CHAPTER 4

END OF CHAPTER QUESTIONS

0-1 TRUE OR FALSE

1. The audit process is a structures series of steps taken by the auditor to achieve his audit objectives.
2. Assertions relating to classes of transactions generally relate to line items presented in the statement of
financial performance while assertions relating to account balances generally relate to line items presented in
the statement of financial position.
3. Management has the responsibility for the preparation and presentation of the face of financial statements
which allows the auditor to prepare the related disclosures.
4. Management has the responsibility to provide the auditor with unrestricted access to any information
maintained by them.
5.Audit evidence serve as the basis in expressing the opinion required by the audit of financial statements.
6. Risk assessment procedures are performed to obtain understanding of the entity that lead to the
identification of risk of material misstatements at the assertion level.
7. Substantive procedures are designed to detect material misstatements at the financial statement level.
8.. Observation consists of looking at a process or procedure being performed by others.
9. Confirmation is a specific type of inquiry to obtain representation of information or of an existing condition
from management.
10. The audit process is comprised of two sub-phases namely, investigative phase and reporting phase.

4-2 TRUE OR FALSE

1. Preliminary engagement activities help eliminate the likelihood of being associated to a client whose
management lacks integrity.
2. If the results of the study and evaluation of internal control support its operating effectiveness, the auditor
proceeds with the completion of the audit and expression of opinion.
3. An auditor may accept an engagement that is beyond his capacity and capability provided that relevant
training and expertise will be obtained during the performance of the audit.
4. In an audit engagement, the audit engagement team must be independent from the client which excludes
the auditor's expert.
5. Matters to be discussed with the previous auditor include the reason for change and disagreements with
management.
6. The auditor must obtain the acknowledgement by management of its responsibility to design, implement and
monitor internal controls during the investigative phase of the audit.
7. The agreement of the audit terms before the commencement of the audit help avoid misunderstandings
between the entity and the auditor.
8. The form and content of engagement letters are prescribed by the engagement standards.
9. To comply with ethical requirements, the audit fee and its basis of computation must be excluded from the
engagement letter.
10. The auditor must determine if there is a reasonable justification for a change in the audit engagement prior
to its completion.

4-3 MULTIPLE CHOICE QUIZZERS - (Les)

1. Acts to be performed in order to obtain audit evidence.

A. Audit standards
B. Audit procedures
C. Audit program
D. Audit strategy

Reference page: p.

2. 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. Tests of control
C. Substantive procedures
D. Analytical procedures

Reference page: p. 125

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

A. Risk assessment procedures

B. Tests of control
C. Substantive procedures
D. Analytical procedures

Reference page: p. 125

4. Audit procedures to detect material misstatements at the assertion level.

A. Risk assessment procedures

B. Tests of control
C. Substantive procedures
D. Analytical procedures

Reference page: p. 125

5. 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. The company is financially sound and the financial statements are accurate
C. Internal control is effective
D. All material disagreements between the company and the auditor about the application of accounting
principles were resolved in the satisfaction of the external auditor.

Reference page: p.
6. Ultimately, the decision about whether or not an auditor is independent must be made by

A. Auditor
B. Public
C. Client's management
D. Audit committee

Reference page: p. 45 or 40

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

A Audit engagements provide assurance to a wide range of potential users; consequently, both independence
in mind and independence in appearance are of particular importance.
B. Only the engagement partner is required by the Code of Ethics to be independent from their assurance
clients.
C. In case of audits of financial statements, the Code of Ethics requires member of the assurance team, the
firm but not network firms to be independent of the client.
D. 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.

Reference page: p.

8. Prior to beginning the fieldwork on a new audit engagement in which a CPA does not possess expertise in
the industry in which the client operates the CPA should

A. Reduce audit risk by lowering the preliminary levels of materiality.

B. Design special substantive tests to compensate for the lack of industry expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain knowledge of matters that relate to the nature of the entity's business.

Reference page: p. 129

9. When one auditor succeeds another, the proposed auditor should request the

A. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior year's
litigation, claims, and assessments.
B. Previous auditor to submit a list of internal control weaknesses that have not been corrected.
C. Client to authorize the previous auditor to respond to inquiries.
D. Previous auditor to update the prior year's report to the date of the change of auditors.

Reference page: p.
https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interp
retations/details/AU315
The successor auditor should request permission from the prospective client to make an inquiry of the
predecessor auditor prior to final acceptance of the engagement.
10. On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the
relevant professional accounting and auditing standards should be held by:

A. The auditor with final responsibility for the audit.

B. All professionals working upon the audit.
C. All professionals working upon the audit and the partner in charge of the CPA firm.
D. All working in the office.

Reference page: p.
(a) The requirement is to determine who, at a minimum, must have knowledge of the relevant professional
accounting and auditing standards when an audit is being performed. Answer (a) is correct because AU-C 200
requires that, at a minimum, the auditor with final responsibility have such knowledge. Answers (b), (c), and (d)
are all incorrect because they suggest a higher minimum requirement.

11. Prior to acceptance of the engagement, a CPA firm is not likely to

A. Make inquiries of previous auditor

B. Make inquiries of the proposed client's legal counsel
C. Review financial statements of proposed client
D. Review the personnel practices of the proposed client

Reference page: p.

12. 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 relations with its previous CPA firm.
D. The client's probability of achieving an unqualified opinion.

Reference page: p.129 (?) The auditor should investigate and consider the prospective client's standing in the
business community, financial stability, management's integrity, and relations with its bankers, attorneys, and
previous CPA firm. The auditor should also determine whether he or she possesses the required competence
and independence to do the audit.

13. Auditors must not only decide whether to accept new clients; they also should periodically review their list
of current clients and remove those clients the firm no longer wants to be associated with. Reasons for
discontinuing clients might include the following, except:

A. Difficulty in working with client personnel.

B. Inability to negotiate an acceptable increase in the audit fee.
C. Evidence indicating a client's management has integrity.
D. Client need for specialized services the current firm is unable or unwilling to provide.

Reference page: p.

14. Before accepting an engagement to audit a new client, a CPA is required to obtain:
A. An understanding of the prospective client's industry and business.
B. The prospective client's signature to the representation letter.
C. A preliminary understanding of the prospective client's control environment.
D. The prospective client's consent to make inquiries of the previous auditor, if any.

Reference page: p. 130 -131

Choice "d" is correct. Inquiry of the predecessor auditor is a required pre-acceptance procedure.
However, consent of the prospective client must be obtained before a CPA can make such inquiries of
the predecessor auditor

Choice "a" is incorrect. Obtaining an understanding of the client's industry and business is a planning
procedure performed after an engagement is accepted.

Choice "b" is incorrect. A management representation letter is not obtained until the end of the audit.

Choice "c" is incorrect. Obtaining a preliminary understanding of the client's control environment is an
audit procedure (required by the second standard of fieldwork) that would be performed after an
engagement is accepted. A successor auditor most likely would make specific inquiries of the
predecessor auditor regarding:

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

A. Contact the previous 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.
B. Accept the engagement without contacting the previous auditor since the CPA can include audit procedures
to verify the reason given by the client for the termination.
C. Not communicate with the previous auditor because this would in effect be asking the auditor to violate the
confidential relationship between an auditor and the client.
D. Advise the client of the intention to contact the previous auditor and request a permission for the contact.

Reference page: p.

4-4 MULTIPLE CHOICE QUIZZERS (Val)

1. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the
previous auditor should:

A. Keep silent of the denial

B. Disclose the fact that the permission to disclosure is denied by the client
C.Disclose adequately to proposed auditor all noncompliance made by the client
D. Seek legal advice before responding to the proposed auditor

Reference page: p.
2. Which of the following factors most likely would cause a CPA to not new audit engagement?

A. The prospective client has already completed its physical inventory count.
B. The CPA facks an understanding of the prospective client's operations and industry.
C. The CPA is unable to review the previous auditor's audit documentation,
D. The prospective client is unwilling to make all financial records available to the CPA

Reference page: p. 130:131 - Investigate the integrity of the prospective client’s management

3. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement
should be rejected?

