Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

AT.3216 SOLIMAN/UY/RICAFRENTE
Considering Other Specific Audit Areas MAY 2022

References:

a. PSA 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Service Organization
b. PSA 510 (Redrafted), Initial Audit Engagements – Opening Balances
c. PSA 540 (Revised and Redrafted) Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures
d. PSA 550 Related Parties
e. PSA 600 (Revised and Redrafted), Special Considerations – Audits of Group Financial Statements
f. PSA 610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming Amendments
g. PSA 620 (Revised and Redrafted), Using the Work of an Auditor’s Expert

LECTURE NOTES
PSA 402—Audit Considerations Relating to an Entity To achieve the objectives set out above, the auditor
Using a Service Organization performs the risk-based audit procedures below:

Service organization is a third-party organization that Risk assessment

provides services to user entities that are part of those
entities’ information systems relevant to financial reporting.
Service auditor refers to an auditor who, at the request of
the service organization, provides an assurance report on
the controls of a service organization. A service auditor may
issue the following on internal control of a service
organization:
a. Type 1 report – Report on the description and design of
controls at a service organization.
b. Type 2 report – Report on the description, design, and
operating effectiveness of controls at a service
organization.
• Understanding services relevant to audit provided by a
service organization.
• Understanding relevant controls in place.
• Determine extent of reliance on the type 1 or type 2
report.
Risk response
• Determine where sufficient appropriate audit evidence
may be obtained.
• Performing tests of controls.
• Making inquiries about significant risks.

In determining the sufficiency and appropriateness of the Conclusion and Reporting

audit evidence provided by a type 1 or type 2 report, the
user auditor shall be satisfied as to:
a. The service auditor’s professional competence and
independence from the service organization; and
b. The adequacy of the standards under which the type 1
or type 2 report was issued.
User entity is an entity that uses a service organization and
whose financial statements are being audited.
User auditor refers to an auditor who audits and reports on
the financial statements of a user entity.
The objectives of the user auditor, when the user entity uses
the services of a service organization, are:
a. To obtain an understanding of the nature and
significance of the services provided by the service
organization and their effect on the user entity’s internal
control relevant to the audit, sufficient to identify and
assess the risks of material misstatement; and
b. To design and perform audit procedures responsive to
those risks.
• No reference to work of a service auditor unless audit
report is modified.
• If no sufficient appropriate evidence is obtained, modify
the audit report.
Obtaining an Understanding of the Services Provided by a
Service Organization, Including Internal Control
The user auditor shall determine whether a sufficient
understanding of the nature and significance of the services
provided by the service organization and their effect on the
user entity’s internal control relevant to the audit has been
obtained to provide a basis for the identification and
assessment of risks of material misstatement.
If the user auditor is unable to obtain a sufficient
understanding from the user entity, the user auditor shall
obtain that understanding from one or more of the following
procedures:
a. Obtaining a type 1 or type 2 report, if available;
b. Contacting the service organization, through the user
entity, to obtain specific information;
c. Visiting the service organization and performing
procedures that will provide the necessary information
about the relevant controls at the service organization;
or
d. Using another auditor to perform procedures that will
provide the necessary information about the relevant
controls at the service organization.

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EXCEL PROFESSIONAL SERVICES, INC.

Responding to the Assessed Risks of Material Misstatement Audit Procedures—Opening Balances

In responding to assessed risks, the user auditor shall:
a. Determine whether sufficient appropriate audit
evidence concerning the relevant financial statement
assertions is available from records held at the user
entity; and, if not,
b. Perform further audit procedures to obtain sufficient
appropriate audit evidence or use another auditor to
perform those procedures at the service organization on
the user auditor’s behalf.
The auditor shall read the most recent financial statements,
if any, and the predecessor auditor’s report thereon, if any,
for information relevant to opening balances, including
disclosures.
The auditor shall obtain sufficient appropriate audit
evidence about whether the opening balances contain
misstatements that materially affect the current period’s
financial statements by:

