requirements and plan
and perform the audit to obtain reasonable
assurance whether the F/S are free of
material misstatement.”
The above passage is most likely from a/an
A. Emphasis of matter paragraph
B. Engagement letter
C. Letter of representation
D. Audit findings
38. PSA 300 requires in part, that audit work be
properly planned. Proper planning as
intended by the Standard would occur
when the auditor
A. Eliminate the possibility of counting
inventory items more than once by
arranging to make extensive test
controls
B. Uses negative accounts receivable
confirmations instead of second
requests and review of subsequent cash
collections
C. Physically observes the movement of
securities already counted to guard
against the substitution of such
securities for others that are not
actually on hand.
D. Compares all cash as a particular date
to avoid performing time consuming
cash cutoff procedures.
39. Which of the following statements would
least likely appear in an auditor’s
engagement letter?
A. After performing our preliminary
analytical procedures, we will discuss
with you the other procedures we
consider necessary to complete the
engagement.
B. Fees for services and out of pocket
expenses

C. Management is responsible for making
all financial records and related
information available to us.
D. Our engagement is subject to the risk
that material errors or fraud, if they
exist, will not be detected.
40. An auditor who, before the completion of
engagement is requested to change the
engagement to one which provides a lower
level of assurance, should
A. Withdraw and consider whether there
is any obligation to report to the other
parties the circumstances necessitating
the withdrawal
B. Not agree to a change of engagement
where there is no reasonable
justification for doing so
C. Issue a report that includes reference to
the original engagement & any
procedures that may have been
performed in the original engagement
D. Consider the change reasonable if it
relates to information that is incorrect,
incomplete or otherwise unsatisfactory.
41. An auditor should accept an assurance
engagement only when the engagement
exhibits all of the following characteristics
except
A. Subject matter is appropriate
B. Criteria to be used are suitable and are
available to the intended users
C. Sufficient appropriate evidence to
support the auditor’s conclusion is
accessible to the auditor
D. Auditor is assured of being paid the
engagement fee
42. When restrictions that significantly limit the
scope of the audit are imposed by the client
at the engagement phase, the auditor
generally should
A. Disclaimer
B. Unmodified opinion
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C. Decline the engagement
D. Issue an adverse opinion
43. An auditor has withdrawn from an audit
engagement of a publicly listed company
after finding irregularities which may
materially affect the F/S. The auditor should
set forth the reasons & finding in
correspondence to the
A. SEC
B. Client’s legal counsel
C. Makati stock exchange
D. Board of Directors
44. An auditor is about to commence a
recurring annual audit engagement, the
continuing auditor’s independence would
ordinarily be considered to be impaired if
the prior year’s audit fee
A. Was only partially paid and the balance
is being disputed
B. Has not been paid and will not be paid
for at least 12 months
C. Has not been paid and the client has
filed a voluntary petition for bankruptcy
D. In all given choices
45. The risk that the client’s financial
statements may be materially false and
misleading is referred to as the
A. Business risk
B. Information risk
C. Client risk
D. Risk assessment
1. PSA 220 deals with the auditor’s
responsibilities in agreeing the terms of the
audit engagement with management and,
where appropriate, those charged with
governance. FALSE