A. The details of most recorded transactions are not available after a specified period of time.
B. Internal control activities requiring the segregation of duties are to management override. subject
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial
statements.
D. Management has a reputation for consulting with several accounting firms about significant accounting
issues.

Reference page: p. 130 - Evaluate Auditability

Choice "b" is correct. A CPA cannot render an opinion on financial statements unless he or she has
obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to
be available, the CPA would most likely reject the potential audit engagement

4. Before accepting an audit engagement, a proposed auditor should make specific inquiries of the previous
auditor regarding:

A. The previous auditor's evaluation of matters of continuing accounting significance

B. Disagreement which the previous had with the client concerning auditing procedures and accounting
principles
C. The degree of cooperation the previous received concerning the inquiry of the client's legal counsel
D. The previous auditor's assessment of inherent risk and judgments about materiality

Reference page: p.131 - Matters to be discussed..

5. If the prospective client refuses to permit the previous to respond or limits the previous auditor's response,
the proposed should:

A. Continue to ask the previous auditor questions on facts that might bear on the integrity of management
B. Accept the engagement but only after an equitable increase in the professional fee
C. 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 previous auditor constitutes a significant
scope limitation

Reference page: p.
https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interpretations
/details/AU315#:~:text=If%20a%20prospective%20client%20refuses,whether%20to%20accept%20the%20eng
agement.

6. A firm has obtained information that would have caused it to decline an engagement had the information
been available earlier. Actions available to the auditor would include the following, except:

A. Reporting the information and its implications to the person/s who appointed the CPA
B. Withdraw from the engagement
C. Withdraw from the client relationship
D. Issue a disclaimer of opinion

Reference page: p.126 - Modified Opinion

7. 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. Memo placed in the permanent section of the working papers
C. Engagement letter
D. Comfort letter

Reference page: p.

8 An engagement letter is best described as

A. A letter from the company to the auditors specifying management's expectations for completion of the audit
on a timely basis and the fees.
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 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.
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.

Reference page: p. 132 - Agreeing the Terms of Audit Engagements

It is in the interest of both the entity and the auditor that the auditor sends an engagement letter,
preferably before the commencement of the audit to help avoid misunderstandings with respect to the
audit.

9. Engagement letters are widely used in practice for:

A. Audits only
B. Related services only
C. Assurance engagements only
D. Professional engagements of all types

Reference page: p.
10. Which of the following statements is/are correct?

Statement 1: The auditor and the client should agree on the terms of the engagement. Such an agreement
may be in the form of audit engagement letter or other suitable form of contract.
Statement 2: Even in those countries where the scope of the audit is established by law, an engagement letter
may be informative for the client.

A. Only statement 1 is correct

B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Reference page: Statement 1: p. 131 - Agree on Terms of the Engagement and prepare an engagement
letter

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

A. Before the auditor report is issued

B. At the end of the fieldwork
C After the audit report is issued
D. Before the commencement of the engagement

Reference page: p.

12. An auditor's engagement letter most likely would include a statement regarding:

A. Management's responsibility to provide certain written representations to the auditor.

B. Conditions under which the auditor may modify the preliminary judgment about materiality.
C. Internal control activities that would reduce the auditor's assessment of risk
D. Materiality matters that could modify the auditor's preliminary assessment of fraud risk.

Reference page: p. 133

13. An audit engagement letter least likely include:

A. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material
misstatements may remain undiscovered
B. Description of any letters or reports that the auditor expects to submit to the client
C. Identification of specific audit procedures that the auditor needs to undertake
D. Basis on which fees are computed and any billing arrangements

Reference page: p.

14. Which of the following statements would least likely appear in an auditor's engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket-expenses.
(a - FRAP)
B. Management is responsible for making all financial records and related information available to us. (f - RA
FORMS)
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected. (a - RA
FORMS)
D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we
consider necessary to complete the engagements.

Reference page: p. 133 - RA FORMS & FRAP Reports

-

15. An engagement letter should ordinarily include information on objectives of the engagement and

A B C D

● CPA’s responsibilities Yes Yes Yes No

● Client’s responsibilities Yes No No No

● Limitations of engagement Yes Yes No No

Reference page: p.

An engagement letter should include information on the objectives of the engagement along with the following:

● Responsibilities of the CPA

● Responsibilities of the client
● Limitation or scope of the engagement

The engagement letter will not include arrangements concerning CPA investment in client securities and the
client engagement letter providing the summary of the audit plan should not be submitted to the client.

4-5 MULTIPLE CHOICE QUIZZERS (kath)

1. Arrangements concerning with which of the following are least likely to be included in the engagement
letter?

A. Fees and billing

B. A previous auditor
C. CPA investment in client securities
D. Other services to be provided in addition to audit

Reference page: p.
http://www.accountingmcqs.com/arrangements-concerning-which-of-the-following-are-mcq-5877
2. In making arrangements for an audit, there should be a clear understanding between the auditor and the
client as to the following except:

A. The type of audit to be performed

B. Assurance of auditor's independence
C. Terms of settlement for audit services
D. Official to whom audit report shall be addressed

Reference page: p.
https://www.studocu.com/ph/document/sti-college/accountancy/audit-theory-review-of-audit-process-q
uestions-and-answers-multiple-choice/14571457

3. An auditor's engagement letter most likely would include a statement that:

A. Lists potential significant deficiencies discovered during the prior year's audit.
B. Explains the analytical procedures that the auditor expects to apply.
C. Describes the auditor's responsibility to evaluate going concern issues.
D. Limits the auditor's responsibility to detect errors and fraud.

Reference page: p.

4. 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. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Reference page: p. 136 - Recurring Audits part

5. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

A. An inadequate understanding of the entity's internal control.

B. The close proximity to the end of the entity's fiscal year.
C. Concluding that the entity's management probably lacks integrity.
D. An inability to perform preliminary analytical procedures before accepting the engagement.

Reference page: p.
https://examposter.com/which-of-the-following-factors-most-likely-would-cause-an-auditor-not-to-acce
pt-a-new-audit-engagement/

Explanation:​
Choice “C” is correct. A conclusion that management lacks integrity would probably cause the auditor not to
accept a new engagement.
Choice “A” is incorrect. Inadequate understanding of the client’s internal control would not prevent the auditor
from accepting the engagement, since that understanding could be obtained later.
Choice “B” is incorrect. Proximity to year-end would not prevent an auditor from accepting a new audit
engagement.
Choice “D” is incorrect. While analytical procedures are required during planning, this generally occurs
subsequent to accepting the engagement.

6. On recurring audit engagements, the auditor may decide not to send a new engagement letter each period.
In which of the following situations will there be no need to send a new letter?

A. Revisions or special terms of the engagement

B. Significant change in nature or size of the client's business
C. Indications of misunderstanding of the objective and scope of the audit
D. Recent change of middle management and rank and file organizational structure

Reference page: p. 136 - 137 dapat a recent change of management bod or ownership

7. An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides lower level of assurance, should

A. Withdraw and consider whether there is any obligation to report to other parties the circumstances
necessitating the withdrawal.
B. Issue a report that includes reference to the original engagement and any procedures that may have been
performed in the original
C. Not agree to a change of engagement where there is reasonable engagement. justification for doing so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete or otherwise
unsatisfactory.

Reference page: p.

8. Which of the following helps prevent misunderstandings during audit planning?

A. Auditor involvement in the preparation of the client's financial records.

B. Client involvement in determining specific audit planning issues.
C. A preliminary meeting conference with the client to discuss fees, timing, client assistance and related
issues.
D. Involvement of the client's internal auditors in setting materiality levels and determining the scope of audit
tests.

Reference page: p.

9. One of the first things that the auditor will do after accepting a new client is:

A. Communicate with the previous auditor.

B. Contact the client's attorney to discover legal obligations.
C. Study the client's internal control structure.
D. Tour the client's facilities.

Reference page: p.

10. An auditor may achieve audit objectives related to particular assertions by:

A. Performing analytical procedures,

B. Preparing audit documentation.
C. Adhering to a system of quality control.
D. Increasing the level of detection risk.

Reference page: p. 126 Analytical Procedures or p. 128 (Using the info…)

https://examposter.com/an-auditor-may-achieve-audit-objectives-related-to-particular-assertions-by/#:~
:text=CPA%20Part%2039-,An%20auditor%20may%20achieve%20audit%20objectives%20related%20to
%20particular%20assertions,Performing%20analytical%20procedures.

