Calamba Review Center - Laguna (LCRC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang, Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW (May 2020 Batch)
Auditing Theory - 04 Randy S. Paderes, CPA

• PSA 210- AGREEING THE TERMS OF AUDIT ENGAGEMENTS

• PSA 300- PLANNING AN AUDIT OF FINANCIAL STATEMENTS
• PSA 315- IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENTS THROUGH
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

PSA 210- AGREEING THE TERMS OF AUDIT ENGAGEMENTS

1. Which of the following is not a precondition to accept an audit engagement?

a. Acceptable financial reporting framework
b. Management’s acknowledgement of its responsibility for the preparation of financial statements in accordance with
the applicable financial reporting framework, including where relavant, their presentation, and internal controls
necessary to enable the preparation of financial statements that are free from material misstatements due to fraud
or error.
c. Auditor will have access to all information relevant to the preparation of financial statements such as records,
documentation and other matters, additional information that the auditor may request from management from time
to time and unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence.
d. Common understanding between the auditor and management and where appropriate, those charged with
governance of the terms of the audit engagement.
e. All of the above are preconditions.

2. If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of
a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an
opinion on the financial statements,
a. The auditor shall accept the limited engagement and issue a disclaimer of opinion.
b. The auditor shall not accept such a limited engagement, unless required by law or regulation to do so.
c. The auditor may accept the engagement provided that management discloses such limitation in the financial
statements.
d. The auditor shall not accept the limited engagement especially if audit fees does not justify acceptance of
engagement risk.

3. The terms of an audit engagement shall include

I. The Objective and scope of the audit of the financial statements.
II. The Responsibilities of the auditor.
III. The Responsibilities of Management.
IV. Identification of the applicable financial reporting framework for the preparation of the financial statements.
V. Reference to the expected form and content of any reports to be issued by the auditor and a statement that
there may be circumstances in which a report may differ from its expected form and content.
VI. The possible audit opinion that may be issued at the end of the engagement.
a. I, II, III, IV, V and VI. c. I, II, III, IV and V only.
b. I, II, III and IV only. d. I, II, IV and V only.

4. If the law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor may
a. Need to specify the law or regulation in the written agreement.
b. Prepare a written agreement nevertheless.
c. Challenge the provisions written in the law or regulation that are in conflict with the provisions of PSA.
d. Need not prepare a written agreement.

5. If management’s responsibilities are prescribed in a law or regulation similar to the provisions of PSA, the following may
be done by the auditor except
a. The auditor should assess whether those prescribed by law are equivalent to the requirements of PSA.
b. The auditor may use the wordings prescribed in the law or regulation.
c. The auditor should strictly use the wordings prescribed by PSA.
d. The auditor shall use the description contained in PSA only to the extent of those responsibilities that are not
prescribed by law or regulation.

6. The terms of audit engagements are documented in

a. Engagement letter c. Proposal letter
b. Management Representation letter d. Acceptance letter

7. The primary purpose of the engangement letter is to

a. Remind management that the primary responsibility for the financial statements rest with management.
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 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. Satisy the requirements of the CPA liability insurance policy.

8. On recurring audits,
a. The auditor should issue a new engagement letter if there are significant changes in the terms of engagement.
b. The auditor should issue engagement letter at least annually to ensure continuity of client engagement.
c. The auditor may issue a new engagement letter only upon request by the client.
d. The auditor may not issue a new engagement letter.

9. Which of the following is a factor that makes it appropriate to revise the terms of the audit engagement?
a. Any indication of client’s possible misunderstanding of the objective and scope of audit.
b. Recent change of senior management and/ or ownership.
c. Change in the financial reporting framework adopted in the preparation of the financial stametements.
d. Change in legal or regulatory requirements.
e. All of the above.

10. 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.

11. Which of the following is not true?

a. The auditor shall not agree to a change in the terms of the audit engagement where there is no justification to do
so.
b. Significant changes to the terms of an audit engagement requires management and the auditor to revise and agree
on new terms of engagement.
c. If the auditor is unable to agree to a change of the terms of audit engagements and is not permitted by
management to continue the original audit engagement, the auditor shall withdraw form the audit engagement
where possible under applicable law or regulation or determine whether there is any obligation either contractual or
otherwise to report the circumstances to other parties such as those charged with governance, owners or
regulators.
d. Any changes in the terms of audit engagement shall be complied with by the auditor under a client-service provider
relationship agreement where the client dictates the service requirements they need from the auditors.

