1.

The following are considered by a CPA firm in deciding whether to accept a new client, except
a. The client’s financial ability
b. The client’s relations with its previous CPA firm
c. The client’s standing in the business community
d. The client’s probability of achieving an unqualified opinion
Potential clients should be evaluated by CPA firms based on their financial statements, reputation in the business
community, and information provided by their prior auditors.

2. S1: Independence must be considered in deciding whether to accept a company as an audit client.
S2: Only partners are required by the Code of Ethics to be independent from their assurance clients.
a. True, False c. True, True
b. False, True d. False, False
It should be the professional accountant in public practice in statement 2.

3. Ultimately, the decision about whether or not an auditor is independent must be made by
a. The public c. The auditor
b. The client d. The PRC
An auditor determines independence in the context of each audit engagement.

4. To emphasize auditor independence from management, many corporations follow the practice of
a. Appointing a partner of the CPA firm conducting the audit to the corporation’s audit committee
b. Establishing a policy of discouraging social contract between employees of the corporation and the staff of the
independent auditor
c. Requesting that a representative of the independent auditor be on hand at the annual stockholder’s meeting
d. Having the independent auditor report to an audit committee of outside members of the board of directors
To emphasize independence from management, many corporations follow the practice of having the independent auditor
appointed by the board of directors or elected by the stockholders.

5. Where the client is changing auditors, PSA requires communication between the predecessor and successor auditors.
The burden of initiating the communication rests with:
a. The client c. The Philippine SEC
b. The predecessor auditor d. The successor auditor
This is because the successor auditor should ask the predecessor auditor specific questions about the predecessor's
evaluation of matters of continuing accounting significance.

6. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding:
a. Disagreements which the predecessor had with the client concerning auditing procedures and accounting
principles
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 legal counsel
d. The predecessor’s assessments of inherent risk and judgments about materiality
Before accepting an audit engagement, a successor auditor should ask the predecessor auditor about any issues the
predecessor had with the client regarding auditing processes and accounting principles.

7. If the prospective client refuses to permit the predecessor to respond or limits the predecessor’s response, the successor
should:
a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management
b. Accept the engagement but only after an equitable increase in the professional fee
c. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant scope
limitation
d. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement
If a prospective client denies or limits the predecessor auditor's response, the successor auditor should investigate as to the
reasons for the denial and examine the implications of that refusal when choosing whether to take the engagement.

8. After client acceptance, the terms of the engagement are agreed by the auditor with the client. The objective and scope
of the audit and the extent of the auditor’s responsibilities to the client are best documented in:
a. Independent auditor’s report c. Client’s representation letter
b. Audit engagement letter d. Audit program
This letter outlines the engagement's terms and conditions, with a focus on the engagement's scope and remuneration
arrangements for the firm.

9. The engagement letter will do one, some, or all of the following:

a. b. c. d.
I. State whether the CPA will perform audit, review or compilation services Yes Yes Yes Yes
II. State whether the CPA will perform tax or management advisory
or other services Yes Yes No Yes
III. State any restriction to be imposed on the CPA’s work No Yes Yes Yes
IV. Identify deadlines for completing the work Yes Yes No Yes
V. State the amount and type of work to be done by client’s personnel
in generating auditor’s workpapers No No Yes Yes
VI. State the CPA’s fees for the engagement Yes Yes No Yes
VII. Inform the client that the CPA does not have responsibility
for detecting fraud No No Yes Yes
The engagement letter will do all of the following above except stating the amount and type of work to be done by client’s
personnel in generating auditor’s workpapers as well as informing the client that the CPA does not have responsibility for
detecting fraud.

10. The primary purpose of the engagement letter is to:

a. Remind management that the primary responsibility for the FS rests with management
b. Provide a written record of the agreement with the client as to the services to be provided
c. Provide a starting point for the auditor’s preparation of the preliminary audit program
d. Satisfy the requirements of the CPA’s liability insurance policy
Engagement letters are commonly used in practice for all types of professional engagements. Its main purpose is to
provide a written record of the agreement with the client regarding the services to be provided.

11. Which of the following is least likely to be included in an audit engagement letter?
a. Identification of specific audit procedures that the auditor needs to undertake
b. Description of any letters or reports that the auditor expects to submit to the client
c. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material misstatements
may remain undiscovered
d. Basis on which fees are computed and any billing arrangements
Except letter A are the terms that have been agreed upon and must be documented in an audit engagement letter. The
engagement letter outlines the auditor's and client's knowledge of the nature and time of the services to be done, the
expected fees and billing basis, the auditor's responsibilities, and the client's responsibilities, among other things.

