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Practice Set Module 2

This document contains 14 multiple choice questions testing knowledge of auditing standards and procedures. It provides the questions, possible answer choices, and feedback indicating the correct answer for each question. The questions cover topics such as audit planning, evidence gathering, engagement letters, auditor independence, and determining the appropriate audit opinion.
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0% found this document useful (0 votes)
245 views65 pages

Practice Set Module 2

This document contains 14 multiple choice questions testing knowledge of auditing standards and procedures. It provides the questions, possible answer choices, and feedback indicating the correct answer for each question. The questions cover topics such as audit planning, evidence gathering, engagement letters, auditor independence, and determining the appropriate audit opinion.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Question 1

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Which of the following statements is/are correct?
Statement 1: The overall audit plan and the audit program should not be revised during the
course of the audit.
Statement 2: The auditor should develop and document an audit program setting out the nature,
timing and extent of planned audit procedures required to implement the overall audit plan.

a.
Both statements are correct
b.
Only statement 1 is correct
c.
Only statement 2 is correct
d.
Both statements are incorrect
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The correct answer is: Only statement 2 is correct

Question 2
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Engagement letters are widely used in practice for

a.
Assurance engagements only
b.
Audits only
c.
Related services only
d.
Professional engagements of all types
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The correct answer is: Professional engagements of all types

Question 3
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If the auditor concludes that there is a reasonable justification for the change in engagement, the
report to be issued would

a.
Include reference to any procedures that may have been performed in the original engagement
b.
Be that appropriate for the revised terms of the engagement
c.
Include reference to the original engagement
d.
Not include reference to any procedures that may have been performed, particularly when the
new engagement is to undertake agreed-upon procedures
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The correct answer is: Be that appropriate for the revised terms of the engagement

Question 4
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If a company’s external auditor expresses an unqualified opinion as a result of the audit of the
company’s financial statements, readers of the audit report can assume that
a.
All material disagreements between the company and the auditor about the application of
accounting principles were resolved in the satisfaction of the external auditor
b.
The external auditor found no fraud
c.
Internal control is effective
d.
The company is financially sound and the financial statements are accurate
Feedback
The correct answer is: All material disagreements between the company and the auditor about
the application of accounting principles were resolved in the satisfaction of the external auditor

Question 5
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Cost-benefit considerations are part of audit planning. In relation to this, which of the following
audit procedures is usually the least costly to perform?

a.
Tests of balances
b.
Substantive tests of transactions
c.
Tests of controls
d.
Analytical procedures
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The correct answer is: Analytical procedures

Question 6
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Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client?

a.
The client’s probability of achieving an unqualified opinion
b.
The client’s relations with its previous CPA firm
c.
The client’s financial ability
d.
The client’s standing in the business community
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The correct answer is: The client’s probability of achieving an unqualified opinion

Question 7
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In developing the overall audit strategy, the focus of the engagement team’s efforts is considered.
Which of the following is not appropriately classified as a factor affecting the focus of the team’s
efforts?

a.
Audit areas where there is a higher risk of material misstatement
b.
Setting materiality for planning purposes
c.
Volume of transactions, which may determine whether it is more efficient for the auditor to rely
on internal control
d.
The financial reporting framework on which the financial information to be audited has been
prepared, including any need for reconciliation to another reporting framework
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The correct answer is: The financial reporting framework on which the financial information to
be audited has been prepared, including any need for reconciliation to another reporting
framework

Question 8
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Set the following phases in proper order:
i. Pre-Engagement
ii. Internal Controls
iii. Evidence-Gathering
iv. Planning
v. Post-Audit Responsibilities
vi. Reporting 

a.
i, iv, ii, iii, v, vi
b.
i, iv, ii, iii, vi, v
c.
i, iv, iii, ii, v, vi
d.
i, ii, iii, iv, v, vi
Feedback
The correct answer is: i, iv, ii, iii, vi, v

Question 9
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If the auditor determines that there are misstatements that remain uncorrected by the client, then
the materiality of these misstatements will determine the choice of the proper audit opinion. The
choice could be

a.
Either a qualified opinion or disclaimer of opinion
b.
Either an adverse opinion or disclaimer of opinion
c.
Either a qualified opinion or an adverse opinion
d.
Either an unqualified opinion or an adverse opinion
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The correct answer is: Either a qualified opinion or an adverse opinion

Question 10
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An engagement letter is best described as

a.
A letter from the auditors to company management that specifies the responsibilities of both the
company and the auditors in completing the audit and the timing for its completion
b.
A letter from the auditors to company management specifying that management is responsible
for the financial statements, and the auditors will issue an opinion on the financial statements
c.
A letter from the company to the auditors specifying management’s expectations for completion
of the audit on a timely basis and the fees
d.
A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor has
been engaged to perform the audit and the fees to be paid
Feedback
The correct answer is: A letter from the auditors to company management that specifies the
responsibilities of both the company and the auditors in completing the audit and the timing for
its completion

Question 11
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If the auditor believes that the scope of the audit examination has resulted in the auditor being
unable to acquire sufficient appropriate evidence with respect to an item included in the financial
statements then the materiality of the item will determine the choice of the proper audit opinion.
The choice could be

a.
Either an adverse opinion or disclaimer of opinion
b.
Either a qualified opinion or an adverse opinion
c.
Either a qualified opinion or disclaimer of opinion
d.
Either an unqualified opinion or an adverse opinion
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The correct answer is: Either an adverse opinion or disclaimer of opinion