Explanation:​
Choice “A” is correct. The auditor relies on substantive tests to achieve audit objectives related to particular
assertions. Analytical procedures are one type of substantive procedure.
Choice “B” is incorrect. CPA firms performing audits are required to adhere to a system of quality control, but
adhering to such a system does not directly help the firm achieve specific audit objectives.
Choice “C” is incorrect. Audit documentation is used to record the results of audit procedures that have been
performed to achieve audit objectives. Mere preparation of audit documentation does not achieve audit
objectives.
Choice “D” is incorrect. Increasing the level of detection risk does not enable the auditor to achieve audit
objectives related to a particular assertion.

11. Set the following phases in proper order:

i. Pre-Engagement
ii. Internal Controls
ii. Evidence-Gathering
iv. Planning
v. Post-Audit Responsibilities
vi. Reporting

A. i, ii, iii, iv, v, vi

B. i, iv, ii, iii, vi, v
C. i, iv, iii, ii, v, vi
D. i, iv, ii, iii, v, vi

Reference page: p. 127-129

12. Which of the following statements is a basic element of the auditor's standard report?

A. The disclosures provide reasonable assurance that the financial statements are free of material
misstatement.
B. The auditor evaluated the overall internal control.
C. An audit includes assessing significant estimates made by management.
D. The financial statements are consistent with those of the prior period.

Reference page: p.
https://www.examtopics.com/exams/test-prep/cpa-auditing-and-attestation/view/3/

Correct Answer: C 🗳️
Choice "c" is correct. The auditor's standard audit report includes a statement that "An audit includes
assessing...significant estimates made by management..."
Choice "a" is incorrect. The standard audit report does not state that disclosures provide reasonable assurance
that the financial statements are free of material misstatement. The correct statement is:
"...standards require that we plan and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement."
Choice "b" is incorrect. The standard audit report does not state that the auditor evaluated the overall internal
control. The correct statement is "An audit includes...evaluating the overall financial statement presentation."
Internal control is not mentioned in the standard audit report.
Choice "d" is incorrect. The standard audit report does not state "The financial statements are consistent with
those of the prior period." According to the second standard of reporting, consistency is implicitly reported.
Only if there is an inconsistency is an explicit statement included.

13. An auditor most likely would express an unqualified opinion and would not add explanatory language to the
report if the auditor:

A. Wishes to emphasize that the entity had significant transactions with related parties.
B. Concurs with the entity's change in its method of computing depreciation.
C. Discovers that supplementary information required by FASB has been omitted.
D. Belleves that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently
supported and disclosed.

Reference page: p.
https://www.examtopics.com/exams/test-prep/cpa-auditing-and-attestation/view/3/

Correct Answer: Explanation 🗳️

Choice "d" is correct. An auditor most likely would express an unqualified opinion and would not add
explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss
resulting from an uncertainty that is sufficiently supported and disclosed.
Choice "a" is incorrect. Emphasis of a matter, such as the existence of significant transactions with related
parties, may result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "b" is incorrect. A change in accounting principle does result in an additional explanatory paragraph
appended to an otherwise unqualified opinion.
Choice "c" is incorrect. Omission of supplemental information required by GAAP does result in an additional
explanatory paragraph appended to an otherwise unqualified opinion.

14. In which of the following circumstances would an auditor not express an unqualified opinion?

A. There has been a material change between periods in accounting principles.

B. Quarterly financial data required by the SEC has been omitted.
C. The auditor wishes to emphasize an unusually important subsequent event.
D. The auditor is unable to obtain audited financial statements of a consolidated investee.

Reference page: p.
https://examposter.com/in-which-of-the-following-circumstances-would-an-auditor-not-express-an-unqualified-o
pinion/
Explanation:
Choice “D” is correct. The inability to obtain audited financial statements of a consolidated investee
represents a scope limitation which may result in either a qualified opinion or a disclaimer of opinion.
Choice “A” is incorrect. A material change in accounting principles between periods is disclosed in an
explanatory paragraph added to an otherwise unqualified opinion.
Choice “B” is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an
explanatory paragraph added to an otherwise unqualified opinion.
Choice “C” is incorrect. Emphasis of a matter is disclosed in an explanatory paragraph added to an otherwise
unqualified opinion.

15. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a
financial statement audit cannot be performed?

A Management fails to modify prescribed internal controls for changes in information technology
B. Internal control activities requiring segregation of duties are rarely monitored by management
C Management is dominated by one person who is also the majority stockholder.
D. There is a substantial risk of intentional misapplication of accounting principles.

Reference page: p.
https://www.coursehero.com/file/9384680/CPA-Review-Audit-3/

Explanation
Choice "b" is correct. Intentional misapplication of accounting principles would indicate that management lacks
integrity and as a result, the auditor might conclude that a financial statement audit cannot be performed.
Choice "d" is incorrect. Management's failure to modify prescribed internal controls for changes in information
technology would preclude the auditor from relying on those controls but would not prevent the auditor from
performing a financial statement audit.
Choice "a" is incorrect. If management rarely monitors segregation of duties, the auditor would not rely on that
particular control, but this would not prevent the auditor from performing a financial statement audit.
Choice "c" is incorrect. If management is dominated by one person who is also the majority stockholder, the
risk of fraudulent financial reporting is increased, but this would not preclude the auditor from performing a
financial statement audit.

4-6 MULTIPLE CHOICE QUIZZERS (allea)

1. Which of the following factors most likely would cause a CPA to decide not to accept a new audit
engagement?

A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit
techniques.
B. Management's disregard of its responsibility to maintain an adequate internal control environment.
C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent
to arm's-length transactions.
D. Management's refusal to permit the CPA to perform substantive tests before the year-end.

Reference page: p.

Choice "b" is correct. The control environment is the foundation for all other components of internal control.
Management's disregard of its responsibility to maintain an adequate internal control environment therefore
compromises its ability to provide reasonable assurance regarding reliable financial reporting. Theauditor may
conclude that the risk of misrepresentation in the financial statements is great enough that an audit should not
be conducted

2. When an independent auditor is approached to perform an audit for the first time, he or she should make
inquiries of the previous auditor. Inquiries are necessary because the previous may be able to provide the
proposed with information that will assist the proposed in determining whether

A The company rotates auditors

B. The engagement should be accepted
C. The previous auditor's work should be used
D. In the previous auditor's opinion, control risk is less than high

Reference page: p. 131 - top part (investigation of the….)

3 Before accepting an audit engagement, a proposed auditor should make specific inquiries of the previous
auditor regarding the previous auditor's:

A. Opinion of any subsequent events occurring since the previous auditor's audit report was issued.
B Understanding as to the reasons for the change of auditors.
C. Awareness of the consistency in the application of PFRS between Periods
D. Evaluation of all matters of continuing accounting significance.

Reference page: p.

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

A. Satisfy the requirements of the CPA's liability insurance policy

B. Remind management that the primary responsibility for the financial statements rests with management
C. Provide a written record of the agreement with the client as to the services to be provided
D. Provide a starting point for the auditor's preparation of the preliminary audit program

Reference page: p. 132 - Agreeing the Terms of Audit Engagements

Best answer is C but B is a possible answer

5. Which of the following matters generally is included in an auditor's engagement letter?

A. The factors to be considered in setting preliminary judgments about materiality.

B. The auditor's responsibility to search for significant internal control deficiencies.
C. Management's responsibility for the entity's compliance with laws and regulations.
D. Management's vicarious liability for illegal acts committed by its employees.

Reference page: p.

choice "c” is correct. An understanding with the client should be established regarding management's
responsibilities, which include identifying and ensuring that the entity complies with applicable laws and
regulations. The understanding should be documented through a written communication, such as an
engagement letter.