Tests of Controls 1. Determining whether the prior period’s closing balances

When the user auditor’s risk assessment includes an
expectation that controls at the service organization are
operating effectively, the user auditor shall obtain audit
evidence about the operating effectiveness of those controls
from one or more of the following procedures:
a. Obtaining a type 2 report, if available;
b. Performing appropriate tests of controls at the service
organization; or
c. Using another auditor to perform tests of controls at the
service organization on behalf of the user auditor.
Reporting by the User Auditor
The user auditor should modify the opinion in the user
auditor’s report if the user auditor is unable to obtain
sufficient appropriate audit evidence regarding the services
provided (i.e., as a scope limitation).
PSA 510—Initial Audit Engagements—Opening
Balances
Initial audit engagement – An engagement in which either:
1. The financial statements for the prior period were not
audited; or
2. The financial statements for the prior period were
audited by a predecessor auditor.
have been correctly brought forward to the current
period or, when appropriate, have been restated;
2. Determining whether the opening balances reflect the
application of appropriate accounting policies; and
3. Performing one or more of the following:
• Where the prior year financial statements were
audited, reviewing the predecessor auditor’s
working papers to obtain evidence regarding the
opening balances;
• Evaluating whether audit procedures performed in
the current period provide evidence relevant to the
opening balances; or
• Performing specific audit procedures to obtain
evidence regarding the opening balances.
If the auditor obtains audit evidence that the opening
balances contain misstatements that could materially affect
the current period’s financial statements, the auditor shall
perform such additional audit procedures as are appropriate
in the circumstances to determine the effect on the current
period’s financial statements. If the auditor concludes that
such misstatements exist in the current period’s financial
statements, the auditor shall communicate the
misstatements with the appropriate level of management
and those charged with governance.
Audit Conclusions and Reporting

Predecessor auditor – The auditor from a different audit

Results Opinion
firm, who audited the financial statements of an entity in
the prior period and who has been replaced by the current Opening Balances:
auditor. No material
misstatements, with
Opening balances refer to those account balances that exist Unmodified
sufficient appropriate audit
at the beginning of the period. Opening balances are based evidence
upon the closing balances of the prior period and reflect the
Qualified or disclaimer; or
effects of transactions and events of prior periods and
accounting policies applied in the prior period. Opening Qualified or disclaimed—
balances also include matters requiring disclosure that No sufficient appropriate results of operations and
existed at the beginning of the period, such as contingencies audit evidence cash flows; and
and commitments. unmodified—financial
position.
In conducting an initial audit engagement, the objective of Contain material
Qualified or adverse
the auditor with respect to opening balances is to obtain misstatements
sufficient appropriate audit evidence about whether: Consistency of Accounting Policies:
Consistently applied Unmodified
1. Opening balances contain misstatements that
materially affect the current period’s financial Not consistently applied Qualified or adverse
statements; and Modification to the Opinion in the Predecessor Auditor’s
Report:
2. Appropriate accounting policies reflected in the opening Modification relevant and
balances have been consistently applied in the current Modified
material
period’s financial statements, or changes thereto are Modification not relevant
properly accounted for and adequately presented and Unmodified
and material
disclosed in accordance with the applicable financial
reporting framework.

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PSA 540—Auditing Accounting Estimates, Fair Value
Accounting Estimates and Related Disclosures
Management is responsible for making accounting
estimates that are reasonable when preparing and
presenting financial statements.
The objective of the auditor is to obtain sufficient
appropriate audit evidence about whether:
1. accounting estimates, including fair value accounting
estimates, in the financial statements, whether
recognized or disclosed, are reasonable; and
2. related disclosures in the financial statements are
adequate, in the context of the applicable financial
reporting framework.
Obtaining sufficient appropriate evidence is particularly
difficult when auditing client accounting estimates (e.g.,
allowance for doubtful accounts, loss reserves, pension
expenses). When evaluating reasonableness, the auditor
concentrates on assumptions or factors
• Significant to the estimate
• Sensitive to variation
• Apparent deviations from historical patterns
• Subjective and susceptible to bias or misstatement
• Loans with no scheduled terms
• Business with major customers, suppliers, etc.
• Services being provided (received) at unreasonable
prices
• Accounting records for large, unusual transactions
• Confirmations
• Invoices from lawyers
In particular, the auditor shall inspect the following for
indications of the existence of related party relationships or
transactions that management has not previously identified
or disclosed to the auditor:
1. Bank and legal confirmations obtained as part of the
auditor’s procedures;
2. Minutes of meetings of shareholders and of those
charged with governance; and
3. Such other records or documents as the auditor
considers necessary in the circumstances of the entity,
such as SEC filings, conflict of interest
statements, pensions, other trusts, and identify officers
thereof, etc.
PSA 600—Audits of Group Financial Statements—
Including Work of Component Auditors
Group audit is the audit of group financial statements.

