The Financial Statement Audit: Client

Acceptance and Planning

material misstatement, whether
due to fraud or error.
1. The auditor may accept or continue an
c. To provide the auditor with access
audit engagement only when the basis
to all information that is relevant to
upon which it is to be performed has
the preparation of the financial
been agreed, through
statements such as records,
I. Establishing whether the
documentation, and other matters.
preconditions for an audit are
d. To provide the auditor with
present.
unrestricted access to persons
II. Confirming that there is a
within the entity from which the
common understanding
auditor determines it necessary to
between the auditor and
obtain audit evidence.
management and, where
appropriate, those charged
with governance of the terms
3. The auditor shall agree the terms of
of the audit engagement.
the audit engagement with
a. I only
management or those charged with
b. II only
governance, as appropriate. The
c. Both I and II
agreed terms shall be recorded in a/an
d. Neither I nor II
a. Engagement letter
b. Letter of audit inquiry
c. Management representation letter
2. An audit is conducted on the premise
d. Confirmation letter
that management and, where
appropriate, those charged with
governance, have acknowledged and
4. The following matters are generally
understand that they have
included in an auditor’s engagement
responsibilities that are fundamental
letter, except
to the conduct of an audit in
a. The factors to be considered in
accordance with PSAs. Which of the
setting preliminary judgments
following is not one of those
about materiality.
responsibilities?
b. The fact that because of the test
a. The preparation of financial
nature and other inherent
statements in accordance with
limitations of an audit, together
relevant pronouncements issued by
with the inherent limitations of
the AASC.
internal control, there is an
b. The establishment and maintenance
unavoidable risk that even some
of an adequate internal control
material misstatements may remain
system that is necessary to enable
undiscovered.
the preparation of financial
c. The scope of the audit
statements that are free from
 d. Management’s responsibility for the d. The preconditions for an audit of
financial statements. the component’s financial
statements are not present.

5. Which of the following statements

would least likely appear in an 7. On recurring audits, the auditor may
auditor’s engagement letter? decide not to send a new engagement
a. Our audit will be made with the letter each period. Which of the
objective of our expressing an following factors may make it
opinion on the financial statements. appropriate to send a new engagement
b. We remind you that the letter?
responsibility for the preparation of
A. B. C. D.
financial statements including
Any revised or special Yes No Yes No
adequate disclosure is that of the
terms of the audit
management of the entity.
engagement
c. After performing our preliminary A recent change of Yes No No Yes
analytical procedures, we will senior management
discuss with you the other A change in legal or Yes Ye Yes Yes
procedures we consider necessary regulatory s
to complete the engagement. requirements
d. Our fees, which will be billed as A significant change in Yes Ye Yes Yes
work progresses, are based on the nature or size of the s
time required by the individuals entity’s business
assigned to the engagement plus
out-of-pocket expenses.
8. The auditor shall not agree to a request
from the entity to change the terms of
the audit engagement or to change the
6. The auditor of a parent entity is also audit engagement to an engagement
the auditor of its component. Which of that conveys a lower level of assurance
the following factors may influence the when there is no reasonable
auditor’s decision whether to send a justification for doing so. Which of the
separate engagement letter to the following may be considered
entity’s component? reasonable justifications for the change
a. Whether a separate auditor’s report in the audit engagement.
is to be issued on the component I. A change in circumstances
b. The component’s management affecting the need for the
does not accept its responsibilities service.
that are fundamental to the II. A misunderstanding as to the
conduct of an audit nature of an audit as originally
c. The financial reporting framework requested.
used by the component is III. A restriction on the scope of
unacceptable the engagement, whether
imposed by management or
cause by other circumstances.
a. I and II only b. II only
b. I and III only c. Both I and II
c. II and III only d. Neither I nor II
d. I, II, and III

12. Which of the following activities should

9. Before the completion of the audit be performed by the auditor at the
engagement, an auditor is requested to beginning of the current audit
change the engagement to one that engagement?
provides a lower level of assurance. If I. Perform procedures regarding the
the auditor concludes that there is a continuance of the client
reasonable justification for the change relationship and the specific audit
in engagement, the report to be issued engagement.
would II. Evaluate compliance with relevant
a. Be that appropriate for the revised ethical requirements, including
terms of engagement independence.
b. Include reference to the original III. Establish an understanding of the
engagement terms of the engagement.
c. Include reference to any procedures a. I and II only
that may have been performed in b. II and III only
the original engagement c. I and III only
d. Not include reference to any d. I, II, and III
procedure that may have been
performed, particularly when the
new engagement is to undertake 13. Adequate planning helps to ensure
agreed-upon procedures. that