Question 12
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The primary purpose of the engagement letter is to

a.
Provide a written record of the agreement with the client as to the services to be provided
b.
Satisfy the requirements of the CPA’s liability insurance policy
c.
Remind management that the primary responsibility for the financial statements rests with
management
d.
Provide a starting point for the auditor’s preparation of the preliminary audit program
Feedback
The correct answer is: Provide a written record of the agreement with the client as to the services
to be provided

Question 13
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Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?

a.
The adequacy of the accounting records
b.
The complexity of the accounting system
c.
The existence of related-party transactions
d.
The operating effectiveness of control procedures
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The correct answer is: The adequacy of the accounting records

Question 14
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With regard to independence, which of the following statements is correct?

a.
In case of audits of financial statements, the Code of Ethics requires the members of the
assurance team, the firm but not network firms to be independent of the client
b.
Audit engagements provide assurance to a wide range of potential users; consequently, both
independence in mind and independence in appearance are of particular importance
c.
In case of audits of financial statements, the Code of Ethics requires the auditor to be
independent from their assurance team from the start of performing procedures required by the
engagement up to the issuance of the report
d.
Only the engagement partner is required by the Code of Ethics to be independent from their
assurance clients
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The correct answer is: Audit engagements provide assurance to a wide range of potential users;
consequently, both independence in mind and independence in appearance are of particular
importance

Question 15
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This serves as the set of instructions to assistants involved in the audit and as a means to control
and record the proper execution of the work of the personnel involved in the service

a.
Audit procedures
b.
Audit plan
c.
Audit risk model
d.
Audit program
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The correct answer is: Audit program
Question 1
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If a change in the type of engagement from higher to lower of assurance is not justified, the
auditor should

a.
Continue with the revised engagement, but make explicit reference about the original
engagement
b.
Withdraw from the engagement
c.
Refuse to agree to management’s request on the change of engagement and continue with the
original engagement
d.
Qualify the report on the original engagement
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The correct answer is: Refuse to agree to management’s request on the change of engagement
and continue with the original engagement

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

a.
An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements
b.
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
c.
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
d.
Materiality judgments are made in light of surrounding circumstanced and necessarily involve
both quantitative and qualitative judgments
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The correct answer is: An auditor considers materiality for planning purposes in terms of the
largest aggregate level of misstatements that could be material to any one of the financial
statements

Question 3
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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.
Procedures to be undertaken to discover litigation, claims, and assessments
b.
Evidence to be gathered to provide a sufficient basis for the auditor’s opinion
c.
Timing of inventory observation procedures to be performed
d.
Pending legal matters to be included in the inquiry of the client’s attorney
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The correct answer is: Timing of inventory observation procedures to be performed

Question 4
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Acts to be performed in order to obtain audit evidence

a.
Audit procedures
b.
Audit strategy
c.
Audit program
d.
Audit standards
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The correct answer is: Audit procedures

Question 5
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Analytical procedures are required:
(i)As a risk assessment procedure performed
(ii) As a substantive test procedure during evidence gathering
(iii) As an overall review at audit completion during planning 

a.
Yes, no, yes
b.
Yes, no, no
c.
Yes, yes, no
d.
Yes, yes, yes
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The correct answer is: Yes, no, yes

Question 6
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An engagement letter is prepared with the interest(s) of

a.
The client only
b.
The public
c.
Both the client and the auditor
d.
The auditor only
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The correct answer is: Both the client and the auditor

Question 7
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Audit procedures to test the operating effectiveness of controls in preventing or detecting and
correcting material misstatements at the assertion level

a.
Substantive procedures
b.
Analytical procedures
c.
Tests of control
d.
Risk assessment procedures
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The correct answer is: Tests of control

Question 8
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Which of the following statements is/are correct?
Statement 1: On recurring audits, the auditor should consider whether circumstances require the
terms of the engagement to be revised and whether there is a need to remind the client of the
existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established client.

a.
Only statement 1 is correct
b.
Both statements are incorrect
c.
Both statements are correct
d.
Only statement 2 is correct
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The correct answer is: Only statement 1 is correct

Question 9
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Audit procedures may be classified as risk assessment procedures and further audit procedures.
Which of the following best describes risk assessment procedures?
a.
These procedures are used detect material misstatements at the assertion level
b.
These procedures test the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level
c.
These procedures include tests of details of classes of transactions, account balances, and
disclosures and analytical procedures
d.
These are procedures for obtaining 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 levels
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The correct answer is: These are procedures for obtaining 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 levels

Question 10
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Which of the following activities should be performed by the auditor at the beginning of the
current audit engagement?
I. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
II. Evaluate compliance with the requirements of the Code of Ethics for Professional
Accountants in the Philippines, including independence.
III. Establish an understanding of the terms of the engagement.

a.
I and II only
b.
II and III only
c.
I, II, and III
d.
I and III only
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The correct answer is: I, II, and III

Question 11
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In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the

a.
Financial statement assertions
b.
Cost-benefit gathering evidence
c.
Selected audit techniques
d.
Timing of audit procedures
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The correct answer is: Financial statement assertions

