CHAPTER 4

The Financial Statement Audit: Client Acceptance and Planning

1. In assessing whether to accept a client for an audit engagement, an audit should consider the
I. Client’s business risk
II. Auditor’s business risk
A. I only
B. II only
C. Both I and II
D. Neither I and II
2. Which of the following factors most likely would cause an auditor to decline a new audit
engagement?
A. Concluding that the entity’s management probably lacks integrity.
B. An inadequate to perform preliminary analytical procedures before assessing control
risk.
C. An inadequate understanding of the entity’s internal control.
D. The close proximity to the end of the entity’s reporting period.

PSQU 1 requires a firm (including a sole practitioner) to establish policies and procedures for
the acceptance and continuance of client relationships and specific engagement, designed to
provide reasonable assurance that it will only accept engagement if it:

1) Is competent to perform the engagement.

2) Can comply with relevant ethical requirements; and
3) Has considered the integrity of the client, and does not have information to
conclude that the entity’s management lacks integrity.

Answer B is incorrect because the auditor performs analytical procedures after accepting the
engagement.

Answer C is incorrect because the auditor obtains an understanding of the entity’s internal
control system subsequent to the acceptance of the engagement.

Answer D is incorrect because an auditor may accept an engagement near or after the end
of the reporting period.

3. Before accepting an engagement to audit a new client, an auditor is required to:

A. Obtain a copy of the client’s financial statements.
B. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
C. Make inquires of the predecessor audit after obtaining the consent of the prospective
client.
D. Discuss the management representation letter with the client’s audit committee.

PSA 300 (Planning an Audit of Financial Statements) states that the auditor shall undertake the
following activities prior to starting an initial audit:
 1) Performing procedures required by PSA 220 (Quality control of an Audit of Financial
Statement) regarding the acceptance of the client relationship and the specific audit
engagement; and
2) Communicating with the predecessor audit, where there has been a change of auditors,
in compliance with relevant ethical requirements.

Answer A is incorrect because the entity’s annual financial statements will be prepared after the
end of the reporting period and the auditor’s acceptance of the engagement will be likely be
prior to that time.

Answer B and D are incorrect because the procedures described will be performed only after the
acceptance of the engagement.

4. Which of the following conditions most likely would pose the greatest risk in accepting a new
audit engagement?
A. There will be a client imposed scope limitation.
B. The client’s financial reporting system has been in place for 10 years.
C. The firm will have to hire an expert in one audit areas.
D. Staff will need to be rescheduled to cover this new client.

According to PSA 210 (agreeing the terms of audit engagement), the auditor shall not accept the
engagement of 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.

5. Which of the following circumstances would permit an independent auditor to accept an

engagement after the end of the reporting period?
A. Expectation of the operating effectiveness of controls.
B. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests
required by PSAs due to the timing of the acceptance of the engagement.
C. Remedy the limitations resulting from accepting the engagement after the end of the
reporting period, such as those relating to the existence of physical inventory.
D. Receipt of an assertion from the predecessor auditor that the entity will be able to
continue as a going concern.

Prior to accepting a proposed audit engagement subsequent to the end of the entity’s reporting
period, the auditor should determine whether circumstances permit an audit in accordance with
PSAs and expression of an unmodified opinions. Otherwise, the auditor should discuss with the
prospective client the possibility of rendering a qualified opinion or an disclaimer of opinion.
However, in some cases, the auditor may remedy the audit limitations such as by observing
another physical count of inventories.

Answer A is incorrect because sufficient appropriate evidence regarding the operating

effectiveness of the entity’s internal control during the year should be available after year-end.
 Answer B is incorrect because a disclaimer of opinion is appropriate only if the auditor cannot
resolve an issue by performing alternative procedures.

Answer D is incorrect because there is no need to obtain representation regarding the

prospective client’s ability to continue at a going concern from the predecessor auditor.