The three basic approaches for evaluating the
reasonableness of these estimates are:
1. to review and test management’s process of deriving
the estimate (consider the reasonableness and accuracy
of management’s approach);
2. develop one’s own expectation of the accounting
estimate and compare it to management’s; and
3. review subsequent events or transactions occurring
prior to the completion of fieldwork which bear on the
estimate.
PSA 550—Related Parties
Group financial statements refer to financial statements
that include the financial information of more than one
component.
A component is an entity or business activity for which
group or component management prepares financial
information that should be included in the group financial
statements.
Component auditor is defined as an auditor who, at the
request of the group engagement team, performs work on
financial information related to a component for the group
audit.

Management is responsible identifying and ensuring The following illustration presents the auditor’s objectives in
sufficiency of related party disclosures on the FSs. the audit of group financial statements, including
considering the work component auditors.
The auditor shall obtain evidence about the sufficiency and
appropriateness of related party disclosures. Communicate scope, timing, and
XYZ, CPAs
ABC, CPAs findings of component auditors
(Component
(Group Auditor) on their work on component
Auditor)
financial information,
The auditor shall inquire of management regarding:
1. The identity of the entity’s related parties, including Obtain sufficient appropriate audit evidence
about the financial information of the
changes from the prior period; component by (1) performing audit of
component or (2) using the work of component
2. The nature of the relationships between the entity auditor on the audit of component.

and these related parties; and

3. Whether the entity entered into any transactions Parent Company
Component A
(e.g. subsidiary)
Component B Component C
Separate FS Separate FS Separate FS
with these related parties during the period and, if Separate FS

so, the type and purpose of the transactions.

Obtain sufficient appropriate
Consolidation
audit evidence about the
During the audit, the auditor shall remain alert, when consolidation process.
Process

inspecting records or documents, for arrangements or other

information that may indicate the existence of related party Group
(Consolidated)
relationships or transactions that management has not
Determine whether to act as
auditor of group financial Financial
statements. Statements
previously identified or disclosed to the auditor.

Indications of the existence of related parties may include:
• Borrowing or lending at no interest or at rates
significantly different from market rates
• Sales of real estate at prices significantly different from
appraised values
• Exchanges of similar property in nonmonetary
transactions
To achieve the objectives set out above, the auditor
performs risk-based audit procedures below:
Risk Assessment
• Agree the terms of engagement to conclude client
acceptance and continuance decision.

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EXCEL PROFESSIONAL SERVICES, INC.

• Establish and develop group audit plans.
• Determine group and component materiality.
• Obtain understanding of the group, its components and
their environments, including component auditors, to
identify and assess risks of material misstatement.
PSA 610—Using the Work of Internal Auditors
The figure below summarizes the external auditor’s
consideration of the work of internal auditor.

Risk Response

• Perform audit procedures on component or use work of

component auditor.
• Perform procedures on consolidation process.
• Communicate group audit requirements to component
auditor.

Conclusion and reporting

• Perform procedures on subsequent events.

• Evaluate audit evidence obtained and misstatements
identified to form an opinion.
• Form opinion on group financial statements.
• Communicate with management and TCWG of the
group.
• Complete audit documentation.

Perform Audit Procedures on Component or Use Work of

Component Auditor

The amount and nature of work required of the group

engagement team relating to that component depends upon
whether that component is considered to be a significant
component.

The following table summarizes the audit work ordinarily

needed for components. Determining Likely Adequacy of Work of Internal Auditor

Not significant The group engagement team should In determining whether the work of the internal auditors is
perform analytical procedures at the likely to be adequate for purposes of the audit, the external
group level. Audit additional auditor shall evaluate:
components if sufficient appropriate
audit evidence has not been obtained. 1. The objectivity (by identifying its line of reporting of
Significant due The group auditor or component results of internal audit that normally is directly to
to its auditor should perform audit of BOD’s audit committee) of the internal audit function;
individual component, adapted as necessary to 2. The technical competence (such as education,
financial the needs of the group engagement experience, professional certification, etc.) of the
significance to team, using the materiality of the internal auditors;
the group component. 3. Whether the work of the internal auditors is likely to be
carried out with due professional care (by reviewing
Significant The group auditor or the component adequate planning, supervision and documentation of
because it is auditor should perform one or more work); and
likely to of: 4. Whether there is likely to be effective
include • Audit component, adapted as communication between the internal auditors and the
significant necessary to the needs of the external auditor.
risks of group engagement team, using
material the materiality of the component.
misstatement • Audit one or more component PSA 620—Using the Work of an Auditor’s Expert
of the group account balances, classes of
financial transactions or disclosures that An expert (or a specialist) refers to a person or firm
statements relate to the significant risks. possessing special skill, knowledge, and experience in a
• Perform specified audit particular field other than accounting and auditing. An
procedures relating to the likely expert may be engaged by the entity or by the auditor,
significant risks of material employed by the entity or by the auditor. Under PSAs, they
misstatement of the group are classified into the following two categories:
financial statements.
1. Auditor’s expert—An individual or organization
possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the auditor
to assist the auditor in obtaining sufficient appropriate
audit evidence. An auditor’s expert may be either an
auditor’s internal expert (who is a partner or staff,

