AU 6 NO Answers

UL INTEGRATED CPA REVIEW AU-6
2ND SEM SY 2021-2022
PSA 200
Overall Objectives of the Independent
Auditor and the Conduct of an Audit in
Accordance with Philippine Standards on
Auditing
FOCUS NOTES:
 Overall objectives of the auditor in conducting an audit of financial

statements:
a. To obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and
b. To report on the financial statements, and communicate as required by
the PSAs, in
accordance with the auditor’s
findings.
 Requirements
 Ethical Requirements Relating to an Audit of Financial
Statements a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality;
e. Professional behavior;
f. Independence.
 Professional Skepticism
 The auditor shall plan and perform an audit with professional
skepticism recognizing that circumstances may exist that cause the
financial statements to be materially misstated.
 Professional Judgment – “HALLMARK OF AUDITING”
 The auditor shall exercise professional judgment in planning and
performing an audit of financial statements.
 Sufficient Appropriate Audit Evidence and Audit Risk
 To obtain reasonable assurance, the auditor shall obtain sufficient
appropriate audit evidence to reduce audit risk to an acceptably low
level and thereby enable the
auditor to draw reasonable conclusions on which to base the
auditor’s opinion.
 Conduct of an Audit in Accordance with PSAs
 Complying with PSAs Relevant to the Audit
- The auditor shall comply with all PSAs relevant to the audit. A PSA
is relevant to the audit when the PSA is in effect and the
circumstances addressed by the PSA exist.
- The auditor shall not represent compliance with PSAs in the
auditor’s report
unless the auditor has complied with the requirements of this PSA
and all other
PSAs relevant to the
audit.
 Objectives Stated in Individual PSAs
1
2ND SEM SY 2021-2022
- To achieve the overall objectives of the auditor, the auditor shall
use the objectives stated in relevant PSAs in planning and
performing the audit, having regard to the interrelationships
among the PSAs, to:
a. Determine whether any audit procedures in addition to those
required by the
PSAs are necessary in pursuance of the objectives stated in
the PSAs; and b. Evaluate whether sufficient appropriate audit
evidence has been obtained.
2
2ND SEM SY 2021-2022
 Complying with Relevant Requirements

- The auditor shall comply with each requirement of a PSA
unless, in the circumstances of the audit:
a.The entire PSA is not relevant; or
b.The requirement is not relevant because it is conditional and the
condition does not exist.
- In exceptional circumstances, the auditor may judge it necessary to
depart from a relevant requirement in a PSA. In such
circumstances, the auditor shall perform alternative audit
procedures to achieve the aim of that requirement.
- The need for the auditor to depart from a relevant requirement is
expected to arise only where the requirement is for a specific
procedure to be performed and, in the specific circumstances of
the audit, that procedure would be ineffective in achieving the aim
of the requirement.
 Failure to Achieve an Objective
- If an objective in a relevant PSA cannot be achieved, the auditor
shall evaluate whether this prevents the auditor from achieving
the overall objectives of the auditor and thereby requires the
auditor, in accordance with the PSAs, to modify the auditor’s
opinion or withdraw from the engagement (where withdrawal is
possible under applicable law or regulation).
- Failure to achieve an objective represents a significant
matter requiring documentation in accordance with PSA
230.
3
2ND SEM SY 2021-2022
MULTIPLE
CHOICE
1. Which of the following best describes the objective of an audit of financial
statements?
a. To make recommendations for improving performance.

b. To express an opinion whether the financial statements are prepared, in
all material respects, in accordance with an identified financial reporting
framework.
c. To give assurance as to the future viability of the firm.
d. To measure the efficiency and effectiveness with which the management
has conducted the affairs of the entity.
2. The auditor’s opinion does not assure the future viability of the entity nor the
efficiency or effectiveness with which management has conducted the affairs
of the entity.
a. True
b. False
3. Which of the following is not a responsibility of the management?
a. Preparation of financial statements in accordance with applicable

financial reporting framework.
b. Design and implementation of internal control
c. Providing the auditor access to all information, records and documents
relevant to the audit. d. Providing the auditor unrestricted access to persons
within the entity from whom the
auditor determines it necessary to obtain audit
evidence.
e. Expression of opinion on the financial statements.
4. The two classifications of applicable financial reporting framework are
a. Fair presentation framework and compliance framework.

b. Conceptual framework and fair presentation
framework c. Compliance framework and
conceptual framework
d. Conceptual framework and regulatory framework
5. Which of the following pertains to fair presentation framework?
a. Requires compliance with the requirements of the framework.

b. Allows management to provide disclosures beyond those specifically
required by the framework in order to achieve fair presentation.
c. In extremely rare circumstances, allows management to depart from a
requirement of the framework in order to achieve fair presentation.
d. All of the above.
e. None of the above.
6. The auditor should make a critical assessment, with a questioning mind, of

the validity of the audit evidence obtained. This attitude is:
4
2ND SEM SY 2021-2022
a. Professional
competence b.
Professional behavior
c. Professional skepticism
5
2ND SEM SY 2021-2022
d. Professional
ethics
7. It refers to the audit procedures deemed necessary in the circumstances to

achieve the objective of an audit.
a. reasonable
assurance b. audit
risk
c. scope of an
audit
d. audit
procedures.
8. Absolute assurance in auditing is not attainable as a result of such factors

as:
a. The need for

judgment b. The use
of testing
c. The inherent limitations of any accounting and internal
control system
d. The fact that most of the audit evidence available to the auditor is
persuasive, rather than conclusive, in nature
e. All of the
above
9. The risk that the auditor expresses an inappropriate audit opinion

when the financial statements are materially misstated.
a. audit
risk
b. control
risk
c. detection
risk d.
inherent risk
10. The auditor considers the risk of material misstatement at two levels: at the
overall financial statement level and at the assertion level. Which of these
risks often relate to the entity’s control environment and are more
pervasive?
a. risks of material misstatement at the overall financial

statement level
b. risks of material misstatement at the
assertion level.
11. The risks of material misstatement at the assertion level consist of two
components. These are:
a. inherent risk and control

risk b. inherent risk and
6
2ND SEM SY 2021-2022
detection risk c. control risk
and detection risk
12. They exist independently of the audit of financial statements:
a. inherent risk and control

risk b. inherent risk and
detection risk c. control risk
and detection risk
13. The susceptibility of an assertion to a misstatement that could be material,

either individually or when aggregated with other misstatements, assuming
that there are no related controls.
a. audit
risk
7
2ND SEM SY 2021-2022
b. inherent
risk
c. control
risk
d. detection
risk
14. The risk that a misstatement that could occur in an assertion and that could
be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely
basis by the entity’s internal control.
a. audit
risk
b. inherent
risk c. control
risk d.
detection risk
15. The risk that the auditor will not detect a misstatement that exists in an
assertion that could be material, either individually or when aggregated with
other misstatements.
a. audit
risk
b. inherent
risk c.
control risk
d. detection
risk
16. This component of audit risk is a function of the effectiveness of the design
and operation of the internal control.
a. audit
risk
b. inherent
risk c. control
risk d.
detection risk
17. This component of audit risk is a function of the effectiveness of an audit

procedure and of its application by the auditor.
a. audit
risk
b. inherent
risk c.
control risk
d. detection
risk
8
2ND SEM SY 2021-2022
18. It is a concept relating to the accumulation of the audit evidence necessary
for the auditor to conclude that there are no material misstatements in the
financial statements taken as a whole.
a. reasonable
assurance
b. absolute
assurance c.
persuasive evidence
d. sufficiency of
evidence
19. Reasonable assurance is obtained:
a. when the auditor has reduced audit risk to an acceptably

low level.
b. when the auditor expresses an
unqualified opinion.
9
PSA Study Guide and
Quizzer
Study Unit 1 PSA 200 – 265 General Principles and
c. when the auditor and the client have no material disagreement regarding
application of accounting principles.
20. The existence of audit risk is recognized by the statement in the auditor’s
standard report that
the
a. auditor is responsible for expressing an opinion of the financial

statements, which are the responsibility of management
b. financial statements are presented fairly, in all materials respects, in
conformity with
GAAP
c. audit includes examining on a test basis, evidence supporting the
amounts and disclosure in the financial statements
d. auditor obtains reasonable assurance about whether the financial
statement are free of material misstatements.
10
PSA Study Guide and
Quizzer
PSA 210
AGREEING THE TERMS OF ENGAGEMENTS
FOCUS
NOTES:
Objective
 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:
(a) Establishing whether the preconditions for an audit are present; and
(b) 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.
Requirements
 Preconditions for an Audit
 In order to establish whether the preconditions for an audit are present,
the auditor
shall:
a. Determine whether the financial reporting framework to be
applied in the preparation of the financial statements is
acceptable; and
b. Obtain the agreement of management that it acknowledges and
understands its responsibility:
(i) For the preparation of the financial statements in accordance with
the applicable
financial reporting framework, including where relevant their fair
presentation;
(ii) 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
(iii) To provide the auditor with:
(a) 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;
(b) Additional information that the auditor may request from
management for the purpose of the audit; and
(c) Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain audit
evidence.
11
PSA Study Guide and
Quizzer
 AGREEMENT ON AUDIT ENGAGEMENT