Question 12
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Which of the following is least likely 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 nature and timing of reports and other communication with the entity that are expected
under the engagement
d.
The content of the representation letters
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The correct answer is: The content of the representation letters

Question 13
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The timing of the audit and nature of communications required include the following, except

a.
The discussion with management and those charged with governance regarding the expected
type and timing of reports to be issued and other communications
b.
The entity’s timetable for reporting, such as interim and final stages
c.
Audit areas where there is a higher risk of material misstatement
d.
The organization of meetings with management, and those charged with governance, to discuss
the nature, extent and timing of the audit work
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The correct answer is: Audit areas where there is a higher risk of material misstatement

Question 14
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Analytical procedures used in planning an audit should focus on identifying
a.
Areas that may represent specific risks relevant to the audit
b.
Material weaknesses in the internal control system
c.
The predictability of financial data from individual transactions
d.
The various assertions that are embodied in the financial statements
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The correct answer is: Areas that may represent specific risks relevant to the audit

Question 15
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Which of the following statements is/are correct?
Statement 1: Where the terms of the engagement are changed, the auditor and the client should
agree on the new terms.
Statement 2: The auditor should not agree to a change of engagement when there is no
reasonable justification for doing so.
Statement 3: If the auditor is unable to agree to a change of the engagement and is not permitted
to continue the original engagement, the auditor should withdraw and consider whether there is
any obligation, either contractual or otherwise, to report to other parties, such as the board of
directors or shareholders, the circumstances necessitating the withdrawal.

a.
Only one statement is correct
b.
All statements are correct
c.
All statements are incorrect
d.
Only two statements are correct
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The correct answer is: All statements are correct
Question 1
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Which of the following statements is/are correct?
Statement 1: According to PSA 300, the auditor may discuss elements of planning with those
charged with governance and the entity's management.
Statement 2: The audit plan sets the scope, timing and direction of the audit guides the
development of the more detailed overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and includes the
nature, timing and extent of audit procedures to be performed engagement team members to
obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

a.
All statements are incorrect
b.
Only 1 statement is correct
c.
All statements are correct
d.
Only 2 statements are correct
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The correct answer is: Only 1 statement is correct
Question 2
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Audit risk has three components: inherent risk, control risk and detection risk. Which of the
following statements is correct?

a.
The risk that material misstatement will not prevent or detected on a timely basis by internal
control can be reduced to a zero by effective controls
b.
The existing levels of inherent risk, control risk and detection risk can be changed at the
discretion of the auditor
c.
Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
d.
Detection risk is a function of the efficiency of an audit procedure
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The correct answer is: Cash is more susceptible to theft than an inventory of coal because it has a
greater inherent risk.

Question 3
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The auditor should design the written audit program, so that

a.
The audit procedures selected will achieve specific audit objectives
b.
All material transactions will be selected for substantive testing
c.
Substantive tests prior to the balance sheet date will be minimized
d.
Each account balance will be tested under either tests of controls or tests of transactions
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The correct answer is: The audit procedures selected will achieve specific audit objectives

Question 4
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According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)

a.
Client representation letter
b.
Comfort letter
c.
Engagement letter
d.
Memo placed in the permanent section of the working papers
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The correct answer is: Engagement letter

Question 5
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A client’s insistence that the audited results are reported quickly after the fiscal year end is of
concern to auditors because

a.
Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the
performance of audit procedures
b.
Many clients have December 31 year ends and it is difficult to complete the audit when many of
the client’s personnel are on holidays
c.
Many uncertainties inherent in the financial statements cannot be resolved until several months
after the year-end closing of the books
d.
The financial statements are less reliable because the period covered by the review for
subsequent events is shortened
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The correct answer is: Time pressure created by unrealistic deadlines increases the risk of errors
in judgment and in the performance of audit procedures

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It involves establishing the overall audit strategy for the engagement and developing an audit
plan in order to reduce audit risk to an acceptably low level

a.
Organizing
b.
Reporting
c.
Planning
d.
Field work
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The correct answer is: Planning

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

Question 8
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Audit procedures to detect material misstatements at the assertion level

a.
Analytical procedures
b.
Risk assessment procedures
c.
Substantive procedures
d.
Tests of control
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The correct answer is: Substantive procedures

Question 9
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Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?

a.
Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity
b.
Coordinating the assistance of entity personnel in data preparation
c.
Selecting a sample of vendor’s invoices for comparison to receiving reports
d.
Reading the current year’s interim financial statements
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The correct answer is: Selecting a sample of vendor’s invoices for comparison to receiving
reports

Question 10
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The auditor should document the overall audit strategy and the audit plan, including significant
changes made during the audit engagement. Which of the following statements on
documentation is incorrect?

a.
Documentation of the overall audit strategy may be made in the form of a memorandum that
contains key decisions regarding the overall scope, timing and conduct of the audit
b.
The auditor may use standard audit programs or audit completion checklists, but such programs
and checklists need to be tailored to the particular client
c.
The auditor’s documentation of any significant changes to the originally planned overall audit
strategy and to the detailed audit plan need not include the reasons for the significant changes
d.
The form and extent of documentation depend on such matters as the size and complexity of the
entity, materiality, the extent of other documentation, and the circumstances of the specific
engagement
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The correct answer is: The auditor’s documentation of any significant changes to the originally
planned overall audit strategy and to the detailed audit plan need not include the reasons for the
significant changes

