LA CONSOLACION COLLEGE TANAUAN

BACHELOR OF SCIENCE IN ACCOUNTANCY

AUDITA1
PRELIMINARY EXAMINATIONS

NAME:
Date:

DIRECTION: Indicate in the answer sheet (Google form) the letter of your best answer.

a The following assertions about classes of transactions and events for the period under audit,
_____1.
except
A. Classification
B. Cutoff
C. Existence
D. Completeness
c 9 The auditor may accept or continue an audit engagement only when the basis upon which it is to
_____2.
be performed has been agreed, through
I. Establishing whether the preconditions for an audit are present
II. Confirming that there is a common understanding between the author and management
and, where appropriate, those charged with governance of the terms of the audit
engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
a 10
_____3. An audit is conducted on the premise that management and where appropriate, those charged
with governance, have acknowledged and understand that they have responsibilities that are fundamental
to the conduct of an audit in accordance with PSAs. Which of the following is not one of those
responsibilities?
A. The preparation of financial statement in accordance with relevant pronouncements issued by
the AASC.
B. The establishment and maintenance of an adequate internal control system that is necessary to
enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
C. To provide the auditor with access to all information that is relevant to the preparation of the
financial statement such as records, documentation, and other matters.
D. To provide the auditor with unrestricted access to persons within the entity from which the
auditor determines it necessary to obtain audit evidence.
11 The auditor shall agree the terms of the audit engagement with management or those charged
a _____4.
with governance, as appropriate. The agreed terms shall be recorded in a /an
A. Engagement letter
B. Letter of audit inquiry
C. Management representation letter
D. Confirmation letter
a 12
_____5. The following matters are generally included in an auditor’s engagement letter, except
A. The factors to be considered in setting preliminary judgements about materiality.
B. The fact that because of the test nature and other inherent limitations of an audit, together
with the inherent limitations of internal control, there is an unavoidable risk that even some
materials misstatements may remain undiscovered.
 C. The scope of the audit.
D. Management’s responsibility for the financial statements.
14 Which of the following statements would least likely appear in an auditor’s engagement letter?
_____6.
c A. Our audit will be made with the objective of our expressing an opinion on the financial
statements.
B. We remind you that the responsibility for the preparation of financial statements
including adequate disclosure is that of the management of the entity.
C. After performing our preliminary analytical procedures, we will discuss with you the
other procedures we consider necessary to complete the engagement.
D. Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to the engagement plus out-of-pocket expenses.
17 a The auditor of a parent entity is also the auditor of its component. Which of the following factors
_____7.
may influence the auditor’s decision whether to send a separate engagement letter to the entity’s
component.
A. Whether a separate auditor’s report is to be issued on the component.
B. The component’s management does not accept its responsibilities that are fundamental to
the conduct of an audit.
C. The financial reporting framework used by the component is unacceptable.
D. The preconditions for an audit of the component’s financial statements are not present.
18 a On recurring audits, the auditor may decide not to send a new engagement letter each period.
_____8.
Which of the following factors may make it appropriate to send a new engagement letter?
A B C D
Any revised or special terms of the audit
Engagement Yes No Yes No
A recent change of senior management Yes No No No
A change in legal or regulatory requirements Yes Yes Yes Yes
A significant change in nature or size of the
entity’s business Yes Yes Yes Yes
19 a The auditor shall not agree to a request from the entity to change the terms of the audit
_____9.
engagement or to change the audit engagement to an engagement that conveys a lower level of assurance
when there is no reasonable justification for doing so. Which of the following may be considered
reasonable justifications for the change in the audit engagement?
I. A change in circumstances affecting the need for the service.
II. A misunderstanding as to the nature of an audit as originally requested.
III. A restriction on the scope of the engagement, whether imposed management or caused by
other circumstances.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
20 a
_____10. Before the completion of the audit engagement, an auditor is requested to change the
engagement to one that provides a lower level or assurance. If the auditor concludes that there is a
reasonable justification for the change in engagement, the report to be issued would
A. Be that appropriate for the revised terms of engagement.
B. Include reference to the original engagement.
C. Include reference to any procedures that may have been performed in the original
engagement.
D. Not include reference to any procedures that may have been performed, particularly when the
new engagement is to undertake agreed-upon procedures.
21 d
_____11. If the auditor is unable to agree to a change of the engagement and is not permitted to continue
the original engagement, the auditor should
A. Insist on continuing the original engagement.
B. Express a qualified opinion.
C. Express an adverse opinion.
D. Withdraw from the engagement.
_____12.
22 c Planning an audit involves
I. Establishing the overall audit strategy for the engagement.
II. Developing an audit plan.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
_____13.
23 d Which of the following activities should be performed by the auditor at the beginning of the
current audit engagement?
I. Perform procedures regarding the continuance of the client relationship and the
specific audit engagement.
II. Evaluate compliance with relevant ethical requirements, including independence
III. Establish an understanding of the terms of the engagement.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
25 b Adequate planning helps to ensure that:
_____14.
A B C D
Appropriate attention is devoted
to important areas of the audit No Yes Yes No
Potential problems are identified
and resolved on a timely, basis Yes Yes No No
The audit engagement is properly
Organized and managed Yes Yes No No