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EXCEL PROFESSIONAL SERVICES, INC.
including temporary staff, of the auditor’s firm or a
network firm), or an auditor’s external expert.
2. Management’s expert—An individual or organization
possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the entity
to assist the entity in preparing the financial
statements.
The following illustration summarizes the auditor’s
consideration when engaging an auditor’s expert:
DISCUSSION QUESTIONS
The Entity’s Use of a Service Organization
1. Which of the following statements is true with respect
to Type 1 Report as referred to in PSA 402
a. Report on the description and design of controls at
a service organization.
b. A report that comprises a description, prepared by
management of the service organization, of the
service organization’s system, control objectives
and related controls that have been designed and
implemented as at a specified date.
c. A report that comprises a report by the service
auditor with the objective of conveying reasonable
assurance that includes the service auditor’s opinion
on the description of the service organization’s
system, control objectives and related controls and
the suitability of the design of the controls to
achieve the specified control objectives.
d. All of the above.
2. Which of the following statements is true with respect
to Type 2 Report as referred to in PSA 402
a. Report on the description, design, and operating
effectiveness of controls at a service organization
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Determining adequacy of work of an auditor’s expert
involves the process table below:
Risk assessment
• Determine if there’s a need for work of an auditor’s expert
by:
o Considering required procedures.
o Considering competence, capability, and
objectivity of expert.
• Understand the expert’s field of expertise.
• Agree the terms of engagement with the auditor’s expert.
Risk response
• Evaluate adequacy of expert’s work, including findings,
conclusions, assumptions used, and sources of data.
• Determine if any further audit work required,
particularly when the work of an auditor’s expert lacks
adequacy to auditor’s purpose.
Conclusion and reporting
• No reference to work of an auditor’s expert unless the
audit report is modified.
• If no sufficient appropriate evidence is obtained, modify
the audit report.
b. A report that comprises a description, prepared by
management of the service organization, of the
service organization’s system, control objectives
and related controls, their design and
implementation as at a specified date or throughout
a specified period and, in some cases, their
operating effectiveness throughout a specified
period
c. A report that comprises a report by the service
auditor with the objective of conveying reasonable
assurance that includes: (a) The service auditor’s
opinion on the description of the service
organization’s system, control objectives and
related controls, the suitability of the design of the
controls to achieve the specified control objectives,
and the operating effectiveness of the controls; and
(b) A description of the service auditor’s tests of the
controls and the results thereof.
d. All of the above
3. Which of the following is least likely entitled to the
report of the service organization auditor on the
suitability of the design and operating effectiveness of
the service organization?
a. Service organization’s management
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b. Service organization’s customers
c. Client’s auditors
d. Service organization’s stockholders
4. Under PSA 402, the objectives of the user auditor, when
the user entity uses the services of a service
organization, are:
a. To obtain an understanding of the nature and
significance of the services provided by the service
organization and their effect on the user entity’s
internal control relevant to the audit, sufficient to
identify and assess the risks of material
misstatement.
b. To design and perform audit procedures responsive
to those risks.
c. Both a and b
d. Either a or b
5. If the user auditor is unable to obtain a sufficient
understanding from the user entity, the user auditor
shall obtain that understanding from one or more of the
following procedures, except:
a. Obtaining a type 1 or type 2 report, if available.
b. Contacting the service organization, but not through
the user entity, to obtain specific information.
c. Visiting the service organization and performing
procedures that will provide the necessary
information about the relevant controls at the
service organization.
d. Using another auditor to perform procedures that
will provide the necessary information about the
relevant controls at the service organization.
6. When the user auditor’s risk assessment includes an
expectation that controls at the service organization are
operating effectively, the user auditor shall obtain audit
evidence about the operating effectiveness of those
controls from one or more of the following procedures:
(Choose the incorrect one)
a. Obtaining a type 1 report, if available.
b. Obtaining a type 2 report, if available.
c. Performing appropriate tests of controls at the
service organization.
d. Using another auditor to perform tests of controls at
the service organization on behalf of the user
auditor.
7. Statement 1: The user auditor shall inquire of
management of the user entity whether the service
organization has reported to the user entity, or whether
the user entity is otherwise aware of, any fraud, non-
compliance with laws and regulations or uncorrected
misstatements affecting the financial statements of the
user entity.
Statement 2: The use of a service organization for
external bookkeeping services (ranging from the
processing of certain transactions such as payment of
payroll taxes and maintenance of their accounting
records to the preparation of their financial statements)
relieves management of the smaller entity and, where
appropriate, those charged with governance of their
responsibilities for the financial statements.
Statement 3: The user auditor shall evaluate how use
of a service organization affect the nature, timing and
extent of the user auditor’s further audit procedures,
including the effect on the user auditor’s conclusions
and user auditor’s report.