12. If the auditor has determined that the financial reporting framework prescribed by law or regulation are unacceptable,
the auditor may still accept the audit engagement only if the following, except one, are present.
a. Management agrees to provide additional disclosures in the financial statements required to avoid the financial
statements being misleading.
b. It is recognized in the engagement terms that the auditor’s report will incorporate an Emphasis of a Matter
Paragraph.
c. Unless the auditor is required by law or regulation to express the auditor’s opinion on the financial statements by
using the phrases “present failry in all material respects” in accordance with the applicable financial reporting
framework, the auditor’s opinion on the financial statements will not include such phrases.
d. If the auditor is nevertheless required by law or regulation to undertake the audit engagement, the auditor shall
evaluate the effect of the misleading nature of the financial statements on the auditor’s report but is not required to
include appropriate reference to this matter in the terms of audit engagement.

13. In cases where the auditor’s report is prescribed by law or regulation,

a. The auditor shall evaluate possible misunderstanding on the assurance that would be obtained from the audit of
financial statements.
b. Assess whether additional explanation in the auditor’s report can mitigate possible misunderstanding.
c. If additional explanation in the auditor’s report cannot mitigate possible misunderstanding, the auditor shall not
accept the audit engagement.
d. All of the above.

14. 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 predecessors 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 assessment of inherent risk and judgment about materiality.

15. Changes in the type of engangement from higher to lower level of assurance,
a. If reasonably justified, should omit reference to the original audit engagement in the report on the related services.
b. If not resonably justified, should require the auditor to refuse to agree to management’s request on the change of
engangement and continue with the original engagement.

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 c. If not reasonably justified, should not include any procedures that may have been peformed in the original audit
engagement, except where the audit engagement is changed to an engagement to undertake agreed-upon
procedures and thus reference to the procedures performed is a normal part of the report.
d. All of the above.

PSA 300- PLANNING AN AUDIT OF FINANCIAL STATEMENTS

16. This involves the establishment of the overall audit strategy for the engagement and developing an audit plan in order
to reduce audit risk to an appropriately low level.
a. Reporting c. Field work
b. Planning d. Organizing

17. This sets the scope, timing and the direction of the audit, and guides the development of the audit plan.
a. Audit Program c. Audit Strategy
b. Audit Plan d. Engagement letter

18. In establishing the overall audit strategy, the auditor shall

a. Identify the scope of the engagement and ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communication required.
b. Consider the factors that, in the auditor’s judgment are significant in directing the engagement team’s efforts.
c. Consider the results of preliminary engagement activities and where applicable, whether knowledge gained on other
engagements performed by the engagement partner for the entity is relevant.
d. Ascertain the nature, timing and extent of resources necessary to perform the engagement.
e. All of the above.

19. In developing an audit plan, the auditor shall include a description of

a. Nature, timing and extent of planned risk assessment.
b. Nature, timing and extent of planned further audit procedures.
c. Other planned audit procedures that are required.
d. All of the above.

20. The auditor shall update and change the overall audit strategy and the audit plan
a. At least annually.
b. At the beginning of the audit only.
c. After performing substantive audit procedures but before issuing the audit opinion.
d. As necessary during the course of the audit.

21. The auditor should document

a. The overall audit strategy.
b. The audit plan.
c. Any significant changes made during the audit engagemetn to the overall audit strategy or the audit plan and the
reasons for such changes.
d. All given choices.

22. Adequate planning benefits the audit of financial statements in several ways, such as
A B C D
• Appropriate attention is devoted to important
areas of the audit. Yes No Yes No
• Potential problems are identified and resolved. Yes Yes Yes Yes
• Audit is conducted efficiently and effectively. Yes Yes No No
• Engagement team members are selected properly. Yes No No Yes
• Audit is properly coordinated with auditors of
components or other experts. Yes Yes Yes Yes

23. The auditor should plan the audit so that the audit will be performed in an effective manner. The extent of planning will
vary according to the
a. Size and complexity of the entity and the area of the audit.
b. The assessed risk of material misstatement.
c. Capabilities and competence of the individual team members.
d. All of the above.

24. An auditor should design the audit progam so that

a. All 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 balnace will be tested under either tests of controls or test of transactions.

