PRE-ENGAGEMENT

1. Which of the following is the correct order of steps in the audit

process?
A. Perform tests of control
B. Develop an overall strategy for the expected conduct and scope
of the audit
C. Obtain client’s written representation
D. Prepare engagement letter
E. Perform substantive tests
a. D, A, B, E, C
b. D, B, C, A, E
c. D, B, A, E,C
d. D, B,E, A,C

2. Which of the following is not is not normally performed in the

preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Making a preliminary estimate of materiality

3. In making a decision to accept or continue with a client, the auditor

should consider:
a b c d

Its competence YES YES YES

YES
Its own independence YES NO YES NO
Its ability to service the client properly YES YES YES
NO
The integrity of the client’s
management YES YES NO YES

4. The purpose of having communication between the predecessor and

successor auditor is

1
 a. to allow predecessor to disclose information which would otherwise
be confidential
b. to help the successor auditor evaluate whether to accept the
engagement
c. to help the client by facilitating the change of auditors
d. to ensure that information which is provided to the SEC will be
accurate

5. Hill, CPA, has been retained to audit the financial statements of Monday
Co. Monday's predecessor auditor was Post, CPA, who has been
notified by Monday that Post's services have been terminated. Under
these circumstances, which party should initiate the communication
between Hill and Post?
a. Hill, the successor auditor.
b. Post, the predecessor auditor
c. Monday's controller of CFO.
d. The chairman of Monday's board of directors

6. In an audit, communication between the predecessor and successor

auditor should be
a. authorized in an engagement letter
b. acknowledged in a representation letter
c. either written or oral
d. written and included in the working papers

7. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Almar

Corporation. Arnel plans to consult Von and to review Von’s prior year
working papers. Arnel may do so if
a. Von and Almar consent
b. Almar consents
c. Von consents
d. Von and Arnel consent

8. Before accepting an audit engagement a successor auditor should make

specific inquiries of the predecessor audit regarding
a. Disagreements the predecessor had with the client concerning
auditing procedures & accounting principles.

2
 b. The predecessor’s evaluation of matters of continuing accounting
significance
c. The degree of cooperation the predecessor received concerning the
inquiry of the client’s lawyer.
d. The predecessor‘s assessment of inherent risk and judgments about
materiality.

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

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

10. Hawkins requested permission to communicate with the predecessor

auditor and review certain portions of the predecessor auditor's work
papers. The prospective client's refusal to permit this will bear directly
on Hawkin's decision concerning the:
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of accounting
principles between years
c. Apparent scope limitation
d. Integrity of management

11. The audit engagement letter should generally include a reference to each
of the following except
a. The expectation of receiving a written management representation
letter
b. A request for the client to confirm the terms of the engagement
c. A description of the auditor’s method of sample selection
d. The risk that material misstatements may remain undiscovered

AUDIT PLANNING/RISK ASSESSMENTS 1

1. The degree of certainty that the practitioner has attained and wishes to
convey is called:
a. audit risk
b. assurance
3
 c. materiality
d. audit report

2. The risk that the auditor may unknowingly fail to appropriately

modify his or her opinion on financial statements that are materially
misstated is:
a. analytical procedures risk.
b. control risk.
c. audit risk.
d. inherent risk.

3. The risk of a material misstatement occurring in an account, assuming

an absence of internal control, is referred to as:
a. Account risk c. Detection risk
b. Control risk d. Inherent risk

4. The risk that the auditor will not detect a material misstatement that
exists in an assertion is:
a. control risk.
b. audit risk.
c. inherent risk.
d. detection risk.

5. Which of the following best describes control risk?

a. The risk that a material misstatement will occur in the
accounting process.
b. The risk that controls will not detect a material misstatement
that occurs.
c. The risk that audit procedures will fail to detect a weak control
system.
d. The risk that the prescribed control procedures will not be
applied uniformly.

6. The auditor faces a risk that the examination will not detect material
misstatements in the financial statements. In regard to minimizing
this risk, the auditor primarily relies on:
a. Substantive test c. Internal control
b. Test of controls d. Statistical analysis
4
7. Which of the following is not among the components of audit risk?
a. Inherent risk c. Substantive risk
b. Detection risk d. Control risk

8. The audit risk against which the auditor and those who rely on his/her
opinion require reasonable protection is a combination of three
separate risks at the account-balance or class-of-transactions level.
The first risk is inherent risk. The second risk is that material
misstatements will not be prevented or detected by internal control.
The third risk is that
a. The auditor will reject a correct account balance as incorrect
b. Material misstatements that occur will not be detected by the
audit
c. The auditor will apply an inappropriate audit procedure
d. The auditor will apply an inappropriate measure of audit
materiality.