2. PSA 510, if the prior period’s F/S were
audited by a predecessor auditor, the
auditor may be able to obtain sufficient
appropriate audit evidence regarding the
opening balances by reviewing the
predecessor auditor’s working papers. TRUE
3. In conducting the initial audit engagement,
the auditor’s objective with respect to the
opening balances is to obtain sufficient
evidence whether misstatements that
materially affect the current period’s F/S
are present. TRUE
4. Audit engagement letter generally include
reference such as identification of the audit
team members. FALSE
5. For initial engagements, the auditor should
obtain sufficient appropriate audit evidence
that the opening balances do not contain
misstatement that materially affect the
current period’s financial statements. TRUE
6. Before accepting an engagement with new
client, the CPA firm shall assess if the client
has the financial capacity to pay the
estimated audit fee. FALSE
7. Making inquiries of the predecessor auditor
after obtaining the consent of the
prospective client, is generally done before
accepting an engagement to audit a new
client. TRUE
8. Client’s financial ability is a consideration
for a CPA firm in deciding whether to accept
a new client. TRUE
9. After preliminary audit arrangements have
been made, an engagement confirmation
letter should be sent to the client. Usually
the letter would not include a statement
that MAS would be made available upon
request. TRUE
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10. An auditor who accepts an audit
engagement and does not possess the
industry expertise of the business entity
should engage financial experts familiar
with the nature of the business entity.
FALSE
11. Opening balances are based upon the
closing balances of the prior period and
reflect the effects of transactions and
events of prior periods and accounting
policies applied in the current period. FALSE
12. The auditor shall obtain sufficient
appropriate audit evidence about whether
the opening balances contain
misstatements that materially affect the
current period’s financial statements. TRUE
13. If the prior period’s financial statements
were audited by a predecessor auditor and
there was a modification to the opinion, the
auditor shall evaluate the effect of the
matter giving rise to the modification in
assessing the ROMM in the prior period’s
financial statements in accordance with PSA
450. FALSE
14. On recurring audits, the auditor may decide
not to send a new engagement letter each
period. An example of this situation is when
there is a recent change of middle
management and rank and file organization
structure. TRUE
15. The objective of the auditor is to accept or
continue an audit engagement only when
the basis upon which it is to be performed
has been agreed, through confirming that
there is a common understanding between
the auditor and management and, where
appropriate, TCWG of the terms of the
audit engagement. TRUE
16. Request to Change the Terms of the Audit
Engagement should consider the
justification given for the request,

particularly the implications of a restriction
on the scope of the audit engagement.
TRUE
17. The auditor may decide to send a new audit
engagement letter or other written
agreement each period. FALSE
18. The fact that 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 be detected,
even though the audit is properly planned
and performed in accordance with PSAs.
FALSE
19. It is in the interests of both the entity and
the auditor that the auditor sends an audit
engagement letter before the
commencement of the audit to help avoid
misunderstandings with respect to the
audit. TRUE
20. The auditor is required to obtain the
agreement of management that it
acknowledges and understands its
responsibility for internal control. However,
the agreement does not imply that the
auditor will find that internal control
maintained by management has achieved
its purpose or will be free of deficiencies.
TRUE
21. 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 is referred to as financial
reporting risk. FALSE
22. Many users of financial statements are not
in a position to demand financial
statements tailored to meet their specific
information needs. While all the
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information needs of specific users cannot
be met, there are financial information
needs that are common to a wide range of
users. FALSE
23. When an entity is registered or operating in
a jurisdiction that does not have authorized
or recognized standards setting
organization, or where use of the financial
reporting framework is not prescribed by
law or regulation, the SEC identifies a
financial reporting framework to be applied
in the preparation of the financial
statements under good corporate
governance. FALSE
24. An independent audit conducted in
accordance with the PSAs does not act as a
substitute for the maintenance of internal
control necessary for the preparation of
financial statements by management. TRUE
25. PSAs require that the auditor shall not
represent compliance with PSAs unless the
auditor has complied with all of the PSAs
relevant to the audit. TRUE
26. This Philippine Standard on Auditing (PSA )
200 deals with the auditor’s responsibility
to plan an audit of financial statements.
FALSE
27. The engagement partner and other key
members of the engagement team shall be
involved in planning the audit, including
planning and participating in the discussion
among engagement team members. TRUE
The involvement of the engagement partner
and other key members of the engagement
team in planning the audit draws on their
experience and insight, thereby enhancing
the effectiveness and efficiency of the
planning process.
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28. The auditor shall update and change the

overall audit strategy and the audit plan
during the course of the audit. FALSE

29. Adequate planning benefits the audit of

financial statements in assisting in the
selection of engagement team members
with appropriate levels of capabilities and
competence to respond to anticipated risks,
and the proper assignment of work to
them. TRUE

30. The auditor may decide to discuss elements

of planning with the entity’s management
to facilitate the conduct and management
of the audit engagement for example, to
coordinate some of the planned audit
procedures with the work of the entity's
personnel). TRUE