A. B. C. D.
Appropriate No Yes Ye No
10. If the auditor is unable to agree to a
attention is s
change of the engagement and is not
devoted to
permitted to continue the original important areas of
engagement, the auditor should the audit
a. Insist on continuing the original Potential problems Ye Yes No No
engagement are identified and s
b. Express a qualified opinion resolved on a
c. Express an adverse opinion timely basis
d. Withdraw from the engagement The audit Ye Yes No No
engagement is s
properly organized
11. Planning an audit involves and managed
I. Establishing the overall audit
strategy for the engagement.
II. Developing an audit plan.
a. I only
14. 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 and continues
until the completion of the current
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.
15. 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 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.
16. 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
17. The establishment of an overall audit
strategy involves
I. Determining the characteristics
of the engagement that define
its scope
II. Ascertaining the reporting
objectives of the engagement
to plan the timing of the audit
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
18. 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
Misstatements 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
19. 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
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 the need to maintain a
questioning mind and to exercise
professional skepticism in the
gathering and evaluation of audit
evidence.
20. Which of the following matters would
an auditor most likely consider when
establishing the scope of the audit?
a. The expected audit coverage, including
the number and location 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.
21. 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
22. In planning the audit engagement, the
auditor should consider each of the
following, except
a. The kind of opinion (unqualified,
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
23. 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.
24. In designing 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
25. An audit program should be designed
for each individual audit and should
incorporate steps and procedures to
a. Detect and eliminate fraud of any
type
b. Gather sufficient amount of
management information available
c. Provide assurances that the
objectives of the audit are satisfied
d. Ensure that only material items are
audited
26. Which of the following is an aspect of
scheduling and controlling the audit
engagement?
a. Including in the engagement letter
an estimate of the minimum and
maximum audit fee
b. Writing a conclusion in individual
working papers indicating how the
results of the audit will affect the
auditor’s report
c. Performing audit work only after
the entity’s books have been closed
for the period under audit
d. Including in the audit program a
column for budgeted
27. In connection with the planning phase
of an audit engagement, which of the
following statements is always correct?
a. Final staffing decisions must be
made prior to completion of the
planning stage
b. Observation of inventory count
should be performed at year-end
c. A portion of the audit of a
continuing audit client can be
performed at interim dates
d. An engagement should not be
accepted after the client’s financial
year-end
28. The auditor shall undertake which of
the following activities prior to starting
an initial audit?
I. Performing procedures required
by PSA 220 (Quality Control for
an Audit of Financial
Statements) regarding the
acceptance of the client
relationship and the specific
audit engagement
II. Communicating with the
predecessor auditor, where
there has been a change of
auditors, in compliance with
relevant ethical requirements.
a. I only
b. II only
c. Either I and II
d. Both I and II
29. Before accepting an audit engagement,
a proposed (successor) auditor should
make inquiries of the previous
(predecessor) auditor regarding the
previous auditor’s
a. Evaluation of all matters of
continuing accounting significance
b. Understanding as to the reasons for
the change of auditors
c. Awareness of the consistency in the
application of PAS/PFRS between
periods
d. Opinion of any subsequent events
occurring since the previous
auditor’s report was issued.
30. Which of the following statements
concerning materiality is not correct?
a. When establishing the overall audit
strategy, the auditor shall determine
materiality for the financial
statements as a whole.
b. If, in the specific circumstances of
the entity, there is one or more
particular classes of transactions,
account balances or disclosure, the
auditor shall also determine the
materiality level or levels to those
particular classes of transactions,
account balances, or disclosures.
c. Determining materiality involves the
exercise of professional judgment
d. The materiality level for the
financial statements as a whole
determined in the planning stage of
the audit should not be affected by
changes in the circumstances of the
engagement.
31. Which of the following would an
auditor most likely use in determining
a preliminary judgment about
materiality?
a. The contents of the management
representation letter
b. The anticipated sample size of the
planned substantive tests
c. The entity’s annualized interim
financial statements.
d. The results of internal control
questionnaire
32. An auditor should consider materiality
when
I. Determining the nature,
timing, and extent of audit
procedures.
II. Evaluating the effect of