TERMS
 The auditor and the client should agree on the terms of the engagement.
 The agreed terms would need to be recorded in:
a. audit engagement letter or
b. other suitable form of contract.
 Audit Engagement Letter
 It documents and confirms the auditor’s acceptance of the
appointment, the objective and scope of the audit, the extent of
the auditor’s responsibilities to the
client and the form of any
reports.
 Should be sent before the commencement of the engagement to
help in avoiding misunderstandings.
 Principal Contents
 The objective and scope of the audit of the financial statements;
 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
 Reference to the expected form and content of any reports to be
issued by the auditor and a statement that there may be
circumstances in which a report may
differ from its expected form and content.
 Others that may be included:
 Arrangements regarding the planning and performance of the audit.
 Expectation of receiving from management written
confirmation concerning representations made in connection
with the audit.
 Request for the client to confirm the terms of the engagement by
acknowledging receipt of the engagement letter.
 Description of any other letters or reports the auditor expects to issue
to the client.
 Basis on which fees are computed and any billing arrangements.
 Arrangements concerning the involvement of other auditors and
experts in some aspects of the audit.
 Arrangements concerning the involvement of internal auditors and
other client staff.
 Arrangements to be made with the predecessor auditor, if any, in
the case of an initial audit.
 Any restriction of the auditor's liability when such possibility exists.
 A reference to any further agreements between the auditor and the
client.
 Audits of components
Factors that influence the decision whether to send a separate
engagement letter to the component include the following:
 Who appoints the auditor of the component.
 Whether a separate auditor’s report is to be issued on the component.
 Legal requirements.
 The extent of any work performed by other auditors.
 Degree of ownership by parent.
 Degree of independence of the component’s management.
 Recurring Audits
12
PSA Study Guide and
Quizzer
 The auditor may decide
Study not
Unitto1 send a new
PSA 200 engagement
– 265 letter each
General Principles and
period.
 The following factors may make it appropriate to send a new letter:
1. Any indication that the client misunderstands the objective
and scope of the audit.
13
PSA Study Guide and
Quizzer
2. Any revised or special terms of the engagement.
3. A recent change of senior management or those charged with
governance.
4. A significant change in ownership.
5. A significant change in nature or size of the client’s business.
6. Legal or regulatory requirements.
7. A change in the financial reporting framework adopted by
management in preparing the financial statements.
 Acceptance of a Change in
Engagement
 consider the appropriateness.
 where the terms of the engagement are changed, the auditor and
the client should agree on the new terms.
 the auditor should not agree to a change of engagement
where there is no reasonable justification.
 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 withdraw.
 Example of an 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 statement of financial position as at
December 31, 2019, and the statement of comprehensive income,
statement of changes in equity and statement cash of flows 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
14
PSA Study Guide and
Quizzer
Study Unit 1 PSAof
includes evaluating the appropriateness 200 – 265 General
accounting Principles
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.
15
PSA Study Guide and
Quizzer
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.
[The responsibilities of management and identification of the

applicable financial reporting framework (for purposes of this example
it is assumed that the auditor has not determined that the law or
regulation prescribes those responsibilities in appropriate terms).]
Our audit will be conducted on the basis that [management and, where
appropriate, those charged with governance] acknowledge and
understand that they have responsibility:
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.]
[Reportin
g]
[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
16
PSA Study Guide and
Quizzer
finding Study Unit 1 PSA 200 – 265 General Principles and
s.
17
PSA Study Guide and
Quizzer
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 on behalf of ABC Company by

(signed)
....................
.. Name and
Title Date
18
PSA Study Guide and
Quizzer
MULTIPLE
CHOICE
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, those charged with governance to
the premise on which audit is conducted.
a. Terms of audit engagement

b. Preconditions for an audit
c. Assurance engagement terms and
conditions d. Acceptability of
engagement
2. It documents and confirms the auditor’s acceptance of the appointment,

the objective and scope of the audit, the extent of the auditor’s
responsibilities to the client and the form of any reports.
a. engagement letter
b. comfort
letter c. audit
report
d. acceptance letter
3. The understanding between the client and the auditor as to the degree of
responsibility to be assumed by each is normally set forth in a(n)
a. Representation
letter. b.
Management letter.
c. Engagement letter.
d. Comfort letter.
4. Which of the following would an auditor most likely consider to decide

whether to accept an engagement or not?
a. The acceptability of financial reporting framework adopted by the

management.
b. The nature of the entity.
c. The objective of the financial
statements. d. All of the above.
5. Documentation of the terms of engagement is required for an audit in

accordance with
Philippine Standards on Auditing.
a. True.
b. False.
6. The auditor may accept a change engagement when:
a. there is reasonable justification for doing it.

19
PSA Study Guide and
Quizzer
b. the client permits. Study Unit 1 PSA 200 – 265 General Principles and
c. there is no change in the amount to
be billed. d. All of the above.
20
PSA Study Guide and
Quizzer
7. Arrangement concerning which of the following are least likely to be
included in engagement letter.
a. A predecessor
auditor b. Fees and
billing
c. CPA investment in client securities
d. Other services to be provided in addition to the audit
8. When an auditor believes that an understanding with the client has not
been established, he or she should ordinarily
a. Perform the audit with increase professional skepticism.

b. Decline to accept or perform the audit.
c. Asses control risk at the maximum level and perform a primarily
substantive audit,
d. Modify the scope of the audit to reflect an increase risk of material
misstatement due to fraud,
9. The auditor should not accept an audit engagement in all of the following
cases, EXCEPT:
a. The financial reporting framework to be applied in the preparation

of the financial statements is unacceptable.
b. Management does not acknowledge its responsibility for the
preparation of financial statements.
c. 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.
d. If the auditor has determined that the financial reporting framework
prescribed by law or regulation would be unacceptable but for the fact
that it is prescribed by law or regulation.
10. Acceptable financial reporting framework that will result in information

provided in financial statements that is useful to the intended users have
the following attributes, EXCEPT:
a. Relevance
b.
Completeness
c. Reliability
d. Neutrality
e. Understandability
f. Independence
g. All of the above are attributes of acceptable financial reporting
framework.
21
PSA Study Guide and
Quizzer
PSA 220
QUALITY CONTROL FOR AUDITS
OF HISTORICAL FINANCIAL
INFORMATION
FOCUS NOTES:
 Responsibility to establish quality control

a. A firm has an obligation to establish a system of quality control.
b. “Firm” refers to a sole practitioner, partnership, corporation or other entity
of
professional
accountants.
c. Under Philippine law, CPA Firms cannot be organized as a corporation.
 Objectives
a. Quality controls —The policies and procedures adopted by a firm
designed to provide it with reasonable assurance
1. that the firm and its personnel comply with professional standards
and regulatory and legal requirements, and
2. that reports issued by the firm or engagement partners are
appropriate in the circumstances.
 Requirements
 Leadership Responsibilities for Quality on Audits

 The engagement partner should take responsibility for the overall
quality on each audit engagement to which that partner is
assigned.
 Relevant Ethical Requirements

 The engagement partner should consider whether members of the
engagement team have complied with ethical requirements.
1. Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and
5. Professional behavior.
 Independence. The engagement partner should form a conclusion
on compliance with independence requirements that apply to the
audit engagement.
1. identify threats to independence.
2. eliminate threats or reduce to an acceptable level by applying
safeguards.
3. document conclusions on independence.
 Acceptance and Continuance of Client Relationships and Specific Audit