a. True, False, True c. False, True, True
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b. True, True, True d. False, False, True
8. The following statements relate to the reporting
requirements under PSA 402. Which is incorrect?
a. The user auditor shall modify the opinion in the user
auditor’s report if the user auditor is unable to
obtain sufficient appropriate audit evidence
regarding the services provided by the service
organization relevant to the audit of the user
entity’s financial statements.
b. The user auditor shall not refer to the work of a
service auditor in the user auditor’s report
containing an unmodified opinion unless required by
law or regulation to do so.
c. If reference to the work of a service auditor is
relevant to an understanding of a modification to
the user auditor’s opinion, the user auditor’s report
shall indicate that such reference does not diminish
the user auditor’s responsibility for that opinion.
d. The user auditor may not need the consent of the
service auditor when making such a reference as it
is implicitly and ethically permitted.
Initial Audit Engagements—Opening Balances
9. For initial audit engagements, the auditor should obtain
sufficient appropriate audit evidence that:
a. The opening balances do not contain misstatements
that materially affect the current period's financial
statements.
b. The prior period's closing balances have been
correctly brought forward to the current period or,
when appropriate, have been restated.
c. Appropriate accounting policies are consistently
applied or changes in accounting policies have been
properly accounted for and adequately disclosed.
d. All of the above.
10. Statement 1: Opening balances include matters
requiring disclosure that existed at the beginning of the
period, such as contingencies and commitments.
Statement 2: Initial audit engagement is an
engagement in which the financial statements for the
prior period were not audited. It does not include an
engagement in which the financial statements for the
prior period were audited by a predecessor auditor.
Statement 3: If the prior period’s financial statements
were audited by a predecessor auditor and there was a
modification to the opinion, the auditor shall evaluate
the effect of the matter giving rise to the modification
in assessing the risks of material misstatement in the
current period’s financial statements
a. True, true, true c. False, true, true
b. True, false, true d. False, false, true
11. Which of the following is least considered in determining
the sufficiency and appropriateness of the audit
evidence that the auditor will obtain regarding opening
balances?
a. The materiality of the opening balances relative to
the current period’s financial statements.
b. The accounting policies adopted by the entity.
c. The risk of misstatements of accounts.
d. The length of years in operations of the entity.
12. The following audit procedures may be deemed
necessary by the auditor in obtaining sufficient
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appropriate audit evidence regarding opening balances,
except:
a. Reading the most recent financial statements, if
any, and the predecessor auditor’s report thereon,
if any, for information relevant to opening balances,
including disclosures.
b. Reviewing the predecessor auditor’s audit
engagement letter.
c. Evaluating whether audit procedures performed in
the current period provide evidence relevant to the
opening balances.
d. Performing specific audit procedures to obtain
evidence regarding the opening balances.
13. Which of the following accounts is most difficult for the
auditor to be satisfied as to the balance at the beginning
of the period?
a. Accounts receivable c. Inventory
b. Accounts payable d. Accrued interest payable
14. If the opening balances contain misstatements which
could materially affect the current period's financial
statements and the effect of the misstatement is not
properly accounted for and adequately disclosed, the
auditor should express a
a. Unqualified opinion with explanatory paragraph.
b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Adverse or disclaimer of opinion.
Auditing Accounting Estimates, Fair Value Accounting
Estimates and Related Disclosures
15. It means an approximation of the amount of an item in
the absence of a precise means of measurement
a. Accounting estimate c. Accounting error
b. Accounting policy d. Accounting change
16. In evaluating an entity's accounting estimates, one of
an auditor's objectives is to determine whether the
estimates are
a. Not subject to bias.
b. Consistent with industry guidelines.
c. Based on objective assumptions.
d. Reasonable in the circumstances.
17. Which of the following procedures would an auditor
ordinarily perform first in evaluating management's
accounting estimates for reasonableness?
a. Develop independent expectations of
management's estimates.
b. Consider the appropriateness of the key factors or
assumptions used in preparing the estimates.
c. Test the calculations used by management in
developing the estimates.
d. Obtain an understanding of how management
developed its estimates.
18. The auditor should adopt one or a combination of the
following approaches in the audit of an accounting
estimate:
I. Review and test the process used by management
to develop the estimate.
II. Use an independent estimate for comparison with
that prepared by management.
III. Review subsequent events which confirm the
estimate made.
a. Any of the above c. Either I or II
b. None of the above d. I only
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19. In evaluating the assumptions on which the estimate is
based, the auditor would need to pay particular
attention to assumptions which are
a. Reasonable in light of actual results in prior periods.
b. Consistent with those used for other accounting
estimates.
c. Consistent with management’s plans which appear
appropriate.
d. Subjective or susceptible to bias resulting in
material misstatement.
Fair Value
20. The degree to which a fair value measurement is
susceptible to misstatement is a(an)
a. Audit risk c. Control risk
b. Inherent risk d. Detection risk
21. Regarding fair value measurements and disclosures, the
auditor is not required to
a. Obtain evidence about management's intent to
carry out specific courses of action, and consider its