_____15.
26 a Which of the following statements concerning audit planning is incorrect?
A. Planning is a discrete phase of an audit.
B. Planning is a continual and iterative process.
C. In a recurring audit, planning often begins shortly after (or in connection with) the
completion of the previous audit engagement.
D. In planning an audit, the auditor considers the timing of certain planning activities
and audit procedures that are to be completed prior to the performance of further
audit procedures.
27 d
______16. In performing an audit of financial statements, the auditor should obtain a sufficient
knowledge of a client’s business and industry to
A. Develop an attitude of professional skepticism concerning management’s financial
statement assertions.
B. Make a constructive suggestions concerning improvements to the client’s internal
control.
C. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client’s
financial statements
 _____17.
28 a Which of the following is the least likely procedure to be performed in planning a financial
statement audit?
A. Selecting a sample of sales invoices for comparison with shipping documents.
B. Coordinating the assistance of entity personnel in data preparation.
C. Reading the current year’s interim financial statements.
D. Discussing matters that may affect the audit with firm personnel responsible for non
audit services to the entity.
_____18.
29 d The establishment of an overall strategy involves
I. Determining the characteristics of the engagement that define its scope.
II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required.
III. Considering the important factors that will determine the focus of the engagement
team’s efforts.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
_____19.
30 c Which of the following should be included in the audit plan?
I. The nature, timing and extent of planned risk assessment procedures, as determined
under PSA 315 (Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment).
II. The nature, timing and extent of planned further audit procedures at the assertion
level, as determined under PSA 330 (The Auditor’s Responses to Assessed Risks).
A. I only
B. II only
C. Both I and II
D. Neither I nor II
_____20.
31 c Which of the following matters would an auditor least likely consider when setting the direction
of the audit?
A. The selection of the engagement team and the assignment of audit work to the team
members.
B. The engagement budget which includes consideration of the appropriate amount of
time to allot for areas where there may be a higher risks of material misstatement.
C. The availability of client personnel and data.
D. The manner in which the auditor emphasizes to engagement team members in the
need to maintain a questioning mind and to exercise professional skepticism in gathering
and evaluation of audit evidence.
32 a Which of the following matters would an auditor most likely consider when establishing the
_____21.
scope of the audit?
A. The expected audit coverage, including the number and locations of the entity’s
components to be included.
B. The entity’s timetable for reporting, such as at interim and final stages.
C. The discussion with the entity’s management concerning the expected
communications on the status of audit work throughout the engagement and the expected
deliverables resulting from the audit procedures.
D. Audit areas where there is a higher risk of material misstatement.
33 a
_____22. In the planning stage of an audit engagement, the auditor is required to perform audit
procedures to obtain an understanding of the entity and its environment, including its internal control.
These procedures are called
A. Risk assessment procedures
B. Substantive tests
 C. Tests of controls
D. Dual-purpose tests
34 a
______23. In planning the audit engagement, the auditor should consider each of the following, except
A. The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
B. The entity’s accounting policies and procedures.
C. Matters relating to the entity’s business and the industry in which it operates.
D. Materiality level and audit risk.
35 c
______24. Audit programs are modified to suit the circumstances of particular engagements. A complete
audit program usually should be developed
A. When the engagement letter is prepared.
B. After obtaining an understanding of the control environment and control activities
components of the entity’s internal control.
C. After the auditor has obtained an understanding of the entity and its environment,
including its internal control and assessed the risks of material misstatement.
D. Prior to beginning the actual audit work.
36 d
______25. In design written audit programs, an auditor should establish specific audit objectives that
relate primarily to the
A. Selected audit techniques.
B. Cost-benefit of gathering audit evidence.
C. Timing of audit procedures.
D. Financial statement assertions.
d
_____26. One of the major parts of audit planning is preplanning. Which of the following is not involved
during the preplanning phase?
a. Obtaining engagement letter
b. Selecting staff for engagement
c. Deciding whether to accept or continue this client
d. Obtaining information about client’s legal obligation
_____27. Preplanning the audit involves several key activities. Which of the following would not be
included in preplanning an audit?
a. Investigating the client’s background
b. Understanding the client’s reason for obtaining an audit
c. Determining the likelihood of issuing an unqualified audit opinion on the client’s financial statements
d. Communicating with the prospective client’s prior auditor to inquire about any disagreements with the
client
____28. What is the most likely course of action that will be taken by an auditor in assessing management
integrity?
a. Tour the plant
b. Review bank reconciliation
c. Review minutes of the meetings of the board of directors
d. Research the background and histories of officers