Question 11
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Engagement letter that documents and confirms the auditor’s acceptance of the engagement
would normally be sent to the client

a.
After the audit report is issued
b.
At the end of the fieldwork
c.
Before the auditor report is issued
d.
Before the commencement of the engagement
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The correct answer is: Before the commencement of the engagement

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Audit procedures performed to obtain an understanding of the entity and its environment,
including its internal control, and to assess the risks of material misstatements at the financial
statement and assertion levels

a.
Analytical procedures
b.
Substantive procedures
c.
Tests of control
d.
Risk assessment procedures
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The correct answer is: Risk assessment procedures

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Which of the following statements is incorrect?

a.
Planning involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of the
planning process
b.
The auditor should plan the audit so that the engagement will be performed in an effective
manner
c.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues
until the finalization of the audit program.
d.
Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit plan, in order to reduce audit risk to an acceptably low level
Feedback
The correct answer is: Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the completion of the
previous audit and continues until the finalization of the audit program.

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The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work. Which of the following statements is incorrect regarding
direction, supervision and review?

a.
The auditor plans the nature, timing, and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement
b.
As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor
performs a more detailed review of their work
c.
As the assessed risk of material misstatement increases, for the area of audit risk, the auditor
ordinarily increases the extent and timeliness of direction and supervision of engagement team
members
d.
The auditor plans the nature, timing and extent of the review of the team’s work based on the
capabilities and competence of the individual team members performing the audit work
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The correct answer is: As the assessed risk of material misstatement decreases, for the area of
audit risk, the auditor performs a more detailed review of their work

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Prior to the acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should

a.
Advise the client of the intention to contact the predecessor auditor and request a permission for
the contact
b.
Contact the predecessor auditor without advising the prospective client and request a complete
report of the circumstances leading to the termination of the engagement with an understanding
that all information disclosed will be kept confidential
c.
Not communicate with the predecessor auditor because this would in effect be asking the auditor
to violate the confidential relationship between an auditor and the client
d.
Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reason given by the client for the termination
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The correct answer is: Advise the client of the intention to contact the predecessor auditor and
request a permission for the contact

Question 1
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Audit procedures performed to obtain an understanding of the entity and its environment,
including its internal control, and to assess the risks of material misstatements at the financial
statement and assertion levels

a.
Risk assessment procedures
b.
Substantive procedures
c.
Tests of control
d.
Analytical procedures
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The correct answer is: Risk assessment procedures

Question 2
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The timing of the audit and nature of communications required include the following, except

a.
Audit areas where there is a higher risk of material misstatement
b.
The organization of meetings with management, and those charged with governance, to discuss
the nature, extent and timing of the audit work
c.
The entity’s timetable for reporting, such as interim and final stages
d.
The discussion with management and those charged with governance regarding the expected
type and timing of reports to be issued and other communications
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The correct answer is: Audit areas where there is a higher risk of material misstatement

Question 3
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If a company’s external auditor expresses an unqualified opinion as a result of the audit of the
company’s financial statements, readers of the audit report can assume that

a.
The external auditor found no fraud
b.
All material disagreements between the company and the auditor about the application of
accounting principles were resolved in the satisfaction of the external auditor
c.
The company is financially sound and the financial statements are accurate
d.
Internal control is effective
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The correct answer is: All material disagreements between the company and the auditor about
the application of accounting principles were resolved in the satisfaction of the external auditor

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Which of the following activities should be performed by the auditor at the beginning of the
current audit engagement?
I. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
II. Evaluate compliance with the requirements of the Code of Ethics for Professional
Accountants in the Philippines, including independence.
III. Establish an understanding of the terms of the engagement.

a.
II and III only
b.
I and III only
c.
I, II, and III
d.
I and II only
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The correct answer is: I, II, and III

Question 5
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Acts to be performed in order to obtain audit evidence

a.
Audit standards
b.
Audit program
c.
Audit procedures
d.
Audit strategy
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The correct answer is: Audit procedures

Question 6
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The auditor should document the overall audit strategy and the audit plan, including significant
changes made during the audit engagement. Which of the following statements on
documentation is incorrect?

a.
The auditor’s documentation of any significant changes to the originally planned overall audit
strategy and to the detailed audit plan need not include the reasons for the significant changes
b.
Documentation of the overall audit strategy may be made in the form of a memorandum that
contains key decisions regarding the overall scope, timing and conduct of the audit
c.
The form and extent of documentation depend on such matters as the size and complexity of the
entity, materiality, the extent of other documentation, and the circumstances of the specific
engagement
d.
The auditor may use standard audit programs or audit completion checklists, but such programs
and checklists need to be tailored to the particular client
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The correct answer is: The auditor’s documentation of any significant changes to the originally
planned overall audit strategy and to the detailed audit plan need not include the reasons for the
significant changes

Question 7
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Engagement letter that documents and confirms the auditor’s acceptance of the engagement
would normally be sent to the client

a.
Before the commencement of the engagement
b.
At the end of the fieldwork
c.
Before the auditor report is issued
d.
After the audit report is issued
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The correct answer is: Before the commencement of the engagement