6. In an audit based on Philippines standards on Auditing (PSAs,), a successor auditor would

normally become satisfied with operating balances by
A. Performing analytic review procedures
B. Reviewing the predecessor’s working papers
C. Auditing the previous year’s working papers
D. Interviewing client personnel.
7. A predecessor withdrew from the engagement after discovering that a client’s financial
statements are materially mastered that it would not revise. If ask by the predecessor auditor
about the termination of the engagement, the predecessor should
A. Suggest that the successor auditor should obtain the client’s consent to discuss the
reasons.
B. Indicate that there was a misunderstanding
C. State that the audit revealed material misstatement that the client would not revise.
D. Suggest that the successor auditor ask the client
8. Which of the following is not correct regarding the communications between
successor/incoming and predecessor/previous auditors?
A. The burden of initiating the communication rests with the predecessor auditor.
B. The burden of initiating the communication rest with the successor audit.
C. The predecessor audit may choose to provide a limed response to a successor auditor
D. The predecessor auditor must receive his/her former client’s permission prior to
disclosing client information to the auditor.
9. The auditor may accept or continue an audit engagement only when the basis upon which it is to
be performed has been agreed, through.
I. Establishing whether the preconditions for an audit are present.
II. Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the audit engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

As defined in PSA 210 (agreeing the terms of audit engagements), “preconditions for an
audit” refers to:

a) The use by management of an acceptance financial reporting framework in the

preparation of the financial statements, and
b) The agreement of management and, where appropriate those charged with
governance to the premise on which at audit is conducted.
 The auditor establishes whether the preconditions for an audit are present by:

1) Determining whether the financial reporting framework to be applied in the

preparation of the financial statements is acceptable; and
2) Obtaining management’s agreement that it acknowledge and understands its
responsibilities that are fundamental to the conduct of an audit in accordance
with PSAs.
10. An audit is conducted on the premise that management and, where appropriate, those charged
with governance have acknowledged and understand that they have responsibilities that are
fundamental to the conduct of an audit in accordance with PSAs. Which of the following is not
one of those responsibilities?
A. The preparation of financial statements in accordance with relevant pronouncements
issued by the AASC.
B. The establishment and maintenance of an adequate internal control system that is
necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
C. To provide the auditor with access to all information that is relevant to the preparation
of the financial statements such as records, documentation, and other matters.
D. To provide the auditor with unrestricted access to persons within the entity from which
the auditor determines. It necessary to obtain audit evidence.

Management is responsible for the preparation of the financial statements to accordance with
the Applicable financial reporting framework, including where relevant their fair presentation.

11. The auditor shall agree the terms of the audit engagement with management or charged with
governance with the applicable financial reporting framework, including where relevant their fair
presentation.
A. Engagement letter
B. Letter of audit inquiry
C. Management representation letter
D. Confirmation letter
The management states that it is in the interest of both the entity and the auditor that the sends
an audit engagement letter before the commencement of the audit to help avoid
misunderstanding with respect to the audit.

The engagement letter shall include:

a) The objectives and scope of the audit of the financial statements.

b) The responsibilities of the auditor:
c) The responsibility of management;
d) Identification of the applicable financial reporting framework for the preparation of the
financial statement; and
e) 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 concept.
12. The following matters are generally included in an auditors engagement letter, except
A. The factors to be considered in determining the overall materiality,
B. The fact that because of the test nature and other inherent limitations of an audit,
together with the inherent limitations of internal control, there is an unavoidable risk
that even some material misstatement may remain undiscovered.
C. The scope of the audit.
D. Management’s responsibility for the financial statements.
13. The following are usually included in an auditor’s engagement letter, except
A. List of audit procedures to be used in inventory observation.
B. The financial statement are the responsibility of the company’s management
C. A reference to PFRS.
D. A reference to PSAs.
14. Which of the following statements would least likely appear in an auditor’s engagement’s letter?
A. Our audit will be made with the objective of our expressing an opinion on the financial
statements.
B. We remind you that the responsibility for the preparation of financial statements
including adequate disclosure is that of the management of the entity.
C. After performing our preliminary analytical procedures, as will discuss with you the
other procedures we consider necessary to complete the engagement.
D. Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to the engagement plus-out-of-pocket expenses.
15. An auditor is required to establish an understanding with a client regarding the services to be
performed for each engagement. This understanding generally includes
A. The auditor’s responsibility to apply the concept of materiality in planning and
performing the the audit.
B. Management’s responsibility for providing the auditor with an assessment of the risk of
material misstatement due to fraud.
C. The auditor’s responsibility for ensuring that those charged with governance are aware
of any significant deficiencies is internal control that may come to the auditor’s
attention.
D. Management’s responsibility for errors and the illegal activities of employees that may
cause material misstatement.