Engagements
 In deciding to accept or to continue the engagement, consider:
1. The integrity of the principal owners, key management and
those charged with governance of the entity;
22
PSA Study Guide and
Quizzer
2. Whether the engagement team200
Study Unit 1 PSA is competent to perform
– 265 General the
Principles and
audit engagement and has the necessary time and resources;
and
3. Whether the firm and the engagement team can
comply with ethical requirements.
23
PSA Study Guide and
Quizzer
 Assignment of Engagement Teams
 Engagement team collectively must have the appropriate
capabilities and competence to
1. Perform the audit engagement in accordance with professional
standards and applicable legal and regulatory requirements;
and
2. Enable an auditor’s report that is appropriate in the circumstances
to be issued.
 Engagement Performance
 Engagement partner shall take responsibility
1. For the direction, supervision and performance of the audit
engagement in compliance with professional standards and
applicable legal and regulatory requirements and for the
auditor’s report.
2. For review of the audit documentation and discussion with the
engagement team, to determine whether sufficient appropriate
audit evidence has been obtained to support the conclusions
reached and for the auditor’s report to be issued.
3. For consultations that should be made on difficult or contentious
matters, agree on the nature and scope of consultations with the
consulted party and
determine that resulting conclusions have been implemented. In
case differences of opinion arise, follow the firm’s policies and
procedures for dealing with and resolving differences of opinion.
4. Engagement Quality Control Review. For audits of financial
statements of listed entities, the engagement partner shall:
a. Determine that an engagement quality control
reviewer has been appointed;
b. Discuss significant matters arising during the audit
engagement, including
those identified during the engagement quality control
review, with the engagement quality control reviewer; and
c. Not date the auditor’s report until the completion of the
engagement quality
control review.
 An engagement quality control review should include

an objective evaluation of:
1. The significant judgments made by the engagement
team; and
2. The conclusions reached in formulating the auditor’s
report.
 Monitoring. Effective system of quality control provides for monitoring to

determine
 relevance of quality controls
 adequacy of quality controls
 operating effectiveness of quality controls
 compliance with quality controls
 Documentation
 The auditor shall include in the audit documentation:
24
PSA Study Guide and
Quizzer
(a) Issues identified with
Study respect
Unit 1 PSAto compliance
200 withPrinciples
– 265 General relevant and
ethical requirements and how they were resolved.
(b) Conclusions on compliance with independence requirements
that apply to the audit engagement, and any relevant
discussions with the firm that support these conclusions.
25
PSA Study Guide and
Quizzer
(c) Conclusions reached regarding the acceptance and
continuance of client relationships and audit engagements.
(d) The nature and scope of, and conclusions resulting from,
consultations undertaken during the course of the audit
engagement.
 The engagement quality control reviewer shall document, for the

audit engagement reviewed, that:
(a) The procedures required by the firm’s policies on engagement
quality control
review have been performed;
(b) The engagement quality control review has been completed on or
before the
date of the auditor’s report; and
(c) The reviewer is not aware of any unresolved matters that would
cause the reviewer to believe that the significant judgments the
engagement team made and the conclusions it reached were
not appropriate.
26
PSA Study Guide and
Quizzer
MULTIPLE
CHOICE:
1. Reasonable assurance that a firm and its personnel comply with
professional standards and regulatory and legal requirements in audit of
historical financial information can be provided by:
a. Maintaining independence in mind and

appearance. b. Internal control on billing of
clients.
c. A system of quality control.
d. A system of peer review
2. In order for a firm to have reasonable assurance that reports it issued are
appropriate in the circumstances, it must:
a. Establish a system of quality control.

b. Accept only engagements before
year end. c. Subject itself for a cold
review.
d. Coordinate with the stockholders before issuing the report.
3. Who is responsible for the overall quality on each audit engagement?
a. client’s
management b.
engagement partner
c. staff
d. engagement quality control reviewer
4. Which one of the following is not a quality control policy and procedure
in acceptance of audit engagements?
a. Consider whether the firm and the engagement team can comply
with the ethical requirements.
b. Consider the integrity of the principal owners, management, and
those charged with governance.
c. Consider the competence of the clients’ management and staff.
d. Consider the competence of the engagement team.
5. Among the possible reasons why an auditor will discontinue servicing an

audit client is:
a. Too many errors have to be adjusted to make the financial statements

conform with
GAAP.
b. The auditor has to use a specialist in verifying inventory valuation.
c. The auditor is also rendering at the same time, a management advisory
engagement for the same client.
d. A change in the client management and the auditor is worried about the
integrity of the new management.
27
PSA Study Guide and
Quizzer
Study Unit
6. A CPA firm establishes quality 1 PSA
control 200 – and
policies 265 General Principles
procedures for and
deciding whether to accept a new client or continue to perform
services for a current client. The primary purpose of establishing such
policies and procedures is
28
PSA Study Guide and
Quizzer
a. To enable the auditor to attest to the integrity or reliability of a client
b. The comply with the quality control standards established by regulatory
bodies.
c. To minimize the likelihood of association with clients whose
managements lack integrity.
d. To lessen the exposure to litigation from failure to detect irregularities in
client financial statement
7. In pursuing a CPA firm’s quality control objectives, a CPA may maintain

records indicating which partners or employees of the CPA firm were
previously employed by the CPA firm’s clients. Which quality control
objective would this be most likely to satisfy?
a. Professional
relationships b.
Supervision
c. Independence
d. Advancement
8. In pursuing its quality control objectives with respect to independence, a

CPA firm may use policies and procedures
a. emphasizing independence in mental attitude in firm training programs

and in supervision of review of work.
b. prohibiting employees from owning shares of the stock of publicity-traded
companies
c. suggesting that employees conduct their banking transaction with banks
that do not maintain accounts with client firms.
d. assigning employees, who may lack independence, research position
that do not require participation in field audit work.
9. In pursuing its quality control objectives with respect to assigning

personnel to engagements, a public accounting firm may use
policies and procedures such as
a. Rotating employees from assignment to assignment on a random

basis to aid in the staff training effort.
b. Requiring timely identification of the staffing requirements of
specific engagements so that enough qualified personnel can
be made available.
c. Allowing staff to select the assignments of their choice to
promote better client relationships.
d. Assigning a number of employees to each engagement in excess of the
number required so as not to overburden the staff and interfere with the
quality of the audit work
performe
d.
10. A process comprising an ongoing consideration and evaluation of the firm’s

system of quality control, including a periodic inspection of a selection of
completed engagements, designed to enable the firm to obtain reasonable
assurance that its system of quality control is operating effectively.
29
PSA Study Guide and
Quizzer
a. monitoring Study Unit 1 PSA 200 – 265 General Principles and
b. direction
c.
supervision
d. review
30
PSA Study Guide and
Quizzer
PSA 230
AUDIT DOCUMENTATION
FOCUS NOTES:
 Audit Documentation
- means the record of audit procedures performed, relevant audit
evidence obtained, and conclusions the auditor reached..
- also known as working papers or workpapers.
 Objectives of Audit Documentation

a. provides a sufficient and appropriate record of the basis for the auditor’s
report; and
b. provides evidence that the audit was performed in accordance
with PSAs and applicable legal and regulatory requirements.
 Purposes
a. Assisting the audit team to plan and perform the audit;
b. Assisting members of the audit team responsible for supervision to
direct and supervise the audit work, and to discharge their review
responsibilities in accordance with PSA
220, “Quality Control for Audits of Historical Financial Information;”
c. Enabling the audit team to be accountable for its work;
d. Retaining a record of matters of continuing significance to future audits;
e. Enabling an experienced auditor to conduct quality control reviews and
inspections;
f. Enabling an experienced auditor to conduct external inspections in
accordance with applicable legal, regulatory or other requirements.
 Nature of Audit Documentation

a. may be recorded on paper or on electronic or
other media. b. Examples:
1. audit programs
2. analyses sheet
3. issues memoranda
4. summaries of significant matters
5. letters of confirmation and representation
6. checklists
7. correspondence (including e-mail) concerning significant matters
8. abstracts or copies of the entity’s records, for example, significant
and specific
contracts and
agreements.
c. Audit documentation is not a substitute for the entity’s accounting
records.
d. The audit documentation for a specific audit engagement is assembled
in an audit file.
 Form, Content and Extent of Audit Documentation