6. A proposed auditor makes specific inquiries of the previous auditor, prior to engagement acceptance, to

A. Have knowledge whether PFRS has been consistently applied

B. Inquire or significant subsequent events with respect to the prior period
C. Gain understanding on the reasons for the change of auditor
D. Compare audit fees

Reference page: p. 137 (Acceptance of a change in Engagement)

7. The terms of the audit engagement shall include: (choose the exception)

A. The objective of the audit

B. The scope of the audit
C. The responsibilities of the auditor
D. The overall audit strategy

Reference page: p.

8. Financial statement assertions are:

A. Directly related to PSAS

B. Directly related to GAAP
C. Indirectly related to PSAs
D. Indirectly related to GAAP

Reference page: p.

9. Assertions about account balances at the period-end include completeness, which means that

A. Assets, liabilities and equity interest exist.

B. All assets, liabilities and equity interests that should have been recorded have been recorded.
C. Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and
any resulting valuation or allocation adjustments are appropriately recorded.
D. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Reference page: p. 123

10. The assertion of accuracy means that:

A. Transactions and events have been recorded in the proper accounts

B. All transactions and events that should have been recorded are recorded
C. Transactions and events have been recorded in the correct accounting period
D. Amounts and other data relating to recorded transactions and events have been recorded appropriately

Reference page: p. 123

(end)

11. Which description refers to the classification and understandability assertion?

A. All disclosures that should have been included in the financial statements have been included. -
Completeness
B. Disclosed events, transactions and other matters have occurred and pertain to the entity. - Occurence
C. Financial information is appropriately presented and described, and disclosures are clearly expressed.
D. Financial and other information are disclosure fairly and at appropriate amounts. - Accuracy & Valuation

Reference page: p.124

12. Which of the following is the best explanation of the difference, if any, between audit objectives and audit
procedures?

A. Audit procedures and audit objectives are essentially the same.

B. Audit objectives are tailor-made for each assignment, audit procedures are generic in application.
C. Audit procedures establish broad general goals, audit objectives specify the detailed work to be performed.
D. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving
audit objectives.

Reference page: p.

13. To provide reliable audit evidence with respect to a tangible asset's existence, which of the following
specific audit procedures may the auditor perform?

A. Observation
B. External confirmation
C. Inquiry
D. Inspection
Reference page: p. 125

14. Which of the following statements appropriately describes inquiry?

A. Physical examination of the assets.

B. Consists of looking at a process or procedures being performed by others.
C. Examining records or documents, whether internal or external, in paper form, electronic form, or other
media.
D. Consists of seeking information from knowledgeable persons, both financial and nonfinancial, within the
entity or outside the entity.

Reference page: p. 125

15. Which of the following statements appropriately describes reperformance?

A. The process of obtaining a representation of information or of an existing condition directly from third party. It
is a specific type of inquiry.
B. Auditor's independent execution of procedures or controls that were originally performed as part of the
entity's internal control.
C. Evaluation of financial information made by study of plausible relationships among both financial and
non-financial data.
D. Consists of checking the mathematical accuracy of documents or records.

Reference page: p.126

4-7 MULTIPLE CHOICE QUIZZERS

1. The main deliverable in an audit engagement where the auditor communicates the conclusions reached is

A. Management letter
B. Audited financial statements
C. Audit report
D. Audit documentation

2. Which is not considered in deciding whether to accept an engagement?

A. Competence of the audit team

B. Ethical considerations
C. Potential client's reputation
D. Type of opinion to be issued

Reference page: p.
3. It is the use by management of an acceptable financial reporting framework (e.g. PFRS) in the preparation
of the financial statements and the agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.

A. Engagement letter
B. Written representation
C. Preconditions for an audit
D. Fair presentation

4. An auditor may most likely decide not to accept a new audit engagement when

A. The prospective client's system is highly automated and the auditor lacks understanding of such system
B. The prospective client's CEO is also the chairman of the governing board
C. The CPA has knowledge of the prospective client's disregard of its responsibilities concerning internal
controls
D. The CPA has knowledge that the prospective client has too many related party transactions

5. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a
new client is to

A. Enable the CPA firm to attest to the integrity of the client management.
B. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management
D. Anticipate before performing any field work whether an unmodified lacks integrity opinion can be expressed.

6. Which of the following matters is generally included in an auditor's engagement letter?

A. Summary of the timing and details of the planned audit procedures

B. Restricted access to some confidential records and files
C. Management's responsibility for the entity's compliance with laws and regulations
D. The type of opinion to be issued

The primary purpose of an engagement letter is to provide written record of the agreement with the
client as to the services to be provided by the auditor. The terms of the engagement should be
documented in an engagement letter that states the following: (1) objective and scope of the audit, (2)
responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control,
(4) the financial reporting framework, and (5) the expected form and content of audit reports.
Management's responsibility for compliance with laws and regulations applicable to its
activities should be included in the agreement.

7. While performing procedures for the audit engagement, the auditor was asked to change the engagement to
review. Assuming the change is not justifiable, which of these statements does not concur?

A. The auditor continues to perform audit procedures.

B. The auditor withdraws from the audit engagement.
C. The auditor communicates the matter to an appropriate level of management.
D. The auditor provides negative assurance on the new report.
8. Which of these circumstances would normally lead to a change in engagement?

A. Restrictions imposed by management

B. Financial statements departing from GAAP
C. Auditor's inability to gather evidence
D. Misunderstanding as to the nature of the engagement

9. The following factors may make it appropriate to revise the terms of the engagement, except for:

A. Indications that the client misunderstands the objective and scope of the audit.
B. Change in financial reporting framework adopted in the preparation for the financial statements
C. Change in the inventory supply chain of the entity
D. Change in legal or regulatory requirements.

10. The group audit team, who is also the appointed component audit team, may consider the following factors
on deciding whether to send a separate engagement letter to the component, except for:

A Legal requirements in relation to audit components

B. Degree of ownership by component pg.112
C. Whether a separate auditor's report is to be issued on the component
D. Degree of independence of the component's management from the parent entity

11. When there is a reasonable justification for the change in an engagement, the auditor shall perform the
following except:

A. The auditor stops performing the old engagement

B. The auditor stops referring to the old engagement
C. The auditor refers the work on the original audit engagement to a different practitioner
D. The auditor starts performing the new engagement

12. The auditor may include the following in the engagement letter, except for:
https://www.ifac.org/system/files/downloads/2008_Auditing_Handbook_A065_ISA_210.pdf
Yaon igdi
A. Unrestricted access to whatever records
B. Reference to further agreements between the auditor and the entity
C. The presence of sampling and non-sampling risk
D. The level of materiality and performance materiality

13. An auditor's engagement letter most likely would include:

A Management's acknowledgment of its responsibility for maintaining effective internal control.

B. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent
financial reporting.
C. A reminder that management is responsible for illegal acts committed by employees.
D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and
assessments.

14. If the auditor concludes that there is 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. Include reference to the original engagement
C. Include reference to any procedures that may have been performed 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

15. If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:

A. Qualify the report on the original engagement.

B. Continue with the revised engagement, but make explicit reference about the original engagement.
C. Refuse to agree to management's request on the change of engagement and continue with the original
engagement.
D. Withdraw from the engagement.
 CHAPTER 5

5-3 MULTIPLE CHOICE QUIZZERS

1. Which of the following statements is/are correct?

Statement 1: The client should plan the audit work so that the audit will be performed in an effective manner. -
F - dapat The “auditor” dapat
Statement 2: The auditor should conduct the audit with an attitude of professional skepticism
Statement 3: The auditor should develop and document an overall audit plan professional skepticism.
describing the scope and conduct of the audit.

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Reference page: p. https://www.ifac.org/system/files/meetings/files/0485.pdf

2. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:

A. Gathering of all corroborating audit evidence. - Objective of Substantive Tests (p.166)

B. Ensuring that appropriate attention is devoted to important areas of the audit.
C. Identifying the areas that need a service of an expert.
D. The audit work is completed efficiently.

Reference page: p.
Adequate planning helps to ensure that appropriate attention is devoted to important areas of the
audit, that potential problems are identified and resolved on a timely basis and that the audit
engagement is properly organized and managed in order to be performed in an effective and efficient
manner.