An auditor’s engagement letter shall include, among other things the auditor’s
responsibility to communicate to those charged with governance of the client significant
internal control deficiencies that may be discovered during the audit.

Answer A is incorrect because determining materiality in planning and performing an

audit is a responsibility that the auditor is not required to share with the client.

Answer B is incorrect because the auditor assesses the risk of material misstatement.

Answer D is incorrect because the auditor management is not responsible for the errors
and illegal activities of employees.

16. An auditor’s engagement letter most likely will include.

 A. A request for permission to contract the client’s lawyer for assistance in identifying
litigation, claim, and assessments.
B. A remainder that management is responsible for illegal acts committed by employees.
C. The auditor’s preliminary assessment of the risk factors relating to misstatements arising
from fraudulent financial reporting.
D. Management’s acknowledgement of its responsibility for such internal control as it
determines is necessary to enable the preparation of financial statements that are free
from materials misstatement.

Among the matters addressed in an engagement letter in management’s responsibility for:

a) The preparation and fair presentation of the financial statement in accordance

with Philippine financial reporting standards; and
b) Such internal control as it determines is necessary to enable the preparation of
financial statement that are free from material misstatement, whether due to
fraud or error

Answer A is incorrect because management is responsible for adopting policies and procedures
to identify, evaluate, and account for litigation, claims, and assessments.

Answer B is incorrect because management is responsible for ensuring that the entity’s
operations are conducted in accordance with laws and regulations. However, it is not responsible
for illegal acts of employees that are unrelated to the entity’s business activity.

Answer C is incorrect because an auditor submits an engagement letter before the

commencement of the audit. Price to performing procedures, the auditor does not assess the
risk factors relating to misstatements that may arise from fraudulent financial reporting.

17. The auditor of a parent entity is also the auditor of its component. Which of the following factors
may influence the auditor’s decision whether to send a separate engagement letter to the entity’s
component?

a. Whether a separate auditor’s report is to be issued on the component

b. The component’s management does not accept its responsibilities that are fundamental to
the conduct of an audit
c. The financial reporting framework used by the component is unacceptable
d. The preconditions for an audit of the component’s financial statements are not present

18. On recurring audits, the auditor may decide not to send a new engagement letter each period. Which
of the following factors may make it appropriate to send a new engagement letter?

A B C D
Any revised or special terms of the audit
YES NO YES NO
engagement
A recent change of senior management YES NO NO NO
A change in legal or regulatory requirements YES YES YES YES
A significant change in nature or size of the
YES YES YES YES
entity’s business

19. The auditor shall not agree to a request from the entity to change the terms of the audit engagement
or to change the audit engagement to an engagement that conveys a lower level of assurance when
there is no reasonable justification for doing so. Which of the following may be considered reasonable
justifications for the change in the audit engagement?

I. A change in circumstances affecting the need for the service.

II. A misunderstanding as to the nature of an audit as originally requested
III. A restriction on the scope of the engagement, whether imposed b management or caused by
other circumstances.