Factors affecting form, content, and extent:
a. The nature of the audit procedures to be performed;
31
PSA Study Guide and
Quizzer
b. The identified risks ofStudy Unit misstatement;
material 1 PSA 200 – 265 General Principles and
c. The extent of judgment required in performing the work and evaluating
the results;
d. The significance of the audit evidence obtained;
e. The nature and extent of exceptions identified;
32
PSA Study Guide and
Quizzer
f. The need to document a conclusion or the basis for a conclusion not
readily determinable from the documentation of the work performed or
audit evidence obtained; and
g. The audit methodology and
tools used.
 Requirements
 The auditor shall prepare the Audit Documentation on a timely basis.
 The auditor shall prepare audit documentation that is sufficient to
enable an experienced auditor, having no previous connection with
the audit, to understand:
 The nature, timing and extent of the audit procedures performed to
comply with the
PSAs and applicable legal and regulatory
requirements;
 The results of the audit procedures performed, and the audit evidence
obtained; and
 Significant matters arising during the audit, the conclusions reached
thereon, and significant professional judgments made in reaching
those conclusions.
 In documenting the nature, timing and extent of audit procedures
performed, the auditor shall record :
 The identifying characteristics of the specific items or matters tested;
 Who performed the audit work and the date such work was completed;
and
 Who reviewed the audit work performed and the date and extent of
such review.
 The auditor shall document discussions of significant matters with
management, those charged with governance and others on a timely
basis.
 Discussion of significant matters.
 Nature of significant matters.
 When and with whom discussed.
 If the auditor has identified information that contradicts or is
inconsistent with the auditor’s final conclusion regarding a significant
matter, the auditor should document how the auditor addressed the
contradiction or inconsistency in forming the final conclusion.
 Where, in exceptional circumstances, the auditor judges it necessary to
depart from a
basic principle or an essential procedure that is relevant in the
circumstances of the audit, the auditor should document how the
alternative audit procedures performed achieve the objective of the
audit, and, unless otherwise clear, the reasons for the departure.
 The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file
on a timely basis after the date of the auditor’s report.
 After the assembly of the final audit file has been completed, the auditor
shall not delete or discard audit documentation before the end of its
retention period.
33
PSA Study Guide and
Quizzer
 When the auditor findsStudy Unit 1 PSA
it necessary 200 – 265
to modify General
existing Principles and
audit
documentation or add new audit documentation after the assembly of
the final audit file has been completed, the auditor should, regardless
of the nature of the modifications or additions, document:
 When and by whom they were made, and (where applicable) reviewed;
 The specific reasons for making them; and
 Their effect, if any, on the auditor’s conclusions.
 When exceptional circumstances arise after the date of the auditor’s
report that require the auditor to perform new or additional audit
procedures or that lead the auditor to reach new conclusions, the
auditor shall document:
34
PSA Study Guide and
Quizzer
 The circumstances encountered;
 The new or additional audit procedures performed, audit evidence
obtained, and conclusions reached; and
 When and by whom the resulting changes to audit documentation were
made, and
(where applicable)
reviewed.
35
PSA Study Guide and
Quizzer
MULTIPLE
CHOICE
1. The auditor’s principal record of the audit procedures performed, the audit
evidence
obtained and the conclusions the auditor reached is the:
a. audit documentation
b. audit plan
c. audit report
d. audit program
2. Which of the following statements is not correct?
a. Audit documentation facilitates planning and performance of the audit.

b. Audit documentation assists in the direction, supervision and review of
audit work.
c. Audit documentation is a substitute for the entity’s accounting records.
d. Audit documentation provides evidence that the audit was performed in
accordance with
PSA.
3. Which of the following factors will least affect the independent auditor's
judgment as to the quantity, type, and content of the working papers
desirable for a particular engagement?
a. Nature of the auditor's report.

b. Nature of the financial statements, schedules, or other information
upon which the auditor is reporting.
c. Need for supervision and review.
d. Number of personnel assigned to the audit.
4. An auditor's working papers will generally be least likely to include

documentation showing how the
a. Client's schedules were prepared.

b. Engagement had been planned.
c. Client's internal control structure had been reviewed
and evaluated. d. Unusual matters were resolved.
5. Which of the following is not a primary purpose of audit working papers?
a. To coordinate the examination.

b. To assist in preparation of the audit report.
c. To support the financial statements.
d. To provide evidence of the audit work performed.
6. The understanding between the client and the auditor as to the degree of
responsibility to be assumed by each is normally set forth in a(n)
a. Representation
letter. b.
Management letter.
36
PSA Study Guide and
Quizzer
c. Engagement letter. Study Unit 1 PSA 200 – 265 General Principles and
d. Comfort letter.
37
PSA Study Guide and
Quizzer
7. An auditor's working papers should
a. Not be permitted to serve as a reference source

for the client. b. Not contain comments critical of
management.
c. Show that the accounting records agree or reconcile with the financial
statements.
d. Be considered the primary support for the financial statements being
audited.
8. Which of the following is not a factor affecting the independent auditor's

judgment about the quantity, type, and content of audit working papers?
a. The needs for supervision and review of the work performed

by assistants. b. The nature and condition of the client's
records and internal controls.
c. The expertise of client personnel and their participation in preparing
schedules.
d. The type of the financial statements, schedules, or other information on
which the auditor is reporting.
9. Files which contain information relating primarily to the audit of single period.
a. current audit files

b. permanent audit
files c. working
paper files
d. evidence files
10. Contain information of continuing importance in the audit of
the same client. a. current audit files

b. permanent audit files
c. working paper
files d. evidence
files
11. An auditor’s permanent file working papers most likely will contain:
a. internal control analysis for the

current year. b. The latest
engagement letter.
c. Memoranda conference with management.
d. Excerpts of the corporate charter and by-laws
12. Working papers are the property of the :
a. auditor
b. client
c. auditee
d. management
38
PSA Study Guide and
Quizzer
Studydata
13. During an audit engagement, Unit 1are
PSA 200 – 265
compiled andGeneral Principles
included and
in the audit
working papers.
The working papers are
a. A client-owned record of conclusions reached by the auditors who

performed the engagement.
b. Evidence supporting financial statements.
39
PSA Study Guide and
Quizzer
c. Support for the auditor's compliance with generally accepted auditing
standards.
d. A record to be used as a basis for the following year's engagement.
14. The current file of the auditor's working papers generally
should include a. A flowchart of the internal controls.

b. Organization charts.
c. A copy of the financial statements.
d. Copies of bond and note indentures.
15. Audit working papers are used to record the results of the auditor’s
evidence gathering procedures. When preparing working papers, the
auditor should remember that
a. Working papers should be kept on the client’s premises so that the client
can have access
to them for reference
purposes.
b. Working papers should be the primary support for the financial
statements being examined
c. Working papers should be considered as a substitute for the client’s
accounting records
d. Working papers should be designed to meet the circumstances and the
auditor’s
needs on each
engagement.
16. The permanent (continuing) file of an auditor’s working papers most likely
would include
copies of the
a. Bank
statements b.
Debt agreements
c. Lead
schedules
d. Attorney’s letter
17. Assembly of final audit file should be accomplished in:
a. Not more than 45 days after the date of the auditor’s report.
b. Not more than 60 days after the date of the auditor’s report.
c. Not more than 90 days after the date of the auditor’s report.
d. Not more than 30 days after the date of the auditor’s report.
18. Retention period of engagement documentation is:
a. No shorter than 5 years from the date of the auditor’s report.

b. No shorter than 3 years from the date of the
auditor’s report. c. No shorter than 10 years from the
date of the auditor’s report. d. No shorter than 4
years from the date of the auditor’s report.
40
PSA Study Guide and
Quizzer
19. Conclusions are typically documented by auditors in which type of work
paper?
a. audit planning
memo b. audit
program
c. audit memoranda
d. representation letter
41
PSA Study Guide and
Quizzer
20. Which of the following documentation is required for an audit in accordance
with PSA?
a. A flowchart or an internal control questionnaire that evaluates the

effectiveness of the
entity’s internal control policies and procedures
b. A client engagement letter that summarizes the timing and details of the
auditor’s planned
fieldwork
c. An indication on the working papers that accounting records agree or
reconcile with the financial statements.
d. The basis for the auditors conclusions when the assessed level of
control risk is at the maximum level for all financial statement assertions
42
PSA Study Guide and
Quizzer
PSA 240
THE AUDITOR’S RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS
FOCUS NOTES:
 Characteristics of Fraud and Error