a The following matters are generally included in an auditor’s engagement letter, except
____29.
12
a. The factors to be considered in determining the overall materiality
b. The fact that because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that even some material misstatements
may remain undiscovered
c. The scope and purpose of the audit
d. Management’s responsibility for the preparation of financial statements
16d
____30. An auditor’s engagement letter most likely will include
a. A request for permission to contact the client’s lawyer for assistance in identifying litigation, claims
and assessments
b. A reminder that management is responsible for illegal acts committed by employees
 c. The auditor’s preliminary assessment of the risk factors relating to misstatements arising from
fraudulent financial reporting
d. Management’s acknowledgment of its responsibility for such internal control as it determines is
necessary to enable the preparation of financial statements that are free from material misstatement
6____31.
d Early appointment of the independent auditor will enable
a. A more thorough examination to be performed
b. A proper study and evaluation of internal control to be performed
c. Sufficient competent evidential matter to be obtained
d. A more efficient examination to be planned
b
____32. An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should
a. Engage financial experts familiar with the nature of the business entity
b. Obtain knowledge of matters that relate to the nature of the entity’s business
c. Refer substantial portion of the audit to another CPA who will act as the principal auditor
d. First inform management that an unqualified opinion cannot be issued
d
____33. Engagement letters are widely used in practice for professional engagement of all types. The
primary purpose of the engagement letter is to
a. Remind management that the primary responsibility for the financial statement rests with management
b. Satisfy the requirements of the CPA’s liability insurance policy
c. Provide a starting point for the auditor’s preparation of the preliminary audit program
d. Provide a written record of the agreement with the client as to services to be provided
_____34. Statement 1: According to PSA 300, the auditor may discuss elements of planning with those
charged with governance and the entity’s management
Statement 2: The audit plan sets the scope, timing and direction of the audit, and guides the
development of the more detailed overall audit strategy
Statement 3: The overall audit strategy is more detailed than the audit plan and includes the
nature, timing and extent of audit procedures to be performed by engagement team members to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptable low level
a. False, False, True
b. True, True, True
c. True, False, False
d. False, True, False
a
____35. In planning an audit of a new client, an auditor most likely would consider the methods used to
process accounting information because such methods
a. Influence the design of internal control
b. Assist in evaluating the planned audit objectives
c. Determine the auditor’s acceptable level of audit risk
d. Affect the auditor’s preliminary judgment about materiality level
d
____36. The element of the audit planning process most likely to be agreed upon which the client before
the implementation of audit strategy is the determination of the
a. Methods of statistical sampling to be sued in confirming accounts receivable
b. Pending legal matters to be included in the inquiry of the client’s attorney
c. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion
d. Schedules and analyses to be prepared by the client’s staff
____37. The auditor should obtain an understanding of the entity’s objectives and strategies, and those
business risks that may result in risks of material misstatement. Which of the following statements
concerning the entity’s business risk is incorrect?
a. Business risk is broader than the risk of material misstatement of the financial statements, though it
includes the later
b. An understanding of the business risks facing the entity increases the likelihood of identifying risks of
material misstatement
c. The auditor has a responsibility to identify or assess all business risks
d. Business risk may arise from the development of new products or services that may fail
____38. What is an audit plan?
a. It is a detailed program of analytical procedures and all substantive tests to be performed in the course
of the audit
b. It is a document that provides an overview of the company and a general plan for the audit work to be
accomplished, timing of the work, and other matters of concern to the audit
c. It is a generic document that auditing firms have developed to lead the process of the audit through a
systematic and logical process
d. Budget of the time that should be necessary to complete each phase of the audit procedures
a
____39. The concept of materiality is least important to an auditor when considering the
a. Effects of a direct financial interest in the client upon the auditor’s independence
b. Decision whether to use positive or negative confirmations of accounts receivable
c. Adequacy of disclosure of a client’s illegal act
d. Discovery of weaknesses in a client’s internal control
d
____40. A basic premise underlying analytical procedure is that a. These procedures cannot replace tests
of balances and transactions. b. Statistical tests of financial information may lead to the discovery of
material misstatements in the financial statements. c. The study of financial ratios is an acceptable
alternative to the investigation of unusual fluctuations. d. Plausible relationships among data may
reasonably be expected to exists and continue in the absence of known conditions to the contrary.

Short answer:
Nos. 41-45: Briefly discuss what is the concept of materiality and its implication during the audit
planning stage. Give example scenario (if applicable).