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

20. Before the completion of the audit engagement an auditor is requested to change the engagement
to one that provides a lower level of assurance. 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 engagement

b. Included reference to the original engagement
c. Include reference to any procedures that may have been performed in 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

21. 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

a. Insist on continuing the original engagement

b. Express a qualified opinion
c. Express an adverse opinion
d. Withdraw from the engagement

22. Planning an audit involves

I. Establishing the overall audit strategy for the engagement
II. Developing an audit plan

a. I only
 b. II only
c. Both I and II
d. Neither I nor II

23. 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 specified audit
engagement
II. Evaluate compliance with relevant ethical requirement, including independence
III. Establish an understanding of the terms of the engagement

a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

24. Initial audit planning involves the following matters, except

a. Identify the client’s reason for the engagement

b. Schedule engagement staff and auditor’s experts
c. Develop an overall audit strategy
d. Request that bank balances be confirmed

25. Adequate planning helps to ensure that

A B C D
Appropriate attention is devoted to important
NO YES YES NO
areas of the audit
Potential problems are identified and resolved
YES YES NO NO
on a timely basis
The audit engagement is properly organized and
YES YES NO NO
managed

26. Which of the following statements concerning audit planning is incorrect?

a. Planning is a discrete phase of an audit

b. Planning is a continual and iterative process
c. In a recurring audit, planning often begins shortly after (or in connection with) the completion
of the previous audit and continues until the completion of the current audit engagement
d. In planning an audit, the auditor considers the timing of certain planning activities and audit
procedures that are to be completed prior to the performance of further audit procedures

27. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a
client’s business and industry to
 a. Develop an attitude of professional skepticism concerning management’s financial statement
assertions
b. Make constructive suggestion concerning improvements to the client’s internal control
c. Evaluate whether the aggregation of known misstatements causes the financial statements
taken as a whole to be materially misstated
d. Understand the events and transactions that may have an effect on the client’s financial
statements

28. Which of the following is the least likely procedure to be formed in planning a financial statement
audit?

a. Selecting a sample of sales invoice for comparison with shipping documents

b. Coordinating the assistance of entity personnel in data preparation
c. Reading the current year’s interim financial statements
d. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity

29. The establishing of an overall audit strategy involves

I. Determining the characteristics of the engagement that define its scope

II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required
III. Considering the important factors that will determine the focus of the engagement team’s
efforts

a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

30. Which of the following should be included in the audit plan?

I. The nature, timing and extent of planned risk assessment procedures.

II. The nature, timing and extent of planned further audit procedures at the assertion level

a. I only
b. II only
c. Both I and II
d. Neither I nor II

31. Which of the following matters would an auditor least likely consider when setting the direction of
the audit?
 a. The selection of the engagement team and the assignment of audit work to the team
members
b. The engagement budget which includes consideration of the appropriate amount of time to
allot for areas where there may be higher risks of material misstatement
c. The availability of client personnel and data
d. The manner in which the auditor emphasizes to engagement team members the need to
maintain a questioning mind and to exercise professional skepticism in the gathering and
evaluation of audit evidence

32. Which of the following matters would an auditor most likely consider when establishing the scope of
the audit?

a. The expected audit coverage, including the number and locations of the entity’s components
to be included
b. The entity’s timetable for reporting, such as at interim and final stages.
c. The discussion with the entity’s management concerning the expected communications on the
expected deliverables resulting from the audit procedures
d. Audit areas where there is a higher risk of material misstatement.

33. In the planning stage of an audit engagement, the auditor is required to perform audit procedures to
obtain an understanding of the entity and its environment, including its internal control. These
procedures are called

a. Risk assessment procedures

b. Substantive tests
c. Tests of controls
d. Dual-purpose tests

34. In planning the audit engagement, the auditor should consider each of the following, except

a. The type of opinion that is likely to be expressed

b. The entity’s accounting policies and procedures
c. Matters relating to the entity’s business and the industry in which it operates
d. Materiality level and audit risk.