 Misstatements in the FS can arise either from fraud or error.
 Fraud
 an intentional act by one or more individuals among management,
those charged with governance, employees, or third parties,
involving the use of deception to
obtain an unjust or illegal advantage.
 it may involve one or more members of management or those charged
with
governance referred to as “management fraud;”
 fraud involving only employees of the entity is referred to as “employee
fraud.”
 Types of Fraud:
a. Fraudulent financial reporting - intentional misstatements
including omissions of amounts or disclosures in financial
statements to deceive financial statement users.
1. manipulation
2. falsification (including forgery)
3. alteration
4. misrepresentation
5. intentional omission
6. intentional misapplication of accounting principles
b. Misappropriation of assets - involves the theft (physical transfer)
of an entity’s
assets.
1. embezzling receipts
2. stealing physical assets or intellectual property
3. causing an entity to pay for goods and services not received
4. using an entity’s assets for personal use
 Three conditions that usually exist when fraud occurs ( the fraud
triangle)
a. Incentive or pressure to
commit fraud b. Opportunity to
commit fraud
c. Attitude or rationalization to justify fraud
 Error
 an unintentional misstatement in financial statements
 examples
1. mistake in gathering or processing data from which financial
statements are prepared.
2. incorrect accounting estimate arising from oversight or
misinterpretation of facts.
3. mistake in the application of accounting principles
 Responsible for prevention and detection of fraud

a. those charged with governance of the
entity and b. entity’s management.
43
PSA Study Guide and
Quizzer
 Inherent Limitations of an Audit in the Context of Fraud
 there is an unavoidable risk that some material misstatements of
the financial statements will not be detected, even though the
audit is properly planned and performed in accordance with
PSAs.
 the risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting a material misstatement resulting
from error because fraud may
involve sophisticated and carefully organized schemes designed to
conceal it.
 concealment may be even more difficult to detect when accompanied by
collusion.
 the risk of the auditor not detecting a material misstatement resulting
from management fraud is greater than for employee fraud, because
management is frequently in a
position to directly or indirectly manipulate accounting records and
present fraudulent financial information.
 Objectives of the auditor are:

(a) To identify and assess the risks of material misstatement of the
financial statements due to fraud;
(b) To obtain sufficient appropriate audit evidence regarding the assessed
risks of material misstatement due to fraud, through designing and
implementing appropriate responses; and
(c) To respond appropriately to fraud or suspected fraud identified during
the audit.
 Requirements
 The auditor shall maintain an attitude of professional skepticism
throughout the audit, recognizing the possibility that a material
misstatement due to fraud could exist,
notwithstanding the auditor’s past experience with the entity about the
honesty and
integrity of management and those charged with governance.
 Members of the engagement team shall discuss the susceptibility of the
entity’s financial
statements to material misstatement due to fraud.
 Perform procedures to obtain information that is used to identify the
risks of material misstatement due to fraud.
a. inquiries
b. analytical
procedures c.
observation
d. inspection
 Identify and assess the risks of material misstatement due to fraud at the
financial statement level and the assertion level; and for those assessed
risks that could result in
a material misstatement due to fraud, evaluate the design of the
entity’s related controls, including relevant control activities, and to
determine whether they have been implemented.
 Determine overall responses to address the risks of material misstatement
due to fraud
at the financial statement level and consider the assignment and
supervision of personnel; consider the accounting policies used by the
44
PSA Study Guide and
Quizzer
entity and incorporateStudy Unit 1 PSA
an element 200 – 265 General
of unpredictability Principles
in the andof
selection
the nature, timing and extent of the audit procedures to be performed.
 Design and perform audit procedures to respond to the risk of
management override of controls.
 Determine responses to address the assessed risks of material
misstatement due to fraud.
 Consider whether an identified misstatement may be indicative of fraud.
45
PSA Study Guide and
Quizzer
 Obtain written representations from management and, where
appropriate, those charged with governance, that:
(a) They acknowledge their responsibility for the design,
implementation and
maintenance of internal control to prevent and detect fraud;
(b) They have disclosed to the auditor the results of management’s
assessment of the risk that the financial statements may be
materially misstated as a result of fraud;
(c) They have disclosed to the auditor their knowledge of fraud, or
suspected fraud, affecting the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the
financial statements; and
(d) They have disclosed to the auditor their knowledge of any
allegations of fraud, or suspected fraud, affecting the entity’s
financial statements communicated by employees, former
employees, analysts, regulators or others.
 Communicate fraud timely with the appropriate level of management.
 Communicate fraud timely with those charged with governance if
fraud involves the following
(a) management;
(b) employees who have significant roles in internal control; or
(c) others where the fraud results in a material misstatement
in the financial statements.
 If the auditor has identified or suspects a fraud, the auditor shall determine
whether
there is a responsibility to report the occurrence or suspicion to a party
outside the entity
(Regulatory and Enforcement Authorities).
 Documentation requirements:
 Understanding of the entity and its environment and the assessment
of the risks of material misstatement:
a. The significant decisions reached during the discussion among
the engagement
team regarding the susceptibility of the entity’s financial
statements to material
misstatement due to fraud; and
b. The identified and assessed risks of material misstatement due
to fraud at the financial statement level and at the assertion level.
 Auditor’s responses to the assessed risks of material misstatement
required
a. The overall responses to the assessed risks of material
misstatement due to fraud at the financial statement level and the
nature, timing and extent of audit procedures, and the linkage of
those procedures with the assessed risks of material
misstatement due to fraud at the assertion level; and
b. The results of the audit procedures, including those designed to
address the risk of management override of controls.
 The auditor shall include in the audit documentation communications
about fraud
46
PSA Study Guide and
Quizzer
Study those
made to management, Unit 1 charged
PSA 200 with
– 265governance,
General Principles and
regulators
and others.
 If the auditor has concluded that the presumption that there is a risk of
material misstatement due to fraud related to revenue recognition is
not applicable in the circumstances of the engagement, the
auditor shall include in the audit documentation the reasons
for that conclusion.
47
PSA Study Guide and
Quizzer
MULTIPLE
CHOICE
1. It refers to an unintentional misstatement in financial statements, including
the omission of an amount or a disclosure.
a.
Fraud
b.
Error
c. Misappropriation of
assets
d. Fraudulent financial
reporting
2. It refers to intentional act involving the use of deception to obtain an

unjust or illegal advantage.
a.
Fraud
b.
Error
c. Misappropriation of
assets
d. Fraudulent financial
reporting
3. The distinguishing factor between fraud and error is:
a. whether the action is intentional or

unintentional
b. whether the amount is material or
immaterial
c. whether it affects the financial
statements or not d. all of the above
4. Intentional misstatements of financial statements including omissions

of amounts or disclosures in financial statements to deceive financial
statement users.
a. Misappropriation of
assets.
b. Fraudulent financial
reporting.
c. Employee
fraud.
d. Management
fraud
5. Theft of an entity’s assets perpetrated by employees or management.

48
PSA Study Guide and
Quizzer
a. Misappropriation of
assets. b. Fraudulent
financial reporting. c.
Employee fraud.
d. Management
fraud
6. Fraud involving one or more members of management or those charge
with governance. a. Misappropriation of assets.

b. Fraudulent financial
reporting.
c. Employee
fraud.
d. Management
fraud
7. Fraud involving only employees of the entity.
49
PSA Study Guide and
Quizzer
a. Misappropriation of assets.
b. Fraudulent financial reporting.
c. Employee fraud.
d. Management fraud
8. An example of
fraud is:
a. mistake in gathering or
processing data b. incorrect
accounting estimates
c. mistake in the application of accounting principles
d. manipulation, falsification or alteration of accounting records.
9. Which of the following is a fraudulent financial reporting?
a. recording fictitious journal entries

b. using an entity’s assets for personal use
c. embezzlement
d. incorrect estimates
10. Which of the following involves fraud?
a. Mathematical or clerical mistakes in the underlying records and

accounting data. b. Oversight or misinterpretation of facts.
c. Misappropriation of assets.
d. Mistake in the application of accounting policies.
11. Statement 1:
The risk of not detecting material misstatement due to fraud is higher
than the risk of not detecting misstatement resulting from error.
Statement 2:
The risk of not detecting misstatement due to management fraud is
greater than for employee fraud.
Statement 3:
Subsequent discovery of material misstatement due to fraud indicate
failure to comply with PSAs.
a. All statements are

true. b. All statements
are false.
c. Statements 1 and 2 are true.
d. Statement 3 is true.
12. In conducting an audit, misstatements arising from suspicion of the fraud

are given more emphasis than the errors. This is an example of applying
the criterion of
a. Materiality
b. Relative risk
50
PSA Study Guide and
Quizzer
c. Dual-purpose Study Unit 1 PSA 200 – 265 General Principles and
51
PSA Study Guide and
Quizzer
d. Reliability of evidence
13. The responsibility for the prevention and detection of fraud and error rests
with:
a. Auditor
b. Stockholders
c. Those charged with governance and the management
d. None of the above
14. Events or conditions that indicate an incentive or pressure to commit fraud

or provide an opportunity to commit fraud. They are often present in
circumstances where frauds have occurred.
a. Inherent risk
b. Engagement risk
c. Fraud risk factors
d. Business risk factors
15. The fraud triangle
includes a. Audit
risk.
b. Opportunity.
c.
Dedication.
d. Control
risk.
16. Which of the following factors is least likely to represent an opportunity to

commit fraud?
a. The audit committee is ineffective.
b. The organizational structure creates unusual lines
of authority. c. The existence of highly complex
transactions.
d. Operating losses make a hostile takeover imminent.
52
PSA Study Guide and
Quizzer
PSA 250
CONSIDERATION OF LAWS AND
REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS
FOCUS NOTES:
 When designing and performing audit procedures and in evaluating and
reporting the results thereof, the auditor should recognize that
noncompliance by the entity with laws and regulations may materially
affect the financial statements.
 “Noncompliance” refers to acts of omission or commission by the entity

being audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations.
 Responsibility for the Compliance with Laws and Regulations