3. The extent of planning will vary according to any of the following, except:

A. Size of the audit client.

B. Auditor's experience with the entity and knowledge of the business.
C. The nature and complexity of the audit engagement
D. The assessed level of control risk.

Reference page: p.
The extent of planning will vary according to the following: 1) Size of the entity; 2) Complexity of the
audit; and 3) Auditor’s experience with the entity and knowledge of the business.

4. Which of the following statements is incorrect?

A. The auditor should plan the audit so that the engagement will be performed in an effective manner. -T
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. - T
C. 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.
D. 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) t the completion of the previous audit and continues until the finalization of
the audit program.

Reference page: p. 159 (Planning as a Phase of an Audit)

https://www.ifac.org/system/files/meetings/files/0485.pdf

C. The auditor considers involving the engagement team in planning the audit to benefit from the
experience and insight of the engagement partner and other key members of the team and to enhance
the effectiveness and efficiency of the planning process.

D. 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
completion of the current audit engagement.

5. The auditors plan should

A B C D
Precede action Yes No Yes Yes
Be static Yes No No No
Be cost-beneficial Yes Yes Yes No

Reference page: p.

6. Which of the following statements is/are correct?

Statement 1: Obtaining knowledge of the entity business is an important part of the planning the audit work.
Statement 2: The auditor's knowledge of the entity's business assists in the identification of events,
transactions and practices which may have a material effect on the financial statements.

A. Only statement 1 is correct

B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Reference page: p. 161 - S1 - Risk Assessment Procedures

S2 - In performing an audit of financial statements, the auditor should have or obtain a knowledge of
the business sufficient to enable the auditor to identify and understand the events, transactions and
practices that, in the auditor’s judgment, may have a significant effect on the financial statements or on
the examination or audit report.

7. 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. Only statement 1 is correct

B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Reference page: p.

8. 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. Only 1 statement is correct

B. Only 2 statements are correct
C. All statements are correct
D. All statements are incorrect 9.

Reference page: page 181 (aduti plan definition)

S1: The auditor may decide to discuss elements of planning with the entity’s management to facilitate
the conduct and management of the audit engagement (for example, to coordinate some of the planned
audit procedures with the work of the entity's personnel). Although these discussions often occur, the
overall audit strategy and the audit plan remain the auditor's responsibility.
S2: “Overall audit Strategy” sets the scope, timing and direction of the audit, and that guides the
development of the audit plan. P. 159
S3: The “audit plan” consists of a detailed plan of the nature, timing and extent of audit procedures to
be performed by engagement team members in order to obtain sufficient appropriate audit evidence to
reduce audit risk to an acceptably low level. p.181

9. 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 content of the representation letters
D. The nature and timing of reports and other communication with the entity that are expected under the
engagement

Reference page: p.

10. In designing audit programs, an auditor should establish specific audit objectives that related primarily to
the
A. Selected audit techniques
B. Timing of audit procedures
C. Financial statement assertions
D. Cost-benefit gathering evidence

Reference page: p.

The requirement is to determine what specific audit objectives are addressed when designing an audit
program so (c) is correct because in obtaining evidence in support of financial statement assertions,
the auditor develops specific audit objectives in the light of those assertions.
Letters (a), (b), and (d) are all incorrect because these replies do not relate specifically to the audit
objectives as do the financial statement assertions.

11. Which of the following matters should be considered by the auditor in developing the overall audit strategy?
A Important characteristics of the entity, its business, its financial performance and its reporting requirements
including changes since the date of the prior audit
B. Conditions requiring special attention, such as the existence of the related parties
C. The setting of materiality level for audit purposes
D. All of the above

Reference page: p.

12. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
B. Procedures to be undertaken to discover litigation, claims, and assessments.
C. Pending legal matters to be included in the inquiry of the client's attorney.
D. Timing of inventory observation procedures to be performed.

Reference page: p. 159 (Impact on Planning Activities)

Example in the Book: An auditor appointed prior to year-end may observe physical inventory count.
The other answers which is Letters A to C involve judgment by the auditor only and as such the
decision process only involves the auditor. Timing of inventory observation procedures to be
performed, however, would necessarily have to involve the client since the client will be preparing the
schedules.

13. Which of the following is most likely to require special planning considerations related to asset valuation?
A. Inventory is comprised of diamond rings.
B. The client has recently purchased an expensive copy machine.
C. Assets costing less than P25,000 are expensed even when the expected life exceeds one year.
D. Accelerated depreciation methods are used for amortizing the costs of factory equipment.

Reference page: p.

14. 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.

Reference page: p. 160 (Documentation)

The auditor’s documentation of any significant changes to the originally planned overall audit strategy
includes the reason for the significant change and the auditor’s response to the events, conditions, or
results of audit procedures that resulted in such changes.

15. In developing an overall audit strategy, an auditor should consider:

A. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
B. Findings from substantive tests performed at interim dates.
C. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in
the financial statements.
D. Preliminary evaluations of materiality, audit risk, and internal control.

Reference page: p.

5-4 MULTIPLE CHOICE QUIZZERS

1. Assertions used by the auditor fall into the following categories, except:
A. Assertions about the faithful representations
B. Assertions about account balances at period end
C. Assertions about classes of transactions and events
D. Assertions about presentation and disclosure

Reference page: p.

2. 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 - p.181
C. Audit program
D. Audit risk model

Reference page: p. 182

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

A. All material transactions will be selected for substantive testing.
B. Substantive tests prior to the balance sheet date will be minimized.
C. The audit procedures selected will achieve specific audit objectives.
D. Each account balance will be tested under either tests of controls or tests of transactions.

Reference page: p.

4. 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 are used detect material misstatements at the assertion level.
C. 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.
D. These procedures include tests of details of classes of transactions, account balances, and disclosures and
analytical procedures.

Reference page: p. 161

5. One of the primary uses of an audit program is to

A. Provide for a standardized approach to the audit engagement
B. Serve as a tool for planning, directing and controlling the audit work
C. Document an auditor's understanding of the internal control
D. Delineate the audit risk accepted by the auditor

Reference page: p.

6. The audit program should contain the following, except:

A. Audit objective
B. Time budget for the various audit areas
C. Set of planned audit procedures
D. The combined assessed level of inherent and control risk - Audit Risk

Reference page: p. 182 (Audit Program)

7. The audit program should set out the

A B C D
Nature of procedures Yes No Yes Yes
Timing of planned procedures Yes No No No
Extent of planned procedures Yes Yes Yes No

Reference page: 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.

8. The audit program usually cannot be finalized until the

A. Consideration of the entity's internal control has been completed.
B. Engagement letter has been communicated to the audit committee.
C. Reportable conditions have been communicated to the audit committee.
D. Search for unrecorded liabilities has been performed and documented.
Reference page:

(a) is correct because the consideration of internal control helps the auditor to assess control risk and to
plan the audit: accordingly, the audit program is not generally finalized prior to the consideration of
internal Control.
(b) is incorrect because, while generally desirable, engagement letters are not required on audits.
(c) is incorrect because significant deficiency may be communicated at various times subsequent to
finalization of the audit program.
(d) is incorrect because audit programs are often finalized prior to the performance of the search for
unrecorded liabilities.
END- CAJURAO

9. Which of the following is/are correct?

Statement 1: The auditor shall perform risk assessment procedures to provide a basis for the identification and
assessment of risk of material misstatement at financial statement and assertion levels.
Statement 2: Risk assessment procedures by themselves provide sufficient appropriate audit evidence on
which to base the opinion.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Reference page: p.

10. 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 statements assertions.

B. Make constructive suggestion concerning improvements causes the financial statements taken as a whole
to be materially misstated.
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.

Reference page: p.
A. Professional skepticism refers to critical assessment with a questioning mind, of the validity of the
evidence obtained and is alert to evidence that contradicts or brings into question the reliability of
documents or representations by the responsible party. Hence, it does not generally pertain to why
auditors should obtain sufficienty knowledge.
B. -
C. The aggregate of misstatements accumulated during the audit approaches the materiality level or levels
used in planning and performing the audit.
D. The auditor should obtain an understanding of the company and its environment ("understanding of the
company") to understand the events, conditions, and company activities that might reasonably be
expected to have a significant effect on the risks of material misstatement. Obtaining an understanding
of the company includes understanding:
a. Relevant industry, regulatory, and other external factors;
b. The nature of the company;
 c. The company's selection and application of accounting principles, including
related disclosures;
d. The company's objectives and strategies and those related business risks that
might reasonably be expected to result in risks of material misstatement; and
e. The company's measurement and analysis of its financial performance.