ability to do so, where relevant to the fair value.
b. Evaluate whether the entity's method for its fair
value measurements is applied consistently.
c. Use the work of an expert.
d. Test the entity's fair value measurements and
disclosures.
22. When testing the entity's fair value measurements and
disclosures, the auditor evaluates whether:
a. The assumptions used by management are
reasonable.
b. The fair value measurement was determined using
an appropriate model, if applicable.
c. Management used relevant information that was
reasonably available at the time.
d. All of the above.
PSA 550—Related Parties
23. Which statement is incorrect regarding the auditor's
responsibilities and audit procedures regarding related
parties and transactions with such parties?
a. The auditor should perform audit procedures
designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure
by management of related parties and the effect of
related party transactions that are material to the
financial statements.
b. An audit cannot be expected to detect all related
party transactions.
c. The auditor is responsible for the identification and
disclosure of related parties and transactions with
such parties.
d. The auditor needs to have a level of knowledge of
the entity's business and industry that will enable
identification of the events, transactions and
practices that may have a material effect on the
financial statements.
24. When auditing related-party transactions, an auditor
places primary emphasis on
a. Confirming the existence of the related parties.
b. Verifying the valuation of the related-party
transactions.
c. Evaluating the disclosure of the related-party
transactions.
d. Ascertaining the rights and obligations of the related
parties.
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25. Which of the following least likely indicates the
existence of previously unidentified related parties?
a. Transactions which have abnormal terms of trade,
such as unusual prices, interest rates, guarantees,
and repayment terms.
b. Transactions which lack an apparent logical
business reason for their occurrence.
c. Transactions in which substance does not differ
from form.
d. Unrecorded transactions such as the receipt or
provision of management services at no charge.
Audits of Group Financial Statements—Including
Work of Component Auditors
26. When using the work of another auditor (component
auditor), the principal auditor should ordinarily perform
the following procedure
a. Obtain information regarding the professional
competence of the other auditor in the context of
the specific assignment undertaken by the other
auditor.
b. Advise the other auditor of the applicable
independence requirements as regards both the
entity and the component and obtain representation
as to his compliance with them.
c. Advise the other auditor of the applicable
accounting, auditing and reporting requirements
and obtain representation of compliance.
d. All of the above
27. The financial statements of a company (investee) in
which another company (investor) has a financial
interest are most likely to be included in a set of
consolidated financial statements of the investor
company in which of the following situations?
a. The investee is a joint venture by the investor
company and another company in which each
investor owns a 50% equity interest.
b. The investor owns 30% of the non-voting shares of
the investee.
c. The investor holds 20% of the shares of the
investee as a temporary investment.
d. The investor holds 60% of the outstanding debt of
the investee.
28. A client follows full PFRSs for its domestic operations
and foreign GAAP for a foreign subsidiary. The foreign
subsidiary is audited by a component auditor, while the
group auditor audits the remainder of the corporation
and issues an audit report on consolidated operations.
Which auditor(s) is (are) responsible for evaluating the
appropriateness of the adjustment of the foreign GAAP
statements to full PFRSs?
Group auditor Component auditor
a. Yes Yes
b. Yes No
c. No Yes
d. No No
29. A group engagement partner decides not to refer to the
audit of another CPA who audited a component of the
overall group financial statements. After making
inquiries about the other CPA’s professional reputation
and independence, the principal auditor most likely
would
a. Add an emphasis-of-matter paragraph.
b. Document in the engagement letter that the
principal auditor assumes no responsibility for the
other CPA’s work and opinion.
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c. Obtain written permission from the other CPA to
omit the reference in the principal auditor’s report.
d. Perform additional audit procedures based on the
significance of the subsidiary.
30. In the auditor’s report, the group engagement partner
decides not to make reference to a component auditor
who audited a client’s subsidiary. The group
engagement partner could justify this decision if, among
other requirements, he or she
a. Issues an unmodified opinion on the consolidated
financial statements.
b. Learns that the component auditor issued an
unmodified opinion on the subsidiary’s financial
statements.
c. Is unable to review the audit plan (programs) and
working papers of the component auditor.
d. Is satisfied as to the independence and professional
reputation of the other CPA.
Division of Responsibility
31. Reference in a principal auditor’s report to the fact that
part of the audit was performed by another auditor most
likely would be an indication of the
a. Divided responsibility between the auditors who
conducted the audits of the components of the
overall financial statements.
b. Lack of materiality of the portion of the financial
statements audited by the other auditor.
c. Principal auditor’s recognition of the other auditor’s
competence, reputation and professional
certification.
d. Different opinions the auditors are expressing on
the components of the financial statements that
each audited.
32. The principal auditor is satisfied with the independence
and professional reputation of the other auditor who has
audited a subsidiary but wants to indicate the division
of responsibility. The principal auditor should
a. Modify only the scope paragraph of the report.
b. Modify only the opinion paragraph of the report.
c. Modify both the scope and opinion paragraphs of