- responsibility for the prevention and detection of noncompliance rests
with management, with the oversight of those charged with governance.
- policies and procedures for the prevention and detection of
noncompliance:
 Monitoring legal requirements and ensuring that operating procedures
are designed to meet these requirements.
 Instituting and operating appropriate internal control.
 Developing, publicizing and following a code of conduct.
 Ensuring employees are properly trained and understand the code of
conduct.
 Monitoring compliance with the code of conduct and acting
appropriately to discipline employees who fail to comply with it.
 Engaging legal advisors to assist in monitoring legal requirements.
 Maintaining a register of significant laws with which the entity has to
comply within its particular industry and a record of complaints.
- In larger entities, these policies and procedures may be supplemented
by assigning appropriate responsibilities to the following:
1. An internal audit function.
2. An audit committee.
3. Compliance function
 Objectives
(a) To obtain sufficient appropriate audit evidence regarding compliance
with the provisions of those laws and regulations generally
recognized to have a direct effect on the determination of material
amounts and disclosures in the financial statements;
(b) To perform specified audit procedures to help identify instances of non-
compliance with other laws and regulations that may have a material
effect on the financial statements; and
(c) To respond appropriately to non-compliance or suspected
noncompliance with laws and regulations identified during the audit.
53
PSA Study Guide and
Quizzer
 Requirements
 Maintain professional skepticism
- The Auditor’s Consideration of Compliance with Laws and Regulations

 Obtain a general understanding of the legal and regulatory framework
applicable to the entity and the industry and how the entity is
complying with that framework.
a. Use the existing understanding of the entity’s industry, regulatory
and other
external factors;
b. Inquire of management concerning the entity’s policies and
procedures regarding compliance with laws and regulations;
c. Inquire of management as to the laws or regulations that may be
expected to have a fundamental effect on the operations of the
entity;
d. Discuss with management the policies or procedures adopted for
identifying, evaluating and accounting for litigation claims and
assessments; and
e. Discuss the legal and regulatory framework with auditors of
subsidiaries in other countries (for example, if the subsidiary is
required to adhere to the securities
regulations of the parent company).
 After obtaining the general understanding, the auditor shall perform
further audit procedures to help identify instances of
noncompliance with those laws and
regulations where noncompliance should be considered when
preparing financial
statements,
specifically:
a. Inquiring of management as to whether the entity is in
compliance with such laws and regulations; and
b. Inspecting correspondence with the relevant licensing or
regulatory authorities.
 Obtain sufficient appropriate audit evidence about compliance with
those laws and regulations generally recognized by the auditor to
have an effect on the determination of material amounts and
disclosures in financial statements.
 The auditor shall obtain written representations that management has
disclosed to
the auditor all known instances of noncompliance or suspected non-
compliance with laws and regulations whose effects should be
considered when preparing financial statements.
- Audit Procedures when Noncompliance is Identified or suspected

 If the auditor becomes aware of information concerning an
instance of noncompliance or suspected non-compliance with laws
and regulations, the auditor
shall
obtain:
 An understanding of the nature of the act and the circumstances
in which it has occurred; and
54
PSA Study Guide and
Quizzer
 Further information to 1evaluate
Study Unit PSA 200 –the
265possible effect onandthe
General Principles
financial statements.
 When evaluating the possible effect on the financial statements,
the auditor considers:
a. The potential financial consequences, such as fines, penalties,
damages, threat of expropriation of assets, enforced
discontinuation of operations and litigation.
b. Whether the potential financial consequences
require disclosure.
c. Whether the potential financial consequences are so serious as to
call into question the true and fair view (fair presentation)
given by the financial statements.
55
PSA Study Guide and
Quizzer
 If the auditor suspects there may be non-compliance, the auditor shall
discuss the matter with management and, where appropriate, those
charged with governance.
 If management or, as appropriate, those charged with governance do
not provide sufficient information that supports that the entity is in
compliance with laws and regulations and, in the auditor’s
judgment, the effect of the suspected noncompliance may be
material to the financial statements, the auditor shall consider the
need to obtain legal advice.
 If sufficient information about suspected non-compliance cannot be
obtained, the auditor shall evaluate the effect of the lack of sufficient
appropriate audit evidence on the auditor’s opinion.
 The auditor shall evaluate the implications of non-compliance in
relation to other
aspects of the audit, including the auditor’s risk assessment and the
reliability of
written representations, and take appropriate action.
- Reporting of Identified or Suspected Non-Compliance

 To those charged with governance
 the auditor shall communicate with those charged with
governance matters involving noncompliance with laws and
regulations that come to the auditor’s
attention during the course of the audit, other than when the
matters are clearly
inconsequent
ial.
 If the auditor suspects that management or those charged with
governance are involved in non-compliance, the auditor shall
communicate the matter to the next
higher level of authority at the entity, if it exists, such as an audit
committee or
supervisory
board.
 Where no higher authority exists, or if the auditor believes that the
communication may not be acted upon or is unsure as to the
person to whom to report, the auditor
shall consider the need to obtain legal
advice.
To the Users of the Auditor’s Report on the Financial Statements
 If the auditor concludes that the non-compliance has a material
effect on the
financial statements, and has not been adequately reflected in
the financial statements, the auditor shall express a qualified
opinion or an adverse opinion on the financial statements.
 If the auditor is precluded by management or those charged with
governance
from obtaining sufficient appropriate audit evidence to evaluate
whether noncompliance that may be material to the financial
statements has, or is likely to have, occurred, the auditor shall
express a qualified opinion or disclaim an opinion on the financial
statements on the basis of a limitation on the scope of the audit.
 If the auditor is unable to determine whether non-compliance has
occurred
56
PSA Study Guide and
Quizzer
because of Study Unit 1 PSA
limitations 200 – 265by
imposed General
the Principles and
circumstances
rather than by management or those charged with
governance, the auditor shall evaluate the effect on the auditor’s
opinion.
To Regulatory and Enforcement Authorities (in certain circumstances)
 If the auditor has identified or suspects non-compliance with laws
and regulations, the auditor shall determine whether the auditor
has a responsibility to report the
identified or suspected non-compliance to parties
outside the entity.
- Documentation
57
PSA Study Guide and
Quizzer
 The auditor shall include in the audit documentation identified or
suspected noncompliance with laws and regulations and the results
of discussion with management and, where applicable, those charged
with governance and other parties outside the entity.
 Indications that Noncompliance may have Occurred

1. Investigation by government departments or payment of fines or
penalties.
2. Payments for unspecified services or loans to consultants, related
parties, employees or government employees.
3. Sales commissions or agent’s fees that appear excessive in relation to
those ordinarily
paid by the entity or in its industry or to the services actually received.
4. Purchasing at prices significantly above or below market price.
5. Unusual payments in cash, purchases in the form of cashiers’ checks
payable to bearer
or transfers to numbered bank accounts.
6. Unusual transactions with companies registered in tax havens.
7. Payments for goods or services made other than to the country from
which the goods or services originated.
8. Payments without proper exchange control documentation.
9. Existence of an information system which fails, whether by design or by
accident, to provide an adequate audit trail or sufficient evidence.
10. Unauthorized transactions or improperly recorded transactions.
11. Media comment.
58
PSA Study Guide and
Quizzer
MULTIPLE
CHOICE
1. It refers to acts of omission or commission by the entity being audited,

either intentional or unintentional, which are contrary to the prevailing laws
and regulations.
a.
noncompliance
b.
nonconformance
c. violation
d.
inconsistency
2. Noncompliance does not include personal misconduct.
a. True b.
False
3. The fact that noncompliance may materially affect the financial

statements should be recognized by the auditor during planning and
performing audit procedures and in evaluating and reporting the results
thereof.
a. True b.
False
4. An audit is expected to bring to light all noncompliance.
a. True b.
False
5. Detection of noncompliance, whether material or immaterial, may have

bearing on
management’s
integrity.
a. True b.
False
6. The auditor should seek legal advice to determine if an act constitutes

noncompliance.
a. True b.
False
7. Responsibility for the prevention and detection of noncompliance rests with:

a. b. auditor
management
59
PSA Study Guide and
Quizzer
c Study Unit 1 PSA 200 lawyer
– 265 General Principles and
. d. court
8. During the planning phase, the auditor shall
a. obtain general understanding of the legal and regulatory framework

applicable to the entity under audit.
b. document the noncompliance found and discuss it with
management. c. report the noncompliance to audit
committee.
9. Which of the following procedures would an auditor perform to

identify instances of noncompliance?
60
PSA Study Guide and
Quizzer
a. Inquiring management about compliance with laws and
regulations.
b. Inspecting correspondence with the relevant licensing or
regulatory authorities. c. Determining the effect of noncompliance
on the financial statements.
d. All of the
above.
e. Choices a and
b.
10. If the auditor becomes aware of information concerning an instance of

noncompliance or suspected non-compliance with laws and regulations, the
auditor shall
a. Obtain an understanding of the nature of the act and the circumstances
in which it has occurred.
b. Obtain further information to evaluate the possible effect on the
financial statements. c. Document the findings and discuss with
management.
d. All of the
above.
11. If members of the senior management including board of directors

are involved in noncompliance, to whom should the auditor communicate
or report the matter?
a. audit
committee
b. chief executive
officer c. chief
operating officer d.
internal auditor
12. If noncompliance has a material effect on the financial statements and has
not been properly reflected on the financial statements, the auditor shall:
a. Express a qualified opinion or an adverse
opinion.
b. Express an adverse opinion or disclaimer
of opinion.
c. Add an explanatory paragraph and express an
unqualified opinion. d. Express an unmodified opinion.
13. If the auditor is precluded by management or those charged with

governance from obtaining sufficient appropriate audit evidence to
evaluate whether non-compliance that may be material to the financial
statements has, or is likely to have, occurred, the auditor shall:
a. Express a qualified opinion or an

adverse opinion. b. Express a qualified or a
disclaimer of opinion. c. Express an
adverse opinion.
d. Express a qualified
opinion.
61
PSA Study Guide and
Quizzer
14. If the auditor Study to
is unable Unitdetermine
1 PSA 200 –whether
265 General Principles and has
non-compliance
occurred because of limitations imposed by the circumstances the auditor
shall
a. Express a qualified opinion or an

adverse opinion. b. Express a qualified or a
disclaimer of opinion. c. Express an
adverse opinion.
d. Express a qualified
opinion.
15. Which of the following may indicate that noncompliance have occurred?
a. Investigation by government departments or payment of
fines or penalties. b. Unauthorized transactions or improperly
recorded transactions.
c. Payments for unspecified
services.
62
PSA Study Guide and
Quizzer
d. Unusual payments in
cash.
e. All of the
above
PSA 260
COMMUNICATION WITH THOSE CHARGED WITH
GOVERNANCE
FOCUS NOTES:
 Those charged with governance – The person(s) or organization(s) (e.g., a
corporate trustee)
with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity. This includes
overseeing the financial reporting process.
 Management – The person(s) with executive responsibility for the conduct of
the entity’s operations. For some entities in some jurisdictions, management
includes some or all of those charged with governance, for example,
executive members of a governance board, or an owner-manager.
 The objectives of the auditor are:
a. To communicate clearly with those charged with governance the
responsibilities of the auditor in relation to the financial statement audit,
and an overview of the planned scope and timing of the audit;
b. To obtain from those charged with governance information
relevant to the audit;
c. To provide those charged with governance with timely observations
arising from the audit that are significant and relevant to their
responsibility to oversee the financial reporting process; and
d. To promote effective two-way communication between the auditor
and those charged with governance.
 Requirements
The auditor shall determine the appropriate person(s) within the

entity’s governance
structure with whom to communicate.
If the auditor communicates with a subgroup of those charged with
governance, for example, an audit committee, or an individual, the
auditor shall determine whether the
auditor also needs to communicate with the governing body.
- Matters to be communicated
The auditor shall communicate with those charged with governance the
responsibilities of the auditor in relation to the financial statement audit
 forming and expressing an opinion on the financial statements that
have been prepared by management with the oversight of those
charged with governance; and
 the audit of the financial statements does not relieve management or
those charged
with governance of their responsibilities.
63
PSA Study Guide and
Quizzer
The auditor shall communicate with
Study Unit those
1 PSA charged
200 with governance
– 265 General an
Principles and
overview of the planned scope and timing of the audit, which includes
communicating about the
significant risks identified by the auditor
The auditor shall communicate with those charged with governance
the significant findings from the audit.
64
PSA Study Guide and
Quizzer
 auditor’s views about significant qualitative aspects of the entity’s
accounting practices, including accounting policies, accounting
estimates and financial statement disclosures.
 significant difficulties, if any, encountered during
the audit;
 significant matters arising during the audit that were discussed,
or subject to correspondence, with management and written
representations the auditor is
requesting;
 circumstances that affect the form and content of the auditor’s
report, if any; and
 any other significant matters arising during the audit that, in the
auditor’s professional
judgment, are relevant to the oversight of the financial reporting
process.
In the case of listed entities, the auditor shall communicate with
those charged with governance:
 statement that the engagement team and others in the firm as
appropriate, the firm and, when applicable, network firms have
complied with relevant ethical requirements
regarding independence;
 All relationships and other matters between the firm, network firms,
and the entity that, in the auditor’s professional judgment, may
reasonably be thought to bear on independence.
 The related safeguards that have been applied to eliminate
identified threats to
independence or reduce them to an acceptable level.
- The Communication Process

The auditor shall communicate with those charged with governance the
form, timing and expected general content of communications.
The auditor shall communicate in writing with those charged with
governance regarding
significant findings from the audit if, in the auditor’s professional
judgment, oral communication would not be adequate. Written
communications need not include all matters that arose during the
course of the audit.
The auditor shall communicate in writing with those charged with
governance regarding
auditor
independence.
The auditor shall communicate with those charged with governance on a
timely basis.
The auditor shall evaluate whether the two-way communication between
the auditor and those charged with governance has been adequate for
the purpose of the audit. If it has not, the auditor shall evaluate the effect,
if any, on the auditor’s assessment of the risks of material misstatement
and ability to obtain sufficient appropriate audit evidence, and shall take
appropriate action.
- Documentation
Where matters required by this PSA to be communicated are
communicated orally, the auditor shall include them in the audit
65
PSA Study Guide and
Quizzer
Study
documentation, and when Unit
and to1whom
PSA 200
they– 265
wereGeneral Principles and
communicated.
Where matters have been communicated in writing, the auditor shall
retain a copy of the communication as part of the audit documentation.
66
PSA Study Guide and
Quizzer
MULTIPLE
CHOICE
1. The term used to describe the role of persons with responsibility for
overseeing the strategic direction of the entity and obligations related to the
accountability of the entity including overseeing the financial reporting
process.
a.
client
b.
management
c.
governance d.
executive
2. Which of the following must the auditor communicate with those charged
with governance on timely basis?
a. Auditor’s responsibilities in relation to the financial

statement audit.
b. Overview of the planned scope and timing of the audit including
significant risks identified. c. The significant findings from the audit.
d. Matter about compliance with
independence.
e. All of the
above.
3. Corporate governance is a process by which the owners and creditors of an