misstatements
a. I only
b. II only
c. Both I and II
d. Neither I nor II
33. As defined in the standard, ________
means the amount or amounts set by
the auditor at less than materiality for
the financial statements as a whole to
reduce to an appropriately low level
the probability that the aggregate of
uncorrected and undetected
misstatements exceeds materiality for
the financial statements as a whole.
a. Performance materiality
b. Materiality
c. Lower materiality
d. Lesser materiality
34. A basic premise underlying analytical
procedures is that
a. Plausible relationships among data
may reasonably be expected to exist
 and continue in the absence of
known conditions to the contrary
b. These procedures cannot replace
tests of details of transactions and
balances
c. Statistical tests of financial
information may lead to the
detection of material misstatements
in the financial statements
d. The study of financial ratios is an
acceptable alternative to the
investigation of unusual
fluctuations.
35. For all audits of financial statements
conducted in accordance with PSAs,
the use of analytical procedures is
required to some extent
A. B. C. D.
As a risk assessment Yes Yes Yes No
procedure in the
planning phase
As a substantive test Yes No No Yes
procedure
In the overall review Yes Yes No Yes
of the financial
statements
36. Which of the following statements
concerning analytical procedures is
true?
a. Analytical procedures are more
efficient, but not more effective,
than tests of details of transactions
b. Analytical procedures used as risk
assessment procedures used data
aggregated at a high level
c. Analytical procedures can replace
tests of controls in gathering audit
evidence to support the assessed
level of control risk
d. Analytical procedures usually
involve comparisons of ratios
develop from recorded amounts
with ratios developed by
management
37. It is an appraisal activity established
within an entity. Its functions include,
among other things, examining,
evaluating, and monitoring the
adequacy and effectiveness of the
accounting and internal control
systems.
a. External auditing
b. Internal auditing
c. Governmental auditing
d. Internal control
38. The external auditor should obtain a
sufficient understanding of the internal
audit function because
a. The understanding of the internal
audit function is an important
substantive test to be performed by
the internal auditor
b. The audit programs, working
papers, and reports of internal
auditors may often be used as a
substitute for the work of the
external auditor’s staff
c. The procedures performed by the
internal audit staff may eliminate
the external auditor’s need for
considering internal control
d. The work performed by internal
auditors may be a factor in
determining the nature, timing, and
extent of the external auditor’s
procedures
39. Internal auditing can affect the scope
of the external auditor’s audit of
financial statements by
 a. Decreasing the external auditor’s
need to perform detailed tests
b. Eliminating the need to observe the
physical inventory taking
c. Allowing the external auditor to
limit his/her audit to the
performance of substantive test
procedures
d. Limiting direct testing by the
external auditor to management
assertions not directly tested by
internal auditing
40. Which of the following is an incorrect
statement concerning the relationship
of the internal auditor and the scope of
the external audit of an entity’s
financial statements?
a. The external auditor is not required
to give consideration to the internal
audit function beyond obtaining a
sufficient understanding to identify
and assess the risks of material
misstatement of the financial
statements and to design and
perform further audit procedures.
b. The internal auditors may
determine the extent to which audit
procedures should be employed by
the external auditor
c. Under certain circumstances, the
internal auditors may assist the
external auditor in performing
substantive tests and tests of
controls
d. The nature, timing, and extent of
the external auditor’s substantive
tests may be affected by the work of
internal auditors.
41. In determining whether the work of
the internal auditors is likely to be
adequate for purposes of the audit, the
external auditor shall evaluate the
internal auditor’s
a. Efficiency and experience
b. Independence and review skills
c. Training and supervisory skills
d. Competence and objectivity
42. In assessing the technical competence
of an internal auditor, an external
auditor most likely would obtain
information about the
a. Quality of working paper
documentation, reports, and
recommendations.
b. Organizational level to which the
internal auditor reports
c. Influence of management on the
internal auditor’s duties
d. Entity’s commitment to integrity
and ethical values
43. The coordination of activities between
internal and external auditors
a. Eliminates duplication of audit
efforts
b. Includes the exchange of audit
reports and management letters
c. Prevents external auditors from
having access to the programs used
by internal auditors
d. Prohibits the internal auditor from
using the same audit techniques as
external auditors and vice versa
44. Which of the following are included in
the activities of the internal audit
function?
I. Monitoring of internal control
II. Examination of financial and
operating information
 III. Review of operating activities
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
45. _______ is 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.
a. Auditor’s expert
b. Management’s expert
c. Expert
d. Specialist
46. _______ is 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