In obtaining an understanding of the company, the auditor should evaluate whether significant changes
in the company from prior periods, including changes in its internal control over financial reporting,
affect the risks of material misstatement.

11. The primary objective of procedures performed to obtain an understanding of the entity and its environment
is to provide an auditor with:
A. Audit evidence to use in assessing inherent risk.
B. A basis for issuing an opinion on the financial statements.
C. Knowledge necessary for risk assessment and audit planning.
D. An evaluation of the consistency of application of management's policies.

Reference page: p.

12. Which of the following procedures is not performed as a part of planning an audit engagement?
A. Reviewing working papers of the prior year - Inspection p. 164
B. Performing analytical procedures - Analytical Procedures p. 165
C. Designing an audit program - p.182
D. Test of controls - (Overall Audit Stategy) (?)

Reference page: p.161-162 - Risk assessment procedures (RAPs)

Performing RAP is to enhance the understanding of the entity in order to specifically identify the
applicable further audit procedures (FAP) and to appropriately respond to the different risks assessed
related to audit. As mentioned, FAPS include tests of controls (TOC) and substantive tests (ST).

As defined in PSA 315, risk assessment procedures are audit procedures performed to obtain
an understanding of the entity and its environment, including the entity's internal control, to
identify and assess the risks of material misstatement, whether due to fraud or error, at the
financial statement and assertion levels.

13. Which of the following procedures not normally performed as part of obtaining an understanding of the
client's environment?
A. Reading trade publications to gain a better understanding of the client's
B. Studying the internal controls over cash receipts and disbursements industry
C. Confirming customer accounts receivable for existence and valuation
D. Touring the client's facilities

Reference page: p.

14. Analytical procedures used in planning an audit should focus on

A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential misstatements will be identified.
C. Enhancing the auditor's understanding of the client's business.
D. Assuming the adequacy of the available evidential matter.

Reference page: p.
To accomplish this, the analytical procedures used in planning the audit should focus on (a) enhancing
the auditor's understanding of the client's business and the transactions and events that have
occurred since the last audit date, and (b) identifying areas that may represent specific risks relevant
to the audit. Thus, the objective of the procedures is to identify such things as the existence of unusual
transactions and events, and amounts, ratios and trends that might indicate matters that have financial
statement and audit planning ramifications.

15. Analytical procedures used in planning an audit should focus on identifying:

A. Material weaknesses in the internal control system
B. The predictability of financial data from individual transactions
C. The various assertions that are embodied in the financial statements
D. Areas that may represent specific risks relevant to the audit

Reference page: p.

5-5 MULTIPLE CHOICE QUIZZERS - allea

1. If the acceptable level of detection risk is determined to be at a low level, the auditor may

A. Plan the timing of substantive tests at year-end

B. Reduce substantive tests based on assessment of risks of material misstatements
C. Eliminate the assessed level of non-sampling risk
D. Lower the assessed level of control risk from maximum level to less than maximum

Reference page: p.

2. What is the usual relationship between control risk and detection risk?
A. Direct
B. Same
C. Indirect
D. No relationship

Reference page: p. 171, 175, 176

Detection risk has an inverse relationship with the assessed risk of material misstatements (Inherent
risk X control risk). Therefore, if risk of material misstatement is high, then detection risk would be set
to low.

Inverse relationship,, meaning di opposite effect niya???

Inherent and control risk are the risks of material misstatement arising in the financial statements.
These types of audit risk are dependent on the business, transactions and internal control system that
the client has in place. On the other hand, detection risk is the risk that is dependent entirely on the
auditors.

3. Performance materiality would be

A. Established after test of controls but before performance of substantive tests

B. Optional for audits of non-listed entities
C. Different for balance sheet and income statement accounts
D. Normally set at a lower level than financial statement materiality

Reference page: p.

4. Fraud is highly difficult to detect if it is due to

A. Overstatement of transactions
B. Understatement of transactions
C. Intercompany transactions
D. Fixed assets

Reference page: p.
5.Which of the following scenarios would be considered an error?
A. Override of controls that appear to be operating effectively
B. Misapplication by management of an accounting policy
C. Concealment of transactions by employees
D. Omission of a transaction to favor a third party

Reference page: p.

6. Which procedure is least likely to be an audit planning procedure? (estimated QUESTION FOR RECIT -
KATH)
A. Signing of the engagement letter
B. Development of the overall audit strategy (page 176)
C. Development of audit programs (page 182)
D. Performance of risk assessment (page 181)

Reference page: p.

(d) is correct because performing the risk assessment occurs subsequent to audit planning
(a) is incorrect because an engagement letter is used to establish an understanding with the client,
and this is a planning procedure.
(b) is incorrect because auditors develop the overall audit strategy during audit planning
(c) is incorrect because the audit plan is developed during planning.

7. Audit plans are designed so that

A. The auditor's conclusions are supported by audit evidence gathered
B. Major audit procedures can be performed as at interim work
C. Inherent risk is assessed at a sufficiently low level
D. Management letter points can be shared to the client

Reference page: p.

8. An auditor should establish specific audit objectives relating to

A. Extent of audit procedures
B. Cost-benefit considerations
C. Assertions of financial statements
D. Performance of risk assessment procedures

Reference page: p.

(c) is correct because in obtaining evidence in support of financial statement assertions, the auditor
develops specific audit objectives in the light of those assertions.
(a), (b), and (d) are all incorrect because these replies do not relate specifically to the audit
objectives as do the financial statement assertions.

9. For new audit clients, the incoming auditor requests the client to authorize the previous auditor to allow the
review of previous audit's

Engagement Letter Audit Documentation Findings and Observations

A. Yes Yes Yes
B. No Yes Yes
C. No Yes No
D. Yes No No

Reference page: p.

10. For continuing audit engagements, the auditor would most likely
A. Opt for a control reliance approach
B. Perform substantive analytical procedures
C. Review prior year audit documentation
D. Set the timing of procedures at year-end

Reference page: p.
(c) is correct because a review of prior year audit documentation may provide useful information about the
nature of the business, organizational structure, operating characteristics, and transactions that may require
special attention.

Sala ni: (dont read)

Answer (a) is incorrect because tests of details of transactions and balances occur subsequent to
planning. Answer (c) is incorrect because while reading specialized industry journals will help the
auditor to obtain a better understanding of the client’s industry, it is likely to be less helpful than
reviewing the working papers. Answer (d) is incorrect because a reevaluation of the client’s
internal control environment occurs subsequent to the ordinal planning of the audit.

11. In planning an audit, which of the following procedures would an auditor normally perform?
A. Sending of confirmation of transactions and balances to related parties
B. Comparison of anticipated performance to the financial statements
C. Obtaining the entity's inventory count sheet
D. Determination of sample sizes to examine occurrence of sales

Reference page: p.

(b) is correct because AU-C 315 requires that an auditor perform analytical procedures such as
comparing the financial statements to anticipated results during the planning stage of an audit

12. Which of the following are considered further audit procedures?

Test of Controls Test of Details Substantive analytical procedures

A Yes Yes Yes

B No Yes Yes
C Yes No No
D No Yes No

Reference page: p.
A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or
detect material misstatements. Depending on the results of this test, auditors may choose to rely upon a
client's system of controls as part of their auditing activities.

13. The audit plan would require a modification if

A. There is a key audit matter to be communicated in the auditor's report
B. Results of test of controls differ from initial assessment
C. A material misstatement has been identified in the accounts
D. The company has a share-based compensation plan

Reference page: p.

14. What is the purpose of obtaining knowledge about a new client's business and its industry?

A. To be able to extrapolate misstatements noted in samples to the whole population

B. To understand events and transactions affecting the client's financial statements
C. To detect fraudulent financial reporting
D. To obtain information about the latest internal controls in the industry

Reference page: p.