25. The outputs of audit planning are the following except

a. An Overall audit strategy.
b. A detailed audit plan.
c. Audit programs
d. None of the above
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PSA 315- IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMETN THROUGH UNDERSTANDING
THE ENTITY AND ITS ENVIRONMENT

26. Which of the following is false?

a. Assertions are representations by management, explicit or otherwise that are embodied in the financials statements,
as used by the auditor to consider the different types of potential misstatements that may occur.
b. Business risk is a risk resulting from significant conditions, events, circumstances, actions or inactions that could
adversely affect an entity’s ability to achieve its objectives and execute its strategies or from the setting of
inappropriate objectives and strategies.
c. Internal control is the process designed, implemented and maintained by those charged with governance,
management and other personnel to provide reasonable asssurance about the achievement of an entity’s objetives
with regard to the reliability of financial reporting, effectiveness and efficiency of operations and compliance with
applicable laws and regulations.
d. Audit planning is the audit procedure performed to obtain an understanding of the entity and its environment,
including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to
fraud or error, at the financial and assertion levels.

27. The auditor’s risk assessment procedures include the following except
a. Inquiries with client.
b. Performance of analytical procedures.
c. Performance of test of controls.
d. Observation and inspection.

28. The level of risk assesment varies whether the client is new or is already existing. In such case
a. The auditor should consider information on client acceptance process for existing clients.
b. The auditor should use existing knowledge on past engagements for new clients.
c. For existing clients, the auditor should determine whether changes have occurred since the previous audit that may
affect its relevants to the current audit.
d. All of the above.

29. The auditor’s procedures for understanding the entity and its environment
a. Allows the auditor to gain more knowledge about different industries and regulations.
b. Requires the auditor to assess the entity’s operations, ownership and governance structures, including its financing
strategies to be able to make a recommendation on the improvement of the entity’s stewardship.
c. Permits the auditor to identify business risk that may have an impact on the audit procedures.
d. All of the above.

30. 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 expencted under the
engagement.

31. According to the Committee of Sponsoring Organizations of the Tradeway Commission (COSO), an effective internal
control system has the following five components that work to support the achievement of an entity’s mission,
strategies and related business objectives:
I. Control environment
II. Risk assessment
III. Control activities
IV. Information and communication
V. Monitoring
a. I, II, III and IV only c. I, II, III, IV and V
b. I, II, and III only d. I, II, IV and V only.

32. The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usuall
is reflected in its
a. Computer-based controls. c. Control environment
b. System of segregation of duties. d. Safeguard over access to assets.

33. Which of the folowing are not considered control enviroment elements
a. Integrity, Ethical values and commitment to competence.
b. Board of directors and audit committees.
c. Organizational structure and assignment of authority and responsibility.
d. Detection risks.

34. This pertains to the process effected by an entity’s board of directors, management and other personnel, designed to
provide reasonable assurance of the achievement of an entity’s objectives.
a. Audit c. Accounting process
b. Internal control d. Strategic Management

35. Which of the following is not one of the three primary objectives of effective internal control?
a. The reliability of the entity’s financial reporting.
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 b. The effectiveness and efficiency of its operations.
c. Compliance with applicable laws and regulations
d. Assurance of elimination of business risk.

36. Monitoring of controls is an internal control component that involves a process of assessing the quality of internal
control performance over time. It involves assessing the design and operation of controls on a timely basis and taking
necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring activities, separate
evaluations or a combination of the two. An entity’s ongoing monitoring activities often include
a. Audit of historical financial statements.
b. Review of payroll process.
c. Periodic audit by the audit committee.
d. Risk assessment.

37. An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These are
a. The efficiency and effectiveness of controls.
b. The frequency and the effectiveness of controls.
c. The design and implementation of internal controls.
d. The design and effectiveness of controls.

38. When obtaining knowledge about an entity’s internal control, it is important for the auditor to consider the competence
of its employees, because their competence bears directly and importantly on the
a. Cost-benefit relationship of internal control.
b. Comparison of recorded accountability with assets.
c. Achievement of the objectives of internal control.
d. Timing of substantive tests to be performed.

39. Control activities are the policies and procedures that help ensure that management directives are carried out. These
include activities relating to authorization, performance reviews, information processing, physical controls and
segregation of duties. There is proper segregation of duties when an individual who
a. Records a transaction does not compare the accounting record of the asset with the asset itself.
b. Authorizes a transaction records it.
c. Authorizes a transation maintains custody of the asset that resulted from the transaction.
d. Maintains custody of an asset has access to the accounting records for the asset.

40. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of material
misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances,
and disclosures. Some of these risks, in the auditor’s judgment, require special audit consideration, such as those that
involve fraud or complex transactions. Such risks are called
a. Business risks. c. Significant risk
b. Audit risks. d. Material risk.

END OF MMC AT-04

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