a. Auditor’s expert
b. Management’s expert
c. Expert
d. Specialist
47. When planning to use the work of an
expert, the auditor should evaluate the
I. Professional competence of the
expert
II. Objectivity of the expert
a. I only
b. II only
c. Both I and II
d. Neither I nor II
48. Which of the following statements is
correct concerning the auditor’s use of
the work of an expert?
a. The auditor is required to perform
substantive test procedures to
verify the expert’s assumptions and
findings
b. The auditor should obtain an
understanding of the methods and
assumptions used by the expert
c. The entity need not have an
understanding of the nature of the
work to be performed by the expert
d. The expert need not have an
understanding of the auditor’s
corroborative use of the expert’s
findings.
49. In using the work of an expert, an
understanding should exist among the
auditor, the entity, and the expert as to
the nature, scope, and objective of the
expert’s work. The documentation of
this understanding should cover
a. The conditions under which a division of
responsibility may be necessary
b. A statement that the expert assumes no
responsibility to update the expert’s
report for future events or
circumstances
c. The intended use by the auditor of the
expert’s work, including the possible
communication to third parties of the
expert’s identity and extent of
involvement.
d. The auditor’s disclaimer as to whether
the expert’s findings corroborate the
representations in the financial
statements.
50. Which of the following is not an expert
upon whose work an auditor may rely?
a. An actuary
b. An individual with expertise in
complex modeling for the purpose
of valuing financial instruments.
c. An expert in taxation law
 d. An individual with expertise in
applying methods of accounting for
deferred income tax
51. If the results of the expert’s work do
not provide sufficient appropriate audit
evidence or are not consistent with
other audit evidence, the auditor
should
a. Report the matter to the appropriate
regulatory agency of the government
b. Resolve the matter
c. Withdraw from the engagement
d. Express an unqualified opinion with
reference to the work of the expert
52. When issuing an unmodified auditor’s
report, the auditor
a. May refer to the work of an expert
b. Should refer to the work of an
expert to indicate a division of
responsibility
c. Should include in the auditor’s
report the identity of the expert and
the extent of the expert’s
involvement
d. Should not refer to the expert’s
work
53. In using the work of an expert, an
auditor referred to the expert’s
findings in the auditor’s report. This is
an appropriate reporting practice if the
a. Auditor, as a result of the expert’s
work, decides to indicate a division
of responsibility with the expert
b. Expert is aware that his/her work
will be used to evaluate the
assertions in the financial
statements
c. Auditor, as a result of the expert’s
work, issues a modified auditor’s
report
d. Auditor, as a result of the expert’s
work, adds an emphasis-of-matter
paragraph in his/her unmodified
auditor’s report
54. As used in PSA 600, Special
Considerations – Audits of Group
Financial Statements (Including the
Work of Component Auditors),
_______ is an entity or business
activity for which group or component
management prepares financial
information that should be included in
the group financial statements.
a. Component
b. Group
c. Significant component
d. Group management
55. As used in PSA 600, financial
statements that include the financial
information of more than one
component are called
a. Component financial statements
b. Group financial statements
c. Consolidated financial statements
d. Common financial statements
56. The __________ is the partner or other
person in the firm who is responsible
for the group audit engagement and its
performance, and for the auditor’s
report on the group financial
statements that is issued on behalf of
the firm.
a. Engagement partner
b. Component engagement partner
c. Principal auditor
 d. Group engagement partner overall group audit strategy and
audit plan
b. The group engagement team shall
57. The group engagement team shall determine the materiality for the
obtain an understanding that is group financial statements as a
sufficient to whole when establishing the overall
I. Confirm or revise its initial group audit strategy
identification of components c. The component engagement
that are likely to be significant partner shall review the overall
II. Assess the risks of material group audit strategy and group
misstatement of the group audit plan
financial statements, whether d. The group engagement partner
due to fraud or error shall agree on the terms of the
a. I only group audit engagement in
b. II only accordance with PSA 210
c. Both I and II
d. Neither I nor II
60. An auditor who, at the request of the
group engagement team, performs
58. If the group engagement team plans to work on financial information related
request a component auditor to to a component for the group audit is a
perform work on the financial a. Group auditor
information of a component, the group b. Component auditor
engagement team shall obtain an c. Component engagement team
understanding of d. Group engagement team
I. Whether the component
auditor understands and will
comply with the ethical
requirements that are relevant
to the group audit and, in
particular, is independent
II. The component auditor’s
professional competence
a. I only
b. II only
c. Both I and II
d. Neither I nor II

59. Which of the following statements

concerning group audits is incorrect?
a. The group engagement team has
the responsibility to establish an