(b) is correct because obtaining a level of knowledge of the client’s business and industry enables
the CPA to obtain an understanding of the events, transactions, and practices that, in the CPA’s judgment,
may have a significant effect on the financial statements.

15. As the acceptable level of detection risk increases, the assurance provided by
A. Substantive tests should decrease
B. Substantive tests should increase
C. Test of controls should increase
D. Test of controls should decrease

Reference page: p.

(b) is correct because as the acceptable level of detection risk decreases, the assurance provided
from substantive tests should increase. To gain this increased assurance the auditors may (1) change the
nature of substantive tests to more effective procedures (e.g., use independent parties outside the entity
rather than those within the entity), (2) change the timing of substantive tests (e.g., perform them at
year-end rather than at an interim date), and (3) change the extent of substantive tests (e.g., take a
larger sample).
(a) is incorrect because the assurance provided from substantive tests increases, it does not
decrease.
(c) and (d) are incorrect because the acceptable level of detection risk is based largely on the
assessed levels of control risk and inherent risk. Accordingly, any tests of controls will already have been
performed.

5-6 MULTIPLE CHOICE QUIZZERS

1. The audit risk model is used primarily

A. For planning purposes in determining accumulate how much evidence to accumulate
B. While doing tests of controls.
C. To determine the type of opinion to express.
D. To evaluate the evidence which has been gathered.

Reference page:

2. In performing analytical procedures, set the following procedures in proper order.

I. Calculate predictions and compare them to recorded amount

II. Develop an expectation
III. Define a significant difference
IV. Investigate significant difference

A. i, ii, iii, iv
B. ii, i, iii, iv
C. i, ii, iv, iii
D. ii, i, iv, iii

Reference page: 165-166: Procedures when applying analytical procedures

Accordingly, there are 3 procedures mentioned when applying analytical procedures.

1. Develop expectations regarding financial statements using (PAA RIN)

a. Prior year's financial statements
b. Annualized interim financial statements
c. Anticipated results such as budgets, forecasts or projections
d. Typical Relationships among financial statements account balances
e. Industry averages
f. Non-financial information
2. Compare expectations with the items presented in the financial statements
3. Define and investigate significant differences

3. Which of the following results from analytical procedures might indicate inventory obsolescence?

A. A decline in inventory turnover

B. A decline in the gross margin ratio
C. A decline in days' sales in inventory
D. An increase in operating margin

Reference page:

4. 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. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
C. 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. pg. 171
D. Levels of inherent risk, control risk and detection risk can be changed at the discretion of the auditor.

Reference page: 171

A. Detection Risk is not a function of efficiency, but rather the risk of an error that might arise and remain
undetected despite following the normal auditing procedures. Moreover, it cannot be classified as an
efficiency function since an "efficient" auditing procedures means attaining the most desirable outcome with
the least amount of resources spent on that process.

Detection risk is a function of the effectiveness of an auditing procedure and of its application by the auditor.

B. Cash is the most liquid, and the most important, account on the financial statements and the account
that is most susceptible to manipulation or theft. With this, Internal controls should be in place for the
issuance, collection, deposit, and posting of cash to the general ledger accounts. Checks should be
signed by an impartial party with proper backup documentation to support operations.

*The more complex a cash transaction is the greater the inherent risk.

Inherent risk is the susceptibility of an assertion to a material misstatement, assuming that there are no
related controls. The risk of such a misstatement is greater for some assertions and related balances or
classes than for others. For example, complex calculations are more likely to be misstated than simple
calculations.

Cash is more susceptible to theft than an inventory of coal. Accounts consisting of amounts derived
from accounting estimates pose greater risks than do accounts consisting of relatively routine, factual
data. External factors also influence inherent risk. pg.171
C. Control risk is a function of the effectiveness of the design, implementation and maintenance of internal
control by management. However, internal control can only reduce but not eliminate risks of material
misstatement in the financial statements. This is because of the inherent limitations of internal control.
D. Detection risk is an item that may be changed by the auditor in order to maintain the acceptable level of
audit risk (as if balancing figure). Unlike inherent and control risks, detection risk may be changed by
the auditor by performing substantive procedures. pg. 175
CR-depende sa evaluation
Other links: https://pcaobus.org/oversight/standards/archived-standards/details/AU312A

5. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:

A. Elements of audit risk while detection risk is not.

B. Changes at the auditor's discretion while detection risk is not.
C. Considered at the individual account balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.

Reference page:

6. There is an inverse relationship that exist between the acceptable level of detection risk and the
A. Risk of falling to discover material misstatement
B. Preliminary judgments about materiality levels
C. Assurance provided by substantive tests
D. Risk of misapplying audit process

Reference page: 175

An auditor assesses control risk by considering internal control. There exists an inverse relationship
between control risk and detection risk - that is, the greater the assessed level of control risk, the lower
the acceptable level of detection risk and vice versa. The acceptable level of detection risk, in turn,
affects substantive testing.As the acceptable level of detection risk decreases, the auditor changes the
nature, timing, and extent of substantive tests to increase assurance they provide. Therefore, there is
an inverse relationship between the acceptable level of detection risk and substantive testing

7. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of
control risk, and therefore the risk of material misstatement, from that originally planned. To achieve an overall
audit risk level that is substantially the same as the planned audit risk level, the auditor would:

A. Increase inherent risk

B. Decrease substantive testing
C. Increase materiality levels
D. Decrease detection risk

Reference page: 176

● *For the auditor to be considered conservative, inherent and control risks are assessed at high levels.
Such assessment will require the auditor to set detection risk at the lowest level in order to maintain the
acceptable level of audit risk.

8. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment
about materiality?

A. The anticipated sample size of the planned substantive tests.

B. The entity's annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.

Reference page: 165

In some situations, the auditor considers materiality for planning purposes before the financial
statements to be audited are prepared. In other situations, planning takes place after the financial
statements under audit have been prepared, but the auditor may be aware that they require significant
modification. In both types of situations, the auditor's preliminary judgment about materiality might be
based on the entity's annualized interim financial statements or financial statements of one or more
prior annual periods, as long as recognition is given to the effects of major changes in the entity's
circumstances (for example, a significant merger) and relevant changes in the economy as a whole or
the industry in which the entity operates. [Paragraph renumbered by the issuance of Statement on
Auditing Standards No. 82, February 1997.]

- https://pcaobus.org/oversight/standards/archived-standards/details/AU312A
9. Which of the following statements is not correct about materiality?

A. 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.
B. 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.
C. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both
quantitative and qualitative judgments.
D. 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.

Reference page: 167 - Materiality in the Context of an Audit

10. In considering materiality for planning purposes, the auditor believes that misstatements aggregating
P100,000 would have material effect on an entity's income statement, but that misstatements would have to
aggregate P80,000 to materially affect the statement of financial position. Ordinarily, it would be appropriate to
design auditing procedures that would expected to detect misstatements that aggregate:

A. P180,000
B. P100,000
C. P90,000
D. P80,000

Reference page:
In planning the audit, the auditor should use their judgment as to the appropriately low level of audit risk
andtheir preliminary judgment about materiality levels in a manner that can be expected to provide,
within the inherent limitations of the auditing process, sufficient evidential matter to obtain reasonable
assurance about whether the financial statements are free of material misstatement. Materiality levels
include an overall level for each statement; however, because the statements are interrelated, and for
reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the
smallest aggregate level of misstatements that could be considered material to any one of the financial
statements.

- (Almost same example) For example, if the auditor believes that misstatements aggregating
approximately $100,000 would have a material effect on income but that such misstatements
would have to aggregate approximately $200,000 to materially affect financial position, it would
not be appropriate for him or her to design auditing procedures that would be expected to detect
misstatements only if they aggregate approximately $200,000. [Paragraph renumbered by the
issuance of Statement on Auditing Standards No. 82, February 1997.]
- https://pcaobus.org/oversight/standards/archived-standards/details/AU312A

11. Which of the following statements concerning materiality thresholds in incorrect?

A Materiality thresholds may change between the planning and review stages of the audit. These changes may
be due to quantitative and/or qualitative factors.
B. The smallest aggregate level of errors or fraud that could be considered material to any of the financial
statements is referred to as a materiality threshold.
C. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality
threshold.
D. Aggregate materiality thresholds are a function of the auditor's preliminary judgment concerning audit risk.