Question 8
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It involves establishing the overall audit strategy for the engagement and developing an audit
plan in order to reduce audit risk to an acceptably low level
a.
Organizing
b.
Planning
c.
Reporting
d.
Field work
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The correct answer is: Planning

Question 9
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A client’s insistence that the audited results are reported quickly after the fiscal year end is of
concern to auditors because

a.
Many uncertainties inherent in the financial statements cannot be resolved until several months
after the year-end closing of the books
b.
Many clients have December 31 year ends and it is difficult to complete the audit when many of
the client’s personnel are on holidays
c.
The financial statements are less reliable because the period covered by the review for
subsequent events is shortened
d.
Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the
performance of audit procedures
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The correct answer is: Time pressure created by unrealistic deadlines increases the risk of errors
in judgment and in the performance of audit procedures

Question 10
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If the auditor determines that there are misstatements that remain uncorrected by the client, then
the materiality of these misstatements will determine the choice of the proper audit opinion. The
choice could be

a.
Either a qualified opinion or an adverse opinion
b.
Either an adverse opinion or disclaimer of opinion
c.
Either an unqualified opinion or an adverse opinion
d.
Either a qualified opinion or disclaimer of opinion
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The correct answer is: Either a qualified opinion or an adverse opinion

Question 11
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This serves as the set of instructions to assistants involved in the audit and as a means to control
and record the proper execution of the work of the personnel involved in the service

a.
Audit risk model
b.
Audit program
c.
Audit procedures
d.
Audit plan
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The correct answer is: Audit program

Question 12
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Which of the following statements is not correct about materiality?

a.
An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements
b.
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
c.
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
d.
Materiality judgments are made in light of surrounding circumstanced and necessarily involve
both quantitative and qualitative judgments
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The correct answer is: An auditor considers materiality for planning purposes in terms of the
largest aggregate level of misstatements that could be material to any one of the financial
statements

Question 13
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If a change in the type of engagement from higher to lower of assurance is not justified, the
auditor should
a.
Continue with the revised engagement, but make explicit reference about the original
engagement
b.
Refuse to agree to management’s request on the change of engagement and continue with the
original engagement
c.
Withdraw from the engagement
d.
Qualify the report on the original engagement
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The correct answer is: Refuse to agree to management’s request on the change of engagement
and continue with the original engagement

Question 14
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If the auditor concludes that there is a reasonable justification for the change in engagement, the
report to be issued would

a.
Be that appropriate for the revised terms of the engagement
b.
Not include reference to any procedures that may have been performed, particularly when the
new engagement is to undertake agreed-upon procedures
c.
Include reference to the original engagement
d.
Include reference to any procedures that may have been performed in the original engagement
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The correct answer is: Be that appropriate for the revised terms of the engagement

Question 15
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If the prospective client refuses to permit the predecessor to respond or limits the predecessor’s
response, the successor should

a.
Accept the engagement but only after an equitable increase in the professional fee
b.
Continue to ask the predecessor auditor questions on facts that might bear on the integrity of
management
c.
Inquire as to the reasons and consider the implications in deciding whether to accept the
engagement
d.
Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes
a significant scope limitation
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The correct answer is: Inquire as to the reasons and consider the implications in deciding
whether to accept the engagement

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Which of the following statements is/are correct?
Statement 1: On recurring audits, the auditor should consider whether circumstances require the
terms of the engagement to be revised and whether there is a need to remind the client of the
existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established client.

a.
Both statements are correct
b.
Only statement 1 is correct
c.
Only statement 2 is correct
d.
Both statements are incorrect
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The correct answer is: Only statement 1 is correct

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In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the

a.
Selected audit techniques
b.
Cost-benefit gathering evidence
c.
Timing of audit procedures
d.
Financial statement assertions
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The correct answer is: Financial statement assertions

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Prior to the acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should

a.
Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reason given by the client for the termination
b.
Advise the client of the intention to contact the predecessor auditor and request a permission for
the contact
c.
Contact the predecessor auditor without advising the prospective client and request a complete
report of the circumstances leading to the termination of the engagement with an understanding
that all information disclosed will be kept confidential
d.
Not communicate with the predecessor auditor because this would in effect be asking the auditor
to violate the confidential relationship between an auditor and the client
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The correct answer is: Advise the client of the intention to contact the predecessor auditor and
request a permission for the contact

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An engagement letter is best described as

a.
A letter from the auditors to company management specifying that management is responsible
for the financial statements, and the auditors will issue an opinion on the financial statements
b.
A letter from the auditors to company management that specifies the responsibilities of both the
company and the auditors in completing the audit and the timing for its completion
c.
A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor has
been engaged to perform the audit and the fees to be paid
d.
A letter from the company to the auditors specifying management’s expectations for completion
of the audit on a timely basis and the fees
Feedback
The correct answer is: A letter from the auditors to company management that specifies the
responsibilities of both the company and the auditors in completing the audit and the timing for
its completion

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Audit procedures to detect material misstatements at the assertion level

a.
Risk assessment procedures
b.
Substantive procedures
c.
Analytical procedures
d.
Tests of control
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The correct answer is: Substantive procedures