organization:
a. Exert
control.
b. Require
accountability.
c. Exert control and require
accountability.
d. Neither exert control nor require
accountability.
4. The responsibility for operating an enterprise is delegated to the:
a.
Auditor.
b. Audit
committee.
c.
Management.
d. Board of
directors.
67
PSA Study Guide and
Quizzer
Study
5. The audit client of the CPA Unit
firm is:1 PSA 200 – 265 General Principles and
a.
Management.
b. The SEC.
c. The board of
directors.
d. The
stockholders.
68
PSA Study Guide and
Quizzer
PSA 265
COMMUNICATING DEFICIENCIES IN INTERNAL
CONTROL TO THOSE CHARGED WITH GOVERNANCE AND
MANAGEMENT
FOCUS NOTES:
 Objective
 to communicate appropriately to those charged with governance and
management deficiencies in internal control that the auditor has
identified during the audit and that, in the auditor’s professional
judgment, are of sufficient importance to merit their respective
attentions.
 Definition
 Deficiency in internal control – This exists when:
a. A control is designed, implemented or operated in such a
way that it is unable to prevent, or detect and correct,
misstatements in the financial statements on a timely basis;
or
b. A control necessary to prevent, or detect and correct,
misstatements in the financial statements on a timely basis is
missing.
 Significant deficiency in internal control – A deficiency or combination of
deficiencies in internal control that, in the auditor’s professional
judgment, is of sufficient importance to merit the attention of those
charged with governance.
 Requirements
 The auditor shall determine whether, on the basis of the audit work
performed, the auditor has identified one or more deficiencies in
internal control.
 If the auditor has identified one or more deficiencies in internal control,
the auditor shall determine, on the basis of the audit work performed,
whether, individually or in combination, they constitute significant
deficiencies.
 The auditor shall communicate in writing significant deficiencies in
internal control
identified during the audit to those charged with governance on a timely
basis.
 The auditor shall also communicate to management at an
appropriate level of responsibility on a timely basis:
(a) In writing, significant deficiencies in internal control that the auditor
has
communicated or intends to communicate to those charged with
governance, unless it would be inappropriate to communicate
directly to management in the circumstances; and
(b) Other deficiencies in internal control identified during the audit that
have not been
communicated to management by other parties and that, in
the auditor’s professional judgment, are of sufficient
importance to merit management’s attention.
69
PSA Study Guide and
Quizzer
 The auditor shall include in the
Study Unitwritten
1 PSA communication of Principles
200 – 265 General significantand
deficiencies in internal control:
(a) A description of the deficiencies and an explanation of their potential
effects; and
(b) Sufficient information to enable those charged with governance and
management to understand the context of the communication. In
particular, the auditor shall explain that:
(i) The purpose of the audit was for the auditor to express an
opinion on the financial statements;
70
PSA Study Guide and
Quizzer
(ii) The audit included consideration of internal control relevant to
the 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 internal control; and
(iii) The matters being reported are limited to those deficiencies that
the auditor has identified during the audit and that the auditor has
concluded are of sufficient importance to merit being reported to
those charged with governance.
 Examples of matters that the auditor may consider in determining

whether a deficiency or combination of deficiencies in internal control
constitutes a significant deficiency include:
1. The likelihood of the deficiencies leading to material misstatements
in the financial statements in the future.
2. The susceptibility to loss or fraud of the related asset or liability.
3. The subjectivity and complexity of determining estimated amounts,
such as fair value accounting estimates.
4. The financial statement amounts exposed to the deficiencies.
5. The volume of activity that has occurred or could occur in the account
balance or class of transactions exposed to the deficiency or
deficiencies.
6. The importance of the controls to the financial reporting process; for
example:
a. General monitoring controls (such as oversight of
management). b. Controls over the prevention and
detection of fraud.
c. Controls over the selection and application of significant
accounting policies. d. Controls over significant transactions with
related parties.
e. Controls over significant transactions outside the entity’s normal
course of business.
f. Controls over the period-end financial reporting process (such as
controls over non- recurring journal entries).
7. The cause and frequency of the exceptions detected as a result of
the deficiencies in the controls.
8. The interaction of the deficiency with other deficiencies in internal
control.
 Indicators of significant deficiencies in internal control include,

for example:
1. Evidence of ineffective aspects of the control environment, such as:
a. Indications that significant transactions in which
management is financially interested are not being
appropriately scrutinized by those charged with governance.
b. Identification of management fraud, whether or not material, that was
not prevented
by the entity’s internal control.
c. Management’s failure to implement appropriate remedial action on
significant
deficiencies previously communicated.
2. Absence of a risk assessment process within the entity where such a
process would ordinarily be expected to have been established.
71
PSA Study Guide and
Quizzer
3. Evidence of an ineffective entity
Study Unit risk assessment
1 PSA process,
200 – 265 General such as
Principles and
management’s failure to identify a risk of material misstatement
that the auditor would expect the entity’s risk assessment process
to have identified.
4. Evidence of an ineffective response to identified significant risks (for
example, absence
of controls over such a risk).
5. Misstatements detected by the auditor’s procedures that were not
prevented, or detected and corrected, by the entity’s internal
control.
6. Restatement of previously issued financial statements to reflect the
correction of a
material misstatement due to error or fraud.
72
PSA Study Guide and
Quizzer
7. Evidence of management’s inability to oversee the preparation of the
financial
statement
s.
Multiple
Choice
1. The auditor may identify deficiencies in internal control
a. During the risk assessment process stage

of the audit
b. When performing test of controls.
c. When performing substantive procedures.
d. All of the above
2. A deficiency or combination of deficiencies in internal control that, in the

auditor’s professional judgment, is of sufficient importance to merit the
attention of those charged with governance.
a. Material weaknesses in internal control

b. Significant deficiency in internal control
c. Control risk
d. Significant risk
3. A deficiency in internal control to be considered significant should have

resulted in actual misstatement that the auditor has found out.
a. True
b. False
4. The auditor is not obligated to search deficiencies in internal control.
a. True
b. False
5. The auditor is required to communicate to those charged with governance

and management the significant deficiencies in internal control.
a. True
b. False
6. Communicating significant deficiencies in internal control assists

those charged with governance in fulfilling their oversight
responsibilities.
a. True
b. False
7. In assessing control risk, the auditor considers internal control for the
purpose of expressing an opinion on the effectiveness of internal control.
73
PSA Study Guide and
Quizzer
a. True Study Unit 1 PSA 200 – 265 General Principles and
b. False
74
PSA Study Guide and
Quizzer
8. Significant deficiencies in internal control that are already known to
management and those charged with governance but are not remedied
because of cost or other considerations should no longer be
communicated.
a. True
b. False
9. Significant deficiencies in internal control that were communicated in

previous audit should be included in the current year communication if
remedial action has not yet been taken.
a. True
b. False
10.When an auditor has identified significant deficiency in internal control, he is

required to
a. Communicate with those charged with governance and to management,

unless not appropriate to communicate directly to management.
b. Modify his opinion due to scope
limitation. c. Assess control risk at
below maximum.
End of Study Unit

1.
75

AU 6 NO Answers

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AU 6 NO Answers

Uploaded by

Copyright:

Available Formats

UL INTEGRATED CPA REVIEW AU-6

2ND SEM SY 2021-2022

 Overall objectives of the auditor in conducting an audit of financial

 Complying with Relevant Requirements

a. To make recommendations for improving performance.

3. Which of the following is not a responsibility of the management?

a. Preparation of financial statements in accordance with applicable

4. The two classifications of applicable financial reporting framework are

a. Fair presentation framework and compliance framework.

5. Which of the following pertains to fair presentation framework?

a. Requires compliance with the requirements of the framework.

6. The auditor should make a critical assessment, with a questioning mind, of

7. It refers to the audit procedures deemed necessary in the circumstances to

8. Absolute assurance in auditing is not attainable as a result of such factors

a. The need for

9. The risk that the auditor expresses an inappropriate audit opinion

a. risks of material misstatement at the overall financial

a. inherent risk and control

12. They exist independently of the audit of financial statements:

a. inherent risk and control

13. The susceptibility of an assertion to a misstatement that could be material,

17. This component of audit risk is a function of the effectiveness of an audit

19. Reasonable assurance is obtained:

a. when the auditor has reduced audit risk to an acceptably

a. auditor is responsible for expressing an opinion of the financial

 AGREEMENT ON AUDIT ENGAGEMENT

To the appropriate representative of management or those charged

[The objective and scope of

You have requested that we audit the financial statements of ABC

[The responsibilities of the

We will conduct our audit in accordance with Philippine Standards on

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

[The responsibilities of management and identification of the

a) For the preparation and fair presentation of the financial statements

As part of our audit process, we will request from [management and,

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

[Insert appropriate reference to the expected form and content of the

amended in the light of our audit

XYZ & Co.

Acknowledged on behalf of ABC Company by

a. Terms of audit engagement

2. It documents and confirms the auditor’s acceptance of the appointment,

4. Which of the following would an auditor most likely consider to decide

a. The acceptability of financial reporting framework adopted by the

5. Documentation of the terms of engagement is required for an audit in

6. The auditor may accept a change engagement when:

a. there is reasonable justification for doing it.

a. Perform the audit with increase professional skepticism.

a. The financial reporting framework to be applied in the preparation

10. Acceptable financial reporting framework that will result in information

 Responsibility to establish quality control

 Leadership Responsibilities for Quality on Audits

 Relevant Ethical Requirements

 Acceptance and Continuance of Client Relationships and Specific Audit

 An engagement quality control review should include

 Monitoring. Effective system of quality control provides for monitoring to

 The engagement quality control reviewer shall document, for the

a. Maintaining independence in mind and

a. Establish a system of quality control.

3. Who is responsible for the overall quality on each audit engagement?

5. Among the possible reasons why an auditor will discontinue servicing an

a. Too many errors have to be adjusted to make the financial statements