35. Audit program are modified to suit the circumstances of particular engagements. A complete audit
program usually should be developed

a. When the engagement letter is prepared

b. After obtaining an understanding of the control environment and control activities component
of the entity’s internal control
c. After the auditor has obtained an understanding of the entity and its environment, including
its internal control and assessed the risks of material misstatement
d. Prior to beginning the actual audit work

36. In designing written audit program, an auditor should establish specific audit objectives that relate
primarily to the
 a. Selected audit techniques
b. Cost-benefit of gathering audit evidence
c. Timing of audit procedures
d. Financial statement assertions

37. An audit program should be designed for each individual audit and should incorporate steps and
procedures to

a. Detect and eliminate fraud of any type.

b. Gather sufficient amount of management information available
c. Provide assurance that the objectives of the audit are satisfied
d. Insure that only material items are audited

38. Which of the following is an aspect of scheduling and controlling the audit engagement?

a. Including in the engagement letter an estimate of the minimum and maximum audit fee
b. Writing a conclusion in individual working papers indicating how the results of the audit will
affect the auditor’s report
c. Performing audit work only after the entity’s books have been closed for the period under
audit
d. Including in the audit program a column for budgeted and actual time

39. In connection with the planning phase of an audit engagement, which of the following statements is
always correct?

a. Final staffing decision must be made prior to completion of the planning stage
b. Observation of inventory count should be performed at year-end
c. A portion of the audit of a continuing audit client can be performed at interim dates
d. An engagement should not be accepted after the client’s financial year-end

40. The auditor shall undertake which of the following activities prior to starting an initial audit?

I. Performing procedures required by PSA 220 (Quality Control for an Audit of Financial
Statements) regarding the acceptance of the client relationship and the specific audit
engagement.
II. Communicating with the predecessor auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements

a. I only
b. II only
c. Either I or II
d. Both I and II

41. Before accepting an audit engagement, a proposed (successor/incoming) auditor should make
inquiries of the previous (predecessor) auditor regarding the previous auditor’s

a. Evaluation of all matters of continuing accounting significance

b. Understanding as to the reasons for the change of auditors
 c. Awareness of the consistency in the application of PAS/PFRS between periods
d. Opinion on any subsequent events occurring since the previous auditor’s report was issued

42. The auditor is required to determine three different levels of materiality: (1) materiality for the
financial statements as a whole, (2) performance materiality, and (3)

a. Overall materiality
b. Planning materiality
c. General materiality
d. Specified materiality

43. What materiality level would be considered by the auditor to determine whether the proposed
adjustments are significant or not?

a. Overall materiality
b. Scoping materiality
c. Specific materiality
d. Performance materiality

44. What materiality level is used by the auditor in determining which line items in the financial
statements are to be tested?

a. Overall materiality
b. Performance materiality
c. Specific materiality
d. Individual materiality

45. Is the amount set by the auditor for particular classes of transactions,
account balances or disclosures for which misstatements, well through lower than overall materiality
could reasonably be expected to influence the economic decisions of users of the financial statements?

a. Performance materiality
b. Planning materiality
c. Specific materiality
d. General materiality

46. Which of the required materiality levels is calculated by multiplying a certain percentage by the
appropriate benchmark which is either an element or component of an entity’s financial statements?

a. Overall materiality
b. Planning materiality
c. Scoping materiality
d. Specific materiality

47. Which of the following factors are normally considered by the auditors in determining the
appropriate benchmark for the purpose of calculating overall materiality?
 I. Components of the entity’s financial statements
II. Laws and regulations
III. Nature of the entity

a. I and II only c. II, and III only

b. I and III only d. I, II, and III

48. Which of the following statements concerning materiality is not correct?

a. When establishing the overall audit strategy, the auditor shall determine materiality for the
financial statements as a whole
b. If, in the specific circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of lesser amounts than
materiality for the financial statements as a whole could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements, the auditors shall
also determine the materiality level or levels to those particular classes of transactions, account
balances or disclosures
c. Determining materiality involves the exercise of professional judgment
d. The materiality level for the financial statements as a whole determined in the planning stage
of the audit should not be affected by changes in the circumstances of the engagement