12. Which of the following factors need to be considered in deciding whether to send a separate engagement letter to a
component (in the case of group audits)?
a. Who appoints the auditor of the component
b. Legal requirements
c. Whether a separate audit report is to be issued on the component
d. All of the above are considered
When a parent entity's auditor is also the auditor of its subsidiary, branch, or division, all of the above are considered
factors that influence whether or not to send a separate engagement letter to the component

13. In which of the following situations will there be a need to send a new letter for recurring engagements?
a. Revisions or special terms of the engagement
b. Significant change in nature or size of the client’s business
c. Indications of misunderstanding of the objective and scope of the audit
d. All of the above are situations that may cause the auditor to send a new letter
The auditor should evaluate whether the engagement conditions need to be updated and whether the client needs to be
reminded of the existing terms of the engagement during recurring audits. A, B and C are the following factors may make
it appropriate to send a new letter.

14. The following may lead the client to request for a change in engagement:
a. Restrictions on the scope of the engagement
b. Misunderstanding as to the nature of an audit or related service originally requested
c. Change in circumstances affecting the need for the service
d. All of the answers
A client may request that the auditor change the engagement due to a change in circumstances affecting the need for the
service, a misunderstanding of the nature of an audit or related service originally requested, or a restriction on the scope of
the engagement, whether imposed by management or caused by circumstances.

15. If a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based
on the revised engagement:
a. Should qualify the opinion due to a scope limitation
b. Omits reference to the original engagement
c. Should always refer to any procedures that may have been performed in the original engagement
d. Should refer to the original engagement in a separate paragraph preceding the opinion paragraph
If a change in the type of engagement from higher to level of assurance is reasonably justified, the report on the related
service would not include reference to the original audit engagement or any procedures that may have been performed in
the original audit engagement.

16. If a change in the type of engagement from higher to lower level of assurance is not justified, the auditor should:
a. Qualify the report on the original engagement
b. Continue with the revised engagement, but make explicit reference about the original engagement
c. Refuse to agree to management’s request on the change of engagement and continue with the original
engagement
d. Withdraw from the engagement
The auditor need not agree to a change in the audit engagement terms if there is no reasonable justification for the change.

17. This refers to the development of a general strategy and a detailed approach for the expected nature, timing and extent
of audit refers to:
a. Supervision c. Audit planning
b. Direction d. Pre-engagement
Audit planning is the process of developing an overall strategy and audit approach to reduce risks. It includes the
engagement partner as well as other family members.

18. Proper planning assures that (select the exception):

a. Appropriate attention is devoted to important areas of the audit
b. Potential problems are identified
c. Work is completed expeditiously
d. An unqualified opinion is expressed
Proper planning ensures that critical areas of the audit receive adequate attention, that any problems are detected and
identified promptly, and that the audit engagement is structured and managed appropriately so that it can be completed
effectively and efficiently.

19. The outputs on audit planning are:

a. An overall audit strategy that sets out the direction, scope and focus of the audit team’s efforts
b. A detailed audit plan containing the nature, extent, and timing of risk assessment procedures and planned
further audit procedures at the assertion level
c. Audit programs, tailored as needed to reflect the particular engagement circumstances
d. All of the answers
The auditor should prepare an audit plan in order to reduce audit risk to an acceptable level. One of the outputs of audit
planning is a detailed audit plan that covers the type, scope, and timing of risk assessment procedures, as well as planned
subsequent audit procedures at the assertion level.

20. An audit plan contains the nature, extent, and timing of procedures for gathering evidence. Regarding audit
procedures, which of the following best describes risk assessment procedures?
a. This category of procedures is used to obtain an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial statement and assertion level
b. This category of procedures is used to test the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level
c. This category of procedures is used to detect material misstatements at the assertion level
d. All of these statements describe risk assessment procedures
At the financial statement and assertion levels, the auditor must conduct risk assessment procedures to establish a
foundation for identifying and assessing material misstatement risks. Risk assessment techniques, on the other hand, do
not provide sufficient audit data on which to base an audit conclusion.