Reference page: https://pcaobus.org/oversight/standards/archived-standards/details/AU312A

A.
B. Materiality levels include an overall level for each statement; however, because the statements
are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for
planning purposes in terms of the smallest aggregate level of misstatements that could be
considered material to any one of the financial statements.
C. The auditor plans the audit to obtain reasonable assurance of detecting misstatements that he
or she believes could be large enough, individually or in the aggregate, to be quantitatively
material to the financial statements. Although the auditor should be alert for misstatements that
could be qualitatively material, it ordinarily is not practical to design procedures to detect them.
Section 326, Evidential Matter, states that "an auditor typically works within economic limits; his
or her opinion, to be economically useful, must be formed within a reasonable length of time and
at reasonable cost." [Paragraph renumbered by the issuance of Statement on Auditing
Standards No. 82, February 1997.]
D.

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

A. Final staffing decisions must be made prior to completion of the planning stage.
B. Observation of inventory count should be performed at year-end.
C. A portion of the audit of a continuing audit client can be performed at interim dates.
D. An engagement should not be accepted after the client's financial year end

Reference page:
A. Final staffing decisions can be made not prior to completion of the planning stage.
B. In a business that does not have accurate inventory records, it is necessary to periodically conduct a
complete count of the inventory (known as a physical count). This is usually done at the end of a
month, quarter, or year, to coincide with the end of a reporting period.
C. Audit testing at interim dates may permit early consideration of significant matters affecting the
year-end financial statements (for example, related party transactions, changed conditions, recent
accounting pronouncements, and financial statement items likely to require adjustment). In addition,
much of the audit planning, including obtaining an understanding of internal control, assessing control
risk and the application of substantive tests to transactions can be conducted prior to the balance-sheet
date.
D. Pg. 132
Limitation on Scope Prior to Audit Engagement Acceptance
- If management or those charged with governance impose a limitation on the scope of the
auditor's work in the terms of a proposed audit engagement such that the auditor believes the
limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor
shall not accept such a limited engagement as an audit engagement, unless required by law or
regulation to do so.
 Other Factors Affecting Audit Engagement Acceptance

If the preconditions for an audit are not present, the auditor shall discuss the matter with management.
Unless required by law or regulation to do so, the auditor shall not accept the proposed audit
engagement:

a. If the auditor has determined that the financial reporting framework to be applied in the
preparation of the financial statements is unacceptable; or

b. If the agreement of management that it acknowledges and understands its responsibility has not
been obtained.

13. A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor
recognizes that the documentation of details of transactions will be retained for only a short period of time. To
compensate for this limitation, the auditor most likely would:

A. Compare a sample of paid vendors' invoices to the receiving records at year-end.

B. Plan for a large measure of tolerable misstatement in substantive tests.
C. Perform tests several times during the year, rather than only at year end.
D. Increase the sample of transactions to be selected for cutoff tests.

Reference page:

14. Which of the following procedures should be performed by the auditor prior to starting an initial audit?

I. Perform procedures regarding the acceptance of the client relationship and the specific audit engagement
II. Communicate with the previous auditor, where there has been a change of auditors, in compliance with
relevant ethical requirements.

A. I only
B. I only
C. Both I and II
D. Neither nor I

Reference page:
Additional Considerations in Initial Audits .18. The auditor should undertake the following activities
before starting an initial audit:
(1) Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement; and
(2) Communicate with the predecessor auditor in situations in which there has been a change of
auditors in accordance with AS 2610, Initial Audits—Communications Between Predecessor
and Successor Auditors.
https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interpretations
/details/Auditing_Standard_9

15. 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. Il and I only
C. I and Ill only
D. I, II, and III

Reference page:

5-7 MULTIPLE CHOICE QUIZZERS

1. Which of the following activities shall not be included in preplanning an audit?

A. Understanding the client's reason for obtaining an audit

B. Investigating the client's background
C. Determining the likelihood of issuing an unqualified audit opinion on the client's financial statements
D. Communicating with the prospective client's prior auditor to inquire about any disagreements with the client

2. 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. Reporting
B. Planning
C. Field work
D. Organizing

Reference page: PSA 300

Planning an audit 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. 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.

3. Which of the following statements best describes an audit plan?

A. A detailed plan of analytical procedures and all substantive tests to be performed in the course of the audit.
B. A generic document that auditing firms have developed to lead the process of the audit through a systematic
and logical process.
C. A document that provides an overview of the company and a general plan for the audit work to be
accomplished, timing of the work, and other matters of concern to the audit.
D. A budget of the time that should be necessary to complete each phase of the audit procedure.

4. Audit plans should be designed so that

A. Most of the required procedures can be performed as interim work.
B. The auditor can make constructive suggestions to management.
C. The audit evidence gathered supports the auditor's conclusion.
D. Inherent risk is assessed at a sufficiently low level.

Reference page:

(c) is correct because an audit program should be designed so that the audit evidence gathered is
sufficient to support the auditor’s conclusions.
(a) is incorrect because, often, most audit procedures will not be performed as interim work
(d) is incorrect because inherent risk need not be assessed at a low level.
(b) is incorrect because while providing constructive suggestions to management is desirable, the audit
program is not based on developing constructive suggestions.

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

6. An audit program provides a proof that

A. Audit work is adequately planned and documented

B. Sufficient appropriate evidence is obtained
C. Generally accepted standards of reporting have been complied
D. Proper study and evaluation of internal control has been performed

Reference page:
a. Refer to page 182, Audit Program
The form and content of the audit program may vary for each particular engagement but
would generally contain the following:
- The audit objectives for each area
- The nature, timing, and extent of audit procedures required to implement the
overall audit plan; and
- A time budget in which hours are budgeted for the various audit areas or
procedures.
It shall serve as a:
- Set of instructions to assistants involved in the audit;
- Means to control and record the proper execution of the work.

Options, B, C, D, can only be performed/assessed after the planning phase of the audit.

7. 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. Selecting a sample of vendor's invoices for comparison to receiving reports.
D. Reading the current year's interim financial statements.

8. During the initial planning for an audit, a CPA obtains a level of knowledge of the client's business to help
him evaluate:

A. The reasonableness of estimates, such as valuation of inventories and allowances for doubtful accounts.
B. Whether to accept the engagement or not.
C. The probability of the business.
D. The nature of the audit report he will issue.

Reference page: ??
The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in
the context of the financial statements taken as a whole. As estimates are based on subjective as well as
objective factors, it may be difficult for management to establish controls over them. Even when management's
estimation process involves competent personnel using relevant and reliable data, there is potential for bias in
the subjective factors. Accordingly, when planning and performing procedures to evaluate accounting
estimates, the auditor should consider, with an attitude of professional skepticism, both the subjective and
objective factors.
https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interpretations
/details/AU342

9. The objective of performing analytical procedures in planning an audit engagement is to identify the
existence of:

A. Unusual transactions and events

B. Illegal acts that went undetected because of internal control weaknesses
C. Related party transactions
D. Recorded transactions that were not properly authorized

10. An auditor compares expenses as a percent of sales to expectations. This is an example of

A. Ratio analysis
B. Crease analysis
C. Trend analysis
D. Vertical analysis

Reference page:

D. Vertical analysis is a method of financial statement analysis in which each line item is listed as a
percentage of a base figure within the statement.
A. Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by studying its financial statements such as the balance sheet and income
statement.
B.
C. Horizontal analysis is an approach used to analyze financial statements by comparing specific
financial information for a certain accounting period with information from other periods.

11. Which of the following procedures would an auditor most likely performin planning an audit of financial
statements?
A. Inquiring of the client's legal counsel concerning pending litigation
B. Comparing the financial statements to anticipated results.
C. Examining computer generated exception reports to verify the effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

12. Which of the following is least likely to be considered a risk assessment procedure?

A. Analytical procedures
B. Inspection of documents
C. Observation of the performance of certain accounting procedures
D. Confirmation of ending accounts receivable

Reference page