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Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?

a.
The existence of related-party transactions
b.
The complexity of the accounting system
c.
The adequacy of the accounting records
d.
The operating effectiveness of control procedures
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The correct answer is: The adequacy of the accounting records

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Cost-benefit considerations are part of audit planning. In relation to this, which of the following
audit procedures is usually the least costly to perform?

a.
Tests of controls
b.
Analytical procedures
c.
Substantive tests of transactions
d.
Tests of balances
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The correct answer is: Analytical procedures

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Audit risk has three components: inherent risk, control risk and detection risk. Which of the
following statements is correct?

a.
The risk that material misstatement will not prevent or detected on a timely basis by internal
control can be reduced to a zero by effective controls
b.
Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
c.
The existing levels of inherent risk, control risk and detection risk can be changed at the
discretion of the auditor
d.
Detection risk is a function of the efficiency of an audit procedure
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The correct answer is: Cash is more susceptible to theft than an inventory of coal because it has a
greater inherent risk.

Question 9
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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.
Pending legal matters to be included in the inquiry of the client’s attorney
b.
Timing of inventory observation procedures to be performed
c.
Evidence to be gathered to provide a sufficient basis for the auditor’s opinion
d.
Procedures to be undertaken to discover litigation, claims, and assessments
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The correct answer is: Timing of inventory observation procedures to be performed

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In developing the overall audit strategy, the focus of the engagement team’s efforts is considered.
Which of the following is not appropriately classified as a factor affecting the focus of the team’s
efforts?

a.
Audit areas where there is a higher risk of material misstatement
b.
Volume of transactions, which may determine whether it is more efficient for the auditor to rely
on internal control
c.
Setting materiality for planning purposes
d.
The financial reporting framework on which the financial information to be audited has been
prepared, including any need for reconciliation to another reporting framework
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The correct answer is: The financial reporting framework on which the financial information to
be audited has been prepared, including any need for reconciliation to another reporting
framework

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Which of the following procedures would an auditor least likely perform in planning a financial
statement 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.
Reading the current year’s interim financial statements
d.
Selecting a sample of vendor’s invoices for comparison to receiving reports
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The correct answer is: Selecting a sample of vendor’s invoices for comparison to receiving
reports

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Which of the following statements is incorrect?

a.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues
until the finalization of the audit program.
b.
The auditor should plan the audit so that the engagement will be performed in an effective
manner
c.
Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit plan, in order to reduce audit risk to an acceptably low level
d.
Planning involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of the
planning process
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The correct answer is: Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the completion of the
previous audit and continues until the finalization of the audit program.

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Audit procedures may be classified as risk assessment procedures and further audit procedures.
Which of the following best describes risk assessment procedures?

a.
These procedures test the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level
b.
These procedures include tests of details of classes of transactions, account balances, and
disclosures and analytical procedures
c.
These procedures are used detect material misstatements at the assertion level
d.
These are procedures for obtaining 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 levels
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The correct answer is: These are procedures for obtaining 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 levels

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The auditor should design the written audit program, so that

a.
Each account balance will be tested under either tests of controls or tests of transactions
b.
Substantive tests prior to the balance sheet date will be minimized
c.
All material transactions will be selected for substantive testing
d.
The audit procedures selected will achieve specific audit objectives
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The correct answer is: The audit procedures selected will achieve specific audit objectives

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Engagement letters are widely used in practice for

a.
Professional engagements of all types
b.
Audits only
c.
Assurance engagements only
d.
Related services only
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The correct answer is: Professional engagements of all types

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The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work. Which of the following statements is incorrect regarding
direction, supervision and review?
a.
As the assessed risk of material misstatement increases, for the area of audit risk, the auditor
ordinarily increases the extent and timeliness of direction and supervision of engagement team
members
b.
The auditor plans the nature, timing and extent of the review of the team’s work based on the
capabilities and competence of the individual team members performing the audit work
c.
The auditor plans the nature, timing, and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement
d.
As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor
performs a more detailed review of their work
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The correct answer is: As the assessed risk of material misstatement decreases, for the area of
audit risk, the auditor performs a more detailed review of their work
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Audit procedures to test the operating effectiveness of controls in preventing or detecting and
correcting material misstatements at the assertion level

a.
Substantive procedures
b.
Tests of control
c.
Analytical procedures
d.
Risk assessment procedures
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The correct answer is: Tests of control

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Which of the following statements is/are correct?
Statement 1: The overall audit plan and the audit program should not be revised during the
course of the audit.
Statement 2: The auditor should develop and document an audit program setting out the nature,
timing and extent of planned audit procedures required to implement the overall audit plan.

a.
Both statements are incorrect
b.
Both statements are correct
c.
Only statement 1 is correct
d.
Only statement 2 is correct
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The correct answer is: Only statement 2 is correct

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According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)

a.
Client representation letter
b.
Engagement letter
c.
Comfort letter
d.
Memo placed in the permanent section of the working papers
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The correct answer is: Engagement letter

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Set the following phases in proper order:
i. Pre-Engagement
ii. Internal Controls
iii. Evidence-Gathering
iv. Planning
v. Post-Audit Responsibilities
vi. Reporting 

a.
i, iv, ii, iii, vi, v
b.
i, ii, iii, iv, v, vi
c.
i, iv, iii, ii, v, vi
d.
i, iv, ii, iii, v, vi
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The correct answer is: i, iv, ii, iii, vi, v