21. The extent of planning will vary according to the following:

a. Size of the audit client
b. Auditor’s experience with the entity and knowledge of the business
c. The nature and complexity of the audit engagement
d. All of these affect the extent of planning
The extent of planning will vary according to size of the entity, complexity of audit and auditor’s experience with entity
and knowledge of the business

22. PSA 315 requires:

a. Obtaining an understanding of the entity and its environment
b. Discussion among engagement team members about the risk of material misstatement in the financial statements
c. Identifying and assessing the risks of material misstatement
d. All of the answers
PAS 315 requires the following - risk assessment procedures and sources of information about the entity and its
environment, including its internal control; understanding the entity and its environment, including its internal control;
identifying and assessing of risks of material misstatements; material weakness in internal control and; documentation
which includes the discussion among engagement team with regards to the susceptibility of entity’s financial statements to
material misstatement.

23. Which of the following statements best describes “observation”?

a. Physical examination of tangible assets, or the examination of records or documents, whether internal or external, in
paper form, electronic form, or other media
b. Looking at a process or procedure being performed by others
c. Seeking information of knowledgeable persons, both financial and non-financial information
d. Evaluating financial information through a study of plausible relationships among both financial and non-financial data
Observation consists of looking at a process or procedure performed by others for example, counting of inventories by
entity’s personnel.

24. The auditor’s understanding of the entity and its environment consists an understanding of the following aspects:
a. Industry, regulatory and other external factors, including the applicable financial reporting framework
b. Nature of the entity, including the entity’s selection and application of accounting policies
c. Objectives and strategies and the related business risks that may result in a material misstatement of the financial
statements
d. All of these
Auditor’s understanding of the entity and its environment consists of understanding the industry, regulatory, and other
external factors; nature of the entity; objectives and strategies and related business risks that may result in material
misstatement of financial statements; measurement and review of entity’s financial performance and; internal control
which includes selection and application of accounting policies.

25. An auditor obtains an understanding of the entity and its environment in order to
a. Make constructive suggestions concerning improvements to the client’s internal control
b. Develop at attitude of professional skepticism concerning management’s financial statement assertions
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
The auditor acquires an understanding of the entity and its environment in understanding events and transactions that may
have an impact on the entity's financial statements and are relevant to achieving its goal of identifying and assessing
material misstatement risks and performing procedures to mitigate those risks.

26. A person or firm possessing special skill, knowledge and experience in a particular field excluding accounting and
auditing
a. Expert c. Multi-skilled personnel
b. Quality control reviewer d. Taxation specialist
A person or firm possessing special skill or knowledge and experience in a particular field other than accounting or
auditing is called an expert.
27. In which of the following situations would an expert be least likely contracted by a CPA?
a. Application of accounting methods in computing inventory balances
b. Determination of fair values using specialized statistical techniques
c. Legal opinions concerning interpretations of engagements, statutes and regulations
d. Valuations of certain types of assets like land and buildings
An expert has an obligation for the appropriateness of assumptions and methods used but not applying such accounting
methods in computing inventory balances.

28. Religious Corp. has a few large accounts receivable that total 1,000,000. Pilgrim Corp. has a large number of small
accounts receivable that also total 1,000,000. The importance of an error in any one account is, therefore, greater for
Religious Corp. than for Pilgrim Corp. This is an example of the auditor’s concept of
a. Materiality c. Reasonable assurance
b. Comparative analysis d. Relative risk
The example illustrates the concept of materiality, which helps auditors in identifying significant amounts that need to be
adjusted.

29. In considering materiality for planning purposes, an auditor believes that misstatements aggregating 10,000 would
have a material effect on an entity’s profit and loss, but that misstatements would have to aggregate 20,000 to materially
affect the statement of financial position. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate:
a. 30,000 c. 15,000
b. 20,000 d. 10,000
It is the misstatement that would have a material effect on the profit and loss of the entity that would be appropriate to
design auditing procedures.

30. When the 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. Tolerable misstatement
b. The materiality range d. Tolerable materiality
It's an example of performance materiality used by auditors in the selection and assessment of sampling results.

31. Regardless of how the allocation of the preliminary judgment about materiality was done, when the audit is complete
the auditor must be confident that the combined errors in all accounts are
a. Less than the preliminary judgment c. More than the preliminary judgment
b. Equal to the preliminary judgment d. Less than or equal to the preliminary judgment
The auditor can find that financial statements are accurately presented when the total number of errors is less than or equal
to the overall materiality.

32. The relationship between materiality and audit risk is

a. Direct c. Indeterminable
b. Inverse d. None of these
The relation between materiality and audit risk is inverse: the higher the level of materiality, the lower the audit risk, and
vice versa.