the report.
d. Modify the introductory, scope and opinion
paragraphs of the report
33. The introductory paragraph of an auditor’s report
contains the following sentences:
We did not audit the financial statements of EZ Inc., a
wholly-owned subsidiary, which statements reflect total
assets and revenues constituting 27 percent and 29
percent, respectively, of the related consolidated totals.
Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for EZ Inc., is
based solely on the report of the other auditors.
These sentences
a. Indicate division of responsibility.
b. Assume responsibility for the other auditor.
c. Require a departure from an unqualified opinion.
d. Are an improper form of reporting.
Using the Work of Internal Auditors
34. The independent auditors might consider the
procedures performed by the internal auditors because:
a. They are employees whose work must be reviewed
during substantive testing.
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EXCEL PROFESSIONAL SERVICES, INC.
b. They are employees whose work might affect the
independent auditors' work.
c. Their work impacts upon the cost/benefit tradeoff in
evaluating inherent limitations.
d. Their degree of independence may be inferred by
the nature of their work.
35. The work of internal auditors may affect the
independent’s auditor’s
I. Procedures performed in obtaining an
understanding of internal control
II. Procedures performed in assessing the risk of
material misstatement
III. Substantive procedures performed in gathering
direct evidence
a. I and III only c. II and III only
b. I and II only d. I, II and III
36. Which of the following is most correct regarding external
auditors use of internal auditors directly on the audit
engagement?
a. Discourage c. Encourage
b. Prohibit d. Permit
37. In making judgments about the effect of the internal
auditors’ work on the external auditor’s procedures in
specific audit areas, which of the following is not among
three issues related to the audit areas that should be
considered by the external auditor?
a. Materiality of the financial statement amounts.
b. Risk of material misstatement of the assertions
related to these financial statement amounts.
c. Degree of subjectivity involved in the evaluation of
the audit evidence gathered in support of the
assertions.
d. Review of quality of audit policies, programs, and
procedures.
38. Under what circumstance is it appropriate for the
auditor to rely on the work of an internal auditor?
a. It is never acceptable for the external auditor to rely
upon the work of the internal auditor.
b. The external auditor may rely on certain of the work
of the internal auditor after making a appropriate audit evidence in areas that are other
comprehensive assessment of the auditor and
his/her work.
c. The external auditor may rely on the work of the
internal auditor if he/she is also a CPA.
d. There is no restriction in relying upon the work of
internal auditors.
39. External auditors would consider internal auditors
effective if they are:
a. Independent of the operating units being evaluated.
b. Competent and well trained.
c. Have performed relevant audit tests of the internal
controls and financial statements.
d. All of the above.
40. To assess the objectivity of the internal auditors, an
independent auditor would most likely
a. Consider the professional qualifications and
experience of the internal auditors.
b. Consider the proper planning, supervision and
documentation of internal auditor’s work.
c. Consider the nature and extent of the internal
auditors’ assignment.
d. Consider the organizational level to which the
internal auditors report the results of their work.
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41. Hanlon Corp. maintains a large internal audit staff that
reports directly to the chief financial officer. Audit
reports prepared by the internal auditors indicate that
the system is functioning as it should and that the
accounting records are reliable. An independent auditor
will probably:
a. eliminate tests of controls.
b. increase the depth of the study and evaluation of
administrative controls.
c. avoid duplicating the work performed by the
internal audit staff.
d. place limited reliance on the work performed by the
internal audit staff.
42. For which of the following judgments may an
independent auditor share responsibility with an entity’s
internal auditor who is assessed to be both competent
and objective?
a. b. c. d.
Materiality of
misstatements Yes No No Yes
Evaluation of
accounting estimates No Yes No Yes
Using the Work of an Auditor’s Expert
43. Which statement is incorrect regarding the auditor’s use
of the work of an expert?
a. “Expert” means a person or firm possessing special
skill, knowledge and experience in a particular field
other than accounting and auditing.
b. When using the work performed by an expert, the
auditor should obtain sufficient appropriate audit
evidence that such work is adequate for the
purposes of the audit.
c. The auditor's education and experience enable the
auditor to be knowledgeable about business matters
in general, but the auditor is not expected to have
the expertise of a person trained for or qualified to
engage in the practice of another profession or
occupation.
d. In all cases, the auditor cannot obtain sufficient
than accounting and auditing.
44. Each of the following procedures requires the assistance
of an expert, except
a. Determining the physical condition or quantity of
underground mineral.
b. Determining the value of works of art.
c. Determining the adequacy of disclosure in the notes
to the financial statements.
d. Interpreting major contracts.
45. In accordance with PSA 620, Using the Work of an
Auditor’s Expert, each of the following is the work of an
expert, except
a. Applying methods of accounting for deferred income
tax.
b. Applying legal expertise in taxation law
c. Performing complex modeling for the purpose of
valuing financial instruments.
d. Valuing of environmental liabilities, and site clean-
up costs.
46. When determining the need to use the work of an
expert, the auditor would consider the following, except
a. The quantity and quality of other audit evidence
available.
b. The materiality of the F/S item being considered.
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EXCEL PROFESSIONAL SERVICES, INC.