9. Risk in auditing means that the auditor accepts some level of

uncertainty in performing the audit function. An effective auditor
will
a. Take any means available to reduce the risk to the lowest
possible level.
b. Set the risk level between 5% and 10%.
c. Perform the audit procedures first and quantitatively set the risk
level before forming an opinion and writing the report.
d. Recognize that risk exists and deal with them in an appropriate
manner.

10. Which of the following audit risk components may be assessed in

quantitative and non-quantitative terms?
Contro Detection Inherent Contro Detection Inherent
l risk risk risk l risk risk risk
a. Yes Yes No c. Yes Yes Yes
b Yes No Yes d. No Yes Yes
5
 .

11. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

12. Which of the following statements is correct?

a. Detection risk is a function of the efficiency of an auditing
procedure and its application.
b. Detection cannot be changed at the auditor’s discretion.
c. Detection risk arises partly because of uncertainties that exist
when the auditor does not examine 100 percent of the population.
d. Detection risk exists independently of the audit of the financial
statements.

13. Which of the following is an incorrect statement?

a. Detection risk can be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears an
inverse relationship to inherent & control risks.
c. The greater the inherent & control risks the auditor believes
exists, the more detection risk that can be accepted.
d. The auditor might make separate or combined assessments of
inherent risk and control risk.

14. As the acceptable level of detection risk decreases, an auditor may

a. Increase substantive test
b. Decrease substantive test
c. Increase tests of controls
d. Decrease tests of controls

15. The acceptable level of detection risk is inversely related to the

a. Assurance provided by substantive tests.
b. Risk of misapplying auditing procedures.
c. Preliminary judgment about materiality levels
d. Risk of failing to discover material misstatements
6
16. As the acceptable level of detection risk decreases, the assurance
directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.

17. Relationship between control risk and detection risk is ordinarily

a. Parallel b. Direct c. Inverse d. Equal

18. Failure to detect material peso errors in the financial statements is a

risk which the auditor primarily mitigates by
a. performing substantive tests
b. performing tests of controls
c. understanding internal control structure
d. obtaining a client representation letter

19. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of
inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim
dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration
as a planning factor.
d. Lower the assessed level of control risk from the maximum
level to below the maximum.

20. On the basis of the audit evidence gathered and evaluated, an auditor
decides to increase the assessed level of control risk from that
originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor
would
a. Decrease substantive testing. c. Decrease detection risk.
7
 b. Increase inherent risk. d. Increase materiality levels.

21. An auditor may compensate for a weakness in the internal control by

increasing the
a. Level of detection risk.
b. Preliminary judgment about audit risk.
c. Extent of tests of controls (compliance tests).
d. Extent of test of details

22. What is the magnitude of audit risk if inherent risk is .50, control
risk .40, and detection risk .10?
a. .20 b. .10 c. .04 d. .02

23. Which of the following types of risk is significantly affected by the

nature, amount and timing of substantive auditing procedures?
a. Inherent risk c. Detection risk
b. Control risk d. Sufficiency risk

24. As the acceptable level of detection risk decreases, an auditor do one

or more of the following except change
a. The timing of substantive tests by performing them at year-end.
b. The nature of substantive tests from a less effective to a more
effective procedure
c. The timing of tests of controls by performing them at several dates
rather than at one time
d. The extent of substantive tests such as using larger sample size

25. As the acceptable level of detection risk decreases the auditor may
a. Perform tests of control at yearend rather than at interim
b. Increase the level of inherent and control risks
c. Design more effective substantive procedures
d. Use larger sample size for tests of controls

26. As the acceptable level of detection risk decreases, an auditor may change
the
a. Timing of substantive tests by performing them at an interim date
rather than at year-end

8
 b. Nature of substantive tests from a less effective to a more effective
procedure
c. Timing of tests of controls by performing them at several dates rather
than at one time
d. Assessed level of inherent risk to a higher amount

27. Some account balances, such as those for pensions or leases, are the
results of complex calculations. The susceptibility to material
misstatements in these types of accounts is defined as
a. Audit risk b. Detection risk c. Sampling risk d. Inherent risk

28. Inherent risk is defined as the susceptibility of an account balance or class

of transactions to error that could be material assuming that there were no
related internal controls. Of the following conditions which one does not
increase inherent risk?
a. The client has entered numerous related party transactions during the
year under audit
b. Internal control over shipping, billing, and recording of sales revenue
is weak
c. The client has lost a major customer accounting for approximately
30% of annual revenue
d. The board of directors approved a substantial bonus for the president
and chief executive office and also approved an attractive stock
option plan for themselves.