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An engagement letter is prepared with the interest(s) of
a.
The auditor only
b.
The client only
c.
Both the client and the auditor
d.
The public
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The correct answer is: Both the client and the auditor

Question 7
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With regard to independence, which of the following statements is correct?

a.
In case of audits of financial statements, the Code of Ethics requires the auditor to be
independent from their assurance team from the start of performing procedures required by the
engagement up to the issuance of the report
b.
Audit engagements provide assurance to a wide range of potential users; consequently, both
independence in mind and independence in appearance are of particular importance
c.
Only the engagement partner is required by the Code of Ethics to be independent from their
assurance clients
d.
In case of audits of financial statements, the Code of Ethics requires the members of the
assurance team, the firm but not network firms to be independent of the client
Feedback
The correct answer is: Audit engagements provide assurance to a wide range of potential users;
consequently, both independence in mind and independence in appearance are of particular
importance

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Analytical procedures are required:
(i)As a risk assessment procedure performed
(ii) As a substantive test procedure during evidence gathering
(iii) As an overall review at audit completion during planning 

a.
Yes, yes, no
b.
Yes, yes, yes
c.
Yes, no, yes
d.
Yes, no, no
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The correct answer is: Yes, no, yes

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Which of the following statements is/are correct?
Statement 1: According to PSA 300, the auditor may discuss elements of planning with those
charged with governance and the entity's management.
Statement 2: The audit plan sets the scope, timing and direction of the audit guides the
development of the more detailed overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and includes the
nature, timing and extent of audit procedures to be performed engagement team members to
obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

a.
All statements are correct
b.
Only 1 statement is correct
c.
All statements are incorrect
d.
Only 2 statements are correct
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The correct answer is: Only 1 statement is correct

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Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client?

a.
The client’s financial ability
b.
The client’s probability of achieving an unqualified opinion
c.
The client’s standing in the business community
d.
The client’s relations with its previous CPA firm
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The correct answer is: The client’s probability of achieving an unqualified opinion

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The primary purpose of the engagement letter is to
a.
Provide a written record of the agreement with the client as to the services to be provided
b.
Satisfy the requirements of the CPA’s liability insurance policy
c.
Remind management that the primary responsibility for the financial statements rests with
management
d.
Provide a starting point for the auditor’s preparation of the preliminary audit program
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The correct answer is: Provide a written record of the agreement with the client as to the services
to be provided

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Which of the following is least likely considered by the CPA when he makes an overall audit
plan?

a.
The effect of information technology on the audit
b.
The content of the representation letters
c.
Identification of complex accounting areas including those involving accounting estimates
d.
The nature and timing of reports and other communication with the entity that are expected
under the engagement
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The correct answer is: The content of the representation letters

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Analytical procedures used in planning an audit should focus on identifying

a.
Areas that may represent specific risks relevant to the audit
b.
The predictability of financial data from individual transactions
c.
The various assertions that are embodied in the financial statements
d.
Material weaknesses in the internal control system
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The correct answer is: Areas that may represent specific risks relevant to the audit

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If the auditor believes that the scope of the audit examination has resulted in the auditor being
unable to acquire sufficient appropriate evidence with respect to an item included in the financial
statements then the materiality of the item will determine the choice of the proper audit opinion.
The choice could be

a.
Either a qualified opinion or an adverse opinion
b.
Either a qualified opinion or disclaimer of opinion
c.
Either an adverse opinion or disclaimer of opinion
d.
Either an unqualified opinion or an adverse opinion
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The correct answer is: Either an adverse opinion or disclaimer of opinion

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Which of the following statements is/are correct?
Statement 1: Where the terms of the engagement are changed, the auditor and the client should
agree on the new terms.
Statement 2: The auditor should not agree to a change of engagement when there is no
reasonable justification for doing so.
Statement 3: If the auditor is unable to agree to a change of the engagement and is not permitted
to continue the original engagement, the auditor should withdraw and consider whether there is
any obligation, either contractual or otherwise, to report to other parties, such as the board of
directors or shareholders, the circumstances necessitating the withdrawal.

a.
Only two statements are correct
b.
All statements are correct
c.
All statements are incorrect
d.
Only one statement is correct
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The correct answer is: All statements are correct

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Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?

a.
The operating effectiveness of control procedures
b.
The existence of related-party transactions
c.
The complexity of the accounting system
d.
The adequacy of the accounting records
Feedback
The correct answer is: The adequacy of the accounting records

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Audit procedures may be classified as risk assessment procedures and further audit procedures.
Which of the following best describes risk assessment procedures?

a.
These procedures test the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level
b.
These are procedures for obtaining 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 levels
c.
These procedures are used detect material misstatements at the assertion level
d.
These procedures include tests of details of classes of transactions, account balances, and
disclosures and analytical procedures
Feedback
The correct answer is: These are procedures for obtaining 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 levels

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If the auditor concludes that there is a reasonable justification for the change in engagement, the
report to be issued would

a.
Not include reference to any procedures that may have been performed, particularly when the
new engagement is to undertake agreed-upon procedures
b.
Include reference to the original engagement
c.
Be that appropriate for the revised terms of the engagement
d.
Include reference to any procedures that may have been performed in the original engagement
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The correct answer is: Be that appropriate for the revised terms of the engagement