49. Which of the following would an auditor most likely use in determining a preliminary judgment
about materiality?

a. The contents of the management representation letter

b. The anticipated sample size of the planned substantive tests
c. The entity’s annualized interim financial statements
d. The results of internal control questionnaire

50. An auditor shall consider materiality when

I. Determining the nature, timing, and extent of audit procedures

II. Evaluating the effect of misstatements

a. I only
b. II only
c. Both I and II
d. Neither I nor II

51. It is appraisal activity established within an entity. Its functions include, among other things,
examining, evaluating, and monitoring the adequacy and effectiveness of the accounting and internal
control systems.

a. External auditing
b. Internal auditing
 c. Governmental auditing
d. Internal control

52. Which is not a similarity between external and internal auditors?

a. Both consider materiality and risk in their work

b. Both use similar methodologies in performing their work
c. Both must be competent
d. Both must be independent of the company

53. The external auditor should obtain a sufficient understanding of the internal audit function because

a. The understanding of the internal audit function is an important substantive test to be

performed by the external auditor
b. The audit program, working papers, and reports of internal auditors may often be used as a
substitute for the work of the external auditor’s staff
c. The procedures performed by the internal audit staff may eliminate the external auditor’s
need for considering internal control
d. The work performed by internal auditors may be a factor in determining the nature, timing,
and extent of the external auditor’s procedures

54. Internal auditing can affect the scope of the external auditor’s audit of financial statements by

a. Decreasing the external auditor’s need to perform detailed test

b. Eliminating the need to observe the physical inventory taking
c. Allowing the external auditor to limit his/her audit to the performance of substantive
procedures
d. Limiting direct testing by the external auditor to management assertions not directly tested by
internal auditing.

55. Which of the following is an incorrect statement concerning the relationship of the internal auditor
and the scope of the external audit of an entity’s financial statements?

a. The external auditor is not required to give consideration to the internal audit function
beyond obtaining a sufficient understanding to identify and assess risks of material misstatement
of the financial statements and to design and perform further audit procedures
b. The internal auditors may determine the extent to which audit procedures should be
employed by the external auditor
c. Under certain circumstances, the internal auditors may assist the external auditor in
performing substantive tests and test of controls
d. The nature, timing, and extent of the external auditor’s substantive tests may be affected by
the work of internal auditors

56. In determining whether the work of the internal auditors is likely to be adequate for purposes of the
audit, the external auditor shall evaluate the internal auditor’s

a. Efficiency and experience

 b. Independence and review skills
c. Training and supervisory skills
d. Competence and objectivity

57. In assessing the technical competence of an internal auditor, an external auditor most likely would
obtain information about the

a. Quality of working paper documentation, reports, and recommendations.

b. Organizational level to which the internal auditor’s reports
c. Influence of management on the internal auditor’s duties
d. Entity’s commitment to integrity and ethical values

58. Which of the following is a false statement about the use of the internal auditor’s work by the
external auditor?

a. The PSAs do not allow the external auditor to use the work of the internal auditor
b. PSAs do not allow the external auditor to substitute the work of the internal auditor for the
work of the external auditor in critical judgments.
c. The PSAs state that, when specific work of the internal auditor is to be used, it should be
evaluate and tested
d. PSAs state that, when considering whether to use the work of the internal auditor, the
external auditor should consider the internal auditor’s competence and objectivity.