c. The risk of misstatement based on the nature and

complexity of the matter being considered.
d. The professional certification or licensing by, or
membership in, an appropriate professional body.

47. When planning to use the work of an expert, the auditor

should assess the objectivity of the expert. This will
involve considering the expert's:
I. Professional certification or licensing by, or
membership in, an appropriate professional body.
II. Experience and reputation in the field in which the
auditor is seeking audit evidence.
III. Relationship to the entity.
a. I, II, III c. I and III
b. I and II d. III only

48. The auditor shall apply the guidance of PSA 500, Audit
Evidence, instead of PSA 620, Using the Working of an
Auditor’s Expert, when using the work of
a. Management’s expert. c. Either a or b.
b. Auditor’s expert. d. Both a and b.

49. The risk that an expert’s objectivity will be impaired

increases when the expert is related in some other
manner to the entity (e.g., by being financially
dependent upon or having an investment in the entity)
and the expert is
a. Engaged by the entity
b. Employed by the entity
c. Engaged by the auditor
d. Employed by the auditor

50. According to PSA 620, Using the Working of an Auditor’s

Expert, which is incorrect?
a. The auditor shall not refer to the work of an
auditor’s expert in an auditor’s report unless
required by law or regulation to do so.
b. It may be appropriate to refer to the auditor’s
expert in an auditor’s report containing a modified
opinion to explain the nature of the modification.
c. If the auditor makes reference to the work of an
auditor’s expert in the auditor’s report, the auditor
shall indicate in the auditor’s report that such
reference does not reduce the auditor’s
responsibility for that opinion.
d. The auditor may not need the permission of the
auditor’s expert when making a reference in the
auditor’s report.

End of AT.3216

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