29. When discussing Inherent Risk (IR) and the Audit Risk Model, which one
of the ff. statements is true?
a. IR is directly related to detection risk.
b. IR is inversely related to evidence.
c. IR is the susceptibility of the financial statements to material error
after considering the entity’s internal control.
d. IR can be changed at the auditor’s discretion.

30. Which of the following conditions supports an increase in detection risk?

a. Internal control over cash receipts is excellent
b. Application of analytical procedures reveals a significant increase in
sales revenue in December, the last month of the fiscal year
9
 c. Internal control over shipping, billing, and recording of sales revenue
is weak
d. Study of the business reveals that the client recently acquired a new
company in an unrelated industry.

AUDIT PLANNING 2
1. If it is probable that the judgment of a reasonable person would have been
changed or influenced by the omission or misstatement of information,
then that information is:
a. significant. b. insignificant. c. material.d. relevant.

2. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important
for fair presentation of financial statements in conformity with
GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the
largest aggregate level of misstatements that could be materiality any
one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances
and necessarily involve both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the
auditor’s perception of the needs of a reasonable person who will rely
on the financial statements.

3. In developing the preliminary level of materiality in an audit, the auditor

will
a. Look to audit standards for specific materiality guidelines
b. Increase the level of materiality if fraud is suspected
c. Rely primarily on professional judgment to determine the materiality
level
d. Use the same materiality level as that used for different clients in the
same industry

4. In setting materiality guidelines, the ASC and the PICPA provide the
following guidelines to practitioners:

10
 a. Both agree that materiality should be set at an amount not greater than 10%
Net income
b. ASC’s guideline is greater than 10% but the PICPA’s is greater than 5%.
c. Both agree that it should be greater than 5%.
d. No specific materiality guidelines are provided by either of them.

5. The auditors must consider materiality in planning an audit engagement.

Materiality for planning purposes is
a. The auditor’s preliminary estimate of the largest amount of error that
would be material to any one of the client’s financial statements.
b. The auditor’s preliminary estimate of the smallest amount of error
that would be material to any one of the client’s financial statements.
c. The auditor’s preliminary estimate of the amount of error that would
be material to the balance sheet.
d. The auditor’s preliminary estimate of the amount of error that would
be material to the income statement.

6. In considering materiality for planning purposes, an auditor believes that

misstatements aggregating P100,000 would have a material effect on an
entity’s income statement, but that misstatements would have to
aggregate P200,000 to materially affect the balance sheet. Ordinarily, it
would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate
a. P100,000 b. P150,000 c. P200,000 d. P300,000

7. “Tolerable misstatement” is the term used to indicate materiality at the:

a. balance sheet level. d. company-wide level.
b. account balance level. e. transactions level.
c. income statement level.

8. All else being equal, as the level of materiality decreases, the amount of
evidence required will:
a. remain the same. d. change in an unpredictable
fashion.
b. increase. e. fluctuate randomly.
c. decrease.

11
9. Which of the following would an auditor most likely use in determining
the auditor’s preliminary judgment about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.

10. Which of the following would an auditor most likely use in determining
the auditor’s preliminary judgment about materiality?
a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

11. When auditors allocate the preliminary judgment about materiality to

account balances, the materiality allocated to any given account balance
is referred to as:
a. the error range. c. the materiality range.
b. tolerable misstatement. d. Tolerable materiality.

12. In allocating materiality, most practitioners choose to allocate to

a. the balance sheet accounts because there are fewer.
b. the income statement accounts because they are more important.
c. both because there could be errors on either one.
d. All of the financial statements because there could be errors on other
statements besides the income statement and balance sheet.

13. Why should the auditor plan more work on individual accounts as lower
acceptable levels of both audit risk and materiality are established?
a. To find smaller errors
b. To find larger errors
c. To increase the tolerable error in the accounts
d. To decrease the risk of overreliance

12