33. When setting a preliminary judgment about materiality,

a. More evidence is required for a low peso amount than for a high peso amount
b. Less evidence is required for a low peso amount than for a high peso amount
c. The same amount of evidence is required for either low or high peso amounts
d. There is no relation between it and the peso amount of evidence needed
If an auditor sets a relatively high degree of materiality, he or she will gather less evidence than if a lower level is
established.

34. These are events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud
may already have occurred
a. Audit risk c. Risk of material misstatement
b. Fraud risk factors d. Fraud indications
Events or conditions that suggest a motivation or pressure to commit fraud, or create a chance to commit fraud, are known
as fraud risk factors, and the other options do not define the same.

35. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional
manipulation of financial statements?
a. Turnover of senior accounting personnel is low
b. Insiders recently purchased additional shares of the entity’s stock
c. Management places substantial emphasis on meeting earnings projections
d. The rate of change in the entity’s industry is slow
Earnings management is used by businesses to give the appearance of consistent profits and to smooth out fluctuations in
earnings. As a result, using an accounting policy that generates higher short-term earnings is one of the most common
ways to manipulate financial records.

36. This refers to acts of omission or commission by the entity being audited which are contrary to prevailing laws or
regulations:
a. Fraud c. Non-compliance
b. Error d. Misstatements
Errors and fraud are both the outcome of misstatements, with the main difference being whether the misrepresentation was
made intentionally or unintentionally. Noncompliance, on the other hand, is an act of omission that violates current rules
or regulations.

37. With respect to errors and irregularities, the auditor should plan to
a. Search for errors that would have a material effect and for irregularities that would have either material or immaterial
effect on the financial statements
b. Search for irregularities that would have a material effect and for errors that would have either material or immaterial
effect on the financial statements
c. Search for errors or irregularities that would have a material effect on the financial statements
d. Discover errors or irregularities that have either material or immaterial effect on the financial statements
The fundamental principles of materiality and reasonable assurance retain to frame the auditor's responsibilities. The
auditor must get reasonable assurance that the financial statements are free of serious misstatements, whether due to error
or irregularities.

38. The auditor should remain alert for evidence of events or conditions which may cast significant doubt on the entity’s
ability to continue as a going concern:
a. During planning and consideration of internal controls c. During year-end audit work
b. During interim audit work d. All of the answers
The auditor must determine if there is reasonable doubt about the entity's capacity to continue as a going concern for a
reasonable amount of time, not to exceed one year after the financial statements are audited.

39. Which one of the following factors is not a good indicator of potential financial failure?
a. Client is constantly short of cash and working capital
b. Client’s retained earnings were reduced by half as a result of a large dividend payout
c. Client relies heavily on debt financing, especially by financing permanent assets with short-term loans
d. Client has had increasing net losses for several years
Dividends provide investors with assurance about a company's financial well-being, and they see a dividend payment as a
sign of the company's strength and a sign that management has high expectations for future earnings.

40. Analytical procedures are required:

I. As a risk assessment procedure performed during planning
II. As a substantive test procedure during evidence-gathering
III. As an overall review at audit completion
a. I - Yes II - Yes III - No
b. I - Yes II - Yes III - Yes
c. I - Yes II - No III - No
d. I - Yes II - No III - Yes
Analytical procedures in the audit process require auditors to do an analytical procedure required as a risk assessment
procedure performed during planning, as a substantive test procedure during evidence-gathering, as an overall review at
audit completion.

41. Analytical procedures used in planning should focus on:

a. Evaluating the adequacy of evidence gathering concerning unusual balances
b. Testing individual account balances that depend on accounting estimates
c. Enhancing the auditor’s understanding of the client’s business
d. Identifying material weaknesses in the control structure
Analytical procedures used in planning the audit should focus on enhancing the auditors understanding of the client’s
business and the transactions and events that have occurred.

42. The objective of performing analytical procedures in planning an audit engagement is to identify the existence of:
a. Unusual transactions and events
b. Illegal acts that went undetected because of internal control weaknesses
c. Related party transactions
d. Recorded transactions that were not properly authorized
The goal of performing analytical procedures during planning is to seek for unusual transactions or events that could
affect financial statement audit planning.

43. The establishment of the overall audit strategy involves:

a. Determining the characteristics of the engagement that defines its scope
b. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the
communications required
c. Considering the important factors that will determine the focus of the engagement team’s efforts
d. All of the answers
All of the following involves in determining the overall audit strategy the characteristics of the engagement that defines its
scope like the financial reporting framework, industry, the audit coverage, and nature of business.