60. Which of the following are included in the activities of the internal audit function?

I. Monitoring of internal control

II. Examination of financial and operating information
III. Review of operating activities

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

61. is an individual or organization possessing expertise in a field other than accounting

or auditing, whose work in that field is used by auditor to assist the auditor in obtaining sufficient
appropriate audit evidence

a. Auditor’s expert
b. Management’s expert
c. Expert
d. Specialist

62. is an individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the
financial statements
 a. Auditor’s expert
b. Management’s expert
c. Expert
d. Specialist

63. When planning to use the work of an expert, the auditor should evaluate the expert’s

I. Professional competence
II. Objectivity

a. I only
b. II only
c. Both I and II
d. Neither I nor II

64. Which of the following statements is correct concerning the auditor’s use of the work of an expert?

a. The auditor is required to perform substantive test procedures to verify the expert’s
assumptions and findings
b. The auditor should obtain an understanding of the methods and assumptions used by the
expert
c. The entity should not have an understanding of the nature of the work to be performed by the
expert
d. The expert should not have an understanding of the auditor’s corroborative use of the
expert’s findings

65. Which of the following not an expert upon whose work an auditor may rely?

a. An actuary
b. An individual with expertise in complex modeling for the purpose of valuing financial
instruments
c. An expert in taxation law
d. An individual with expertise in applying methods of accounting for deferred income tax

66. If the results of the expert’s work do not provide sufficient appropriate audit evidence or are not
consistent with other audit evidence, the auditor should

a. Report the matter to the appropriate regulatory agency of the government

b. Resolve the matter
c. Withdraw from the engagement
d. Express an unmodified opinion with reference to the work of the expert

67. When issuing an unmodified auditor’s report, the auditors

 a. May refer to the work of an expert
b. Should refer to the work of an expert to indicate a division of responsibility
c. Should include in the auditor’s report the identity of the expert and the expert’s involvement
d. Should not refer to the expert’s work

68. In using the work of an expert, an auditor referred to the expert’s finding in the auditor’s report. This
is an appropriate reporting practice if the

a. Auditor, as a result of the expert’s work, decides to indicate a division of responsibility with
the expert.
b. Expert is aware that his/her work will be used to evaluate the assertions in the financial
statements
c. Auditor, as a result of the expert’s work. Issues a report that contains an unmodified opinion
d. Auditor, as a result of the expert’s work, adds an emphasis-of-matter paragraph in his/her
unmodified auditor’s report

69. As used in PSA 600, Special Considerations – Audits of Group Financial Statements (Including the
Work of Component Auditors), is an entity or business activity for which group or
component management prepares financial information that should be included in the group financial
statements

a. Component
b. Group
c. Significant component
d. Group management

70. As used in PSA 600, financial statements that include the financial information of more than one
component are called

a. Component financial statements

b. Group financial statements
c. Consolidated financial statements
d. Common financial statements

71. The is the partner or other person in the firm who is responsible for the group audit
engagement and its performance, and for the auditor’s report on the group financial statements that is
issued on behalf of the firm

a. Engagement partner
b. Component engagement partner
c. Principal auditor
d. Group engagement partner

72. The group engagement team shall obtain an understanding that is sufficient to

I. Confirm or revise its initial identification of components that are likely to be significant
 II. Assess the risks of material misstatement of the group financial statements, whether due to
fraud or error

a. I only
b. II only
c. Both I and II
d. Neither I nor II

73. If the group engagement team plans to request a component auditor to perform work on the
financial information of a component, the group engagement team shall obtain understanding of

I. Whether the component auditor understands and will comply with the ethical requirements
that are relevant to the group audit and, In particular, is independent
II. The component auditor’s professional competence

a. I only
b. II only
c. Both I and II
D. Neither I nor II

74. Which of the following statements concerning group audits is incorrect?

a. The group engagement team has the responsibility to establish an overall group audit strategy
and audit plan
b. The group engagement team shall determine the materiality for the group financial
statements as a whole when establishing the overall group audit strategy
c. The component engagement partner shall review the overall audit strategy and group audit
plan.
d. The group engagement partner shall agree on the terms of the group audit engagement in
accordance with PSA 210

75. An auditor who, at the request of the group engagement team, perform work on financial
information related to a component for the group audit is a

a. Group audit
b. Component auditor
c. Component engagement team
d. Group engagement team