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The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work. Which of the following statements is incorrect regarding
direction, supervision and review?

a.
The auditor plans the nature, timing and extent of the review of the team’s work based on the
capabilities and competence of the individual team members performing the audit work
b.
As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor
performs a more detailed review of their work
c.
As the assessed risk of material misstatement increases, for the area of audit risk, the auditor
ordinarily increases the extent and timeliness of direction and supervision of engagement team
members
d.
The auditor plans the nature, timing, and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement
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The correct answer is: As the assessed risk of material misstatement decreases, for the area of
audit risk, the auditor performs a more detailed review of their work

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Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client?

a.
The client’s financial ability
b.
The client’s standing in the business community
c.
The client’s probability of achieving an unqualified opinion
d.
The client’s relations with its previous CPA firm
Feedback
The correct answer is: The client’s probability of achieving an unqualified opinion

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With regard to independence, which of the following statements is correct?

a.
In case of audits of financial statements, the Code of Ethics requires the members of the
assurance team, the firm but not network firms to be independent of the client
b.
In case of audits of financial statements, the Code of Ethics requires the auditor to be
independent from their assurance team from the start of performing procedures required by the
engagement up to the issuance of the report
c.
Audit engagements provide assurance to a wide range of potential users; consequently, both
independence in mind and independence in appearance are of particular importance
d.
Only the engagement partner is required by the Code of Ethics to be independent from their
assurance clients
Feedback
The correct answer is: Audit engagements provide assurance to a wide range of potential users;
consequently, both independence in mind and independence in appearance are of particular
importance

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A client’s insistence that the audited results are reported quickly after the fiscal year end is of
concern to auditors because

a.
Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the
performance of audit procedures
b.
The financial statements are less reliable because the period covered by the review for
subsequent events is shortened
c.
Many clients have December 31 year ends and it is difficult to complete the audit when many of
the client’s personnel are on holidays
d.
Many uncertainties inherent in the financial statements cannot be resolved until several months
after the year-end closing of the books
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The correct answer is: Time pressure created by unrealistic deadlines increases the risk of errors
in judgment and in the performance of audit procedures

Question 8
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Audit procedures to test the operating effectiveness of controls in preventing or detecting and
correcting material misstatements at the assertion level

a.
Tests of control
b.
Risk assessment procedures
c.
Substantive procedures
d.
Analytical procedures
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The correct answer is: Tests of control

Question 9
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Analytical procedures are required:
(i)As a risk assessment procedure performed
(ii) As a substantive test procedure during evidence gathering
(iii) As an overall review at audit completion during planning 

a.
Yes, yes, no
b.
Yes, no, no
c.
Yes, yes, yes
d.
Yes, no, yes
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The correct answer is: Yes, no, yes

Question 10
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The primary purpose of the engagement letter is to

a.
Provide a written record of the agreement with the client as to the services to be provided
b.
Provide a starting point for the auditor’s preparation of the preliminary audit program
c.
Remind management that the primary responsibility for the financial statements rests with
management
d.
Satisfy the requirements of the CPA’s liability insurance policy
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The correct answer is: Provide a written record of the agreement with the client as to the services
to be provided

Question 11
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If a company’s external auditor expresses an unqualified opinion as a result of the audit of the
company’s financial statements, readers of the audit report can assume that

a.
The company is financially sound and the financial statements are accurate
b.
All material disagreements between the company and the auditor about the application of
accounting principles were resolved in the satisfaction of the external auditor
c.
The external auditor found no fraud
d.
Internal control is effective
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The correct answer is: All material disagreements between the company and the auditor about
the application of accounting principles were resolved in the satisfaction of the external auditor

Question 12
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Which of the following statements is incorrect?

a.
Planning involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of the
planning process
b.
Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit plan, in order to reduce audit risk to an acceptably low level
c.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues
until the finalization of the audit program.
d.
The auditor should plan the audit so that the engagement will be performed in an effective
manner
Feedback
The correct answer is: Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the completion of the
previous audit and continues until the finalization of the audit program.

Question 13
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According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)

a.
Memo placed in the permanent section of the working papers
b.
Engagement letter
c.
Comfort letter
d.
Client representation letter
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The correct answer is: Engagement letter

Question 14
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Question text
Audit procedures performed to obtain an understanding of the entity and its environment,
including its internal control, and to assess the risks of material misstatements at the financial
statement and assertion levels

a.
Tests of control
b.
Analytical procedures
c.
Substantive procedures
d.
Risk assessment procedures
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The correct answer is: Risk assessment procedures

Question 15
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Question text
Audit risk has three components: inherent risk, control risk and detection risk. Which of the
following statements is correct?

a.
Detection risk is a function of the efficiency of an audit procedure
b.
The risk that material misstatement will not prevent or detected on a timely basis by internal
control can be reduced to a zero by effective controls
c.
The existing levels of inherent risk, control risk and detection risk can be changed at the
discretion of the auditor
d.
Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
Feedback
The correct answer is: Cash is more susceptible to theft than an inventory of coal because it has a
greater inherent risk.

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