44. With respect to planning an audit, which of the following statements is always true?
a. It is acceptable to perform a portion of the audit of a continuing client at interim dates
b. An engagement should not be accepted after the client’s year-end
c. An inventory count must be observed at year-end
d. Final staffing decisions must be made prior to completion of the planning stage
Audit planning are typically scheduled three months from beginning to end.

45. The element of the audit planning process most likely to be agreed upon with the client before implementation of the
audit strategy is the determination of the
a. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion
b. Procedures to be undertaken to discover litigation, claims, and assessments
c. Pending legal matters to be included in the inquiry of the client’s attorney
d. Timing of inventory observation procedures to be performed
An auditor will ordinarily observe the counting of inventory and this will require a degree of coordination between the
performance of audit procedures and client count procedures.

46. The audit plan should (select the exception)

a. Succeed action c. Be cost-beneficial
b. Be flexible d. Precede action
An audit's planning is a continuous and iterative process and not a one-time event.

47. Which of the following is least likely considered by the auditor in establishing the overall audit strategy and
developing the audit plan?
a. Understanding of the accounting and internal control systems
b. Risk and materiality
c. The involvement of other auditors in the audit of major subsidiaries
d. The terms of payment pertaining to other auditors and their respective clients
In establishing the overall audit strategy and developing the audit plan the auditor considered the overall strategy like the
nature, timing and extent of audit procedures to be performed by engagement teams regarding only on the auditing
process. The terms of payment pertaining to other auditors and their respective clients is least likely to consider.

48. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting estimates
b. The effect of information technology on the audit
c. The content of the representation letters
d. The nature and timing of reports and other communication with the entity that are expected under the engagement
The auditor should consider the engagement's reporting objectives and the nature of the communications required by
PCAOB standards, the results of preliminary engagement activities and the auditor's evaluation of the important matters,
and the nature, timing, and extent of resources required to complete the engagement when establishing the overall audit
plan.

49. This is a listing of all things which the auditor will use to gather sufficient appropriate audit evidence:
a. Audit procedures c. Audit program
b. Audit plan d. Audit risk model
The audit plan is a detailed list of the specific audit procedures that must be completed in order for the audit to collect
enough appropriate evidence audit evidence.

50. The auditor should design the written audit program so that:
a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized
c. The audit procedures selected will achieve specific audit objectives
d. Each account balance will be tested under either tests of controls or tests of transactions
An audit program lays out in detail the audit procedures that must be followed in order to meet specific audit goals.

51. In designing audit programs, an auditor should establish specific audit objectives that related primarily to the
a. Timing of audit procedures c. Selected audit techniques
b. Cost-benefit of gathering evidence d. Financial statement assertions
An auditor should set specific audit objectives when creating a written audit plan, focusing on financial statement
assertions where a company's official statement figures the company is reporting a true presentation of its financial
statement.

52. The audit program should set out the:

a. Nature of planned procedures c. Extent of planned procedures
b. Timing of planned procedures d. All of the answers
The audit program should set out the nature, timing and extent of planned procedures .

53. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit procedures us
usually the least costly to perform?
a. Test of balances c. Analytical procedures
b. Substantive test of transactions d. Test of controls
Analytical procedures are the least costly type of audit test. It is the process of analyzing plausible relationships between
data, both financial and non-financial data.

54. The audit program usually cannot be finalized until the

a. Consideration of the entity’s internal control has been completed
b. Engagement letter has been signed by the auditor and the client
c. Reportable conditions have been communicated to the audit committee
d. Search for unrecorded liabilities has been performed and documented
The audit program is not generally finalized prior to the consideration of internal control.
55. The senior auditor responsible for coordinating the field work usually schedules a pre-audit conference with the audit
team primarily to
a. Give guidance to the staff regarding both technical and personnel aspects of the audit
b. Discuss staff suggestions concerning the establishment and maintenance of time budgets
c. Establish the need for using the work of specialists and internal auditors
d. Provide an opportunity to document staff disagreements regarding technical issues
Technical and personnel aspects of the audit are typically planned during pre-audit planning meetings. Assistants should
be aware of their responsibilities as well as the goals of the procedures they will be performing.

56. Which of the following procedures is least likely performed in planning an FS audit?
a. Coordinating the assistance of entity personnel in data preparation
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity
c. Selecting a sample of vendor’s invoices for comparison to receiving reports
d. Reading the current year’s interim financial statements
Item C is performed during fieldwork so this is least likely performed in planning an FS audit because this is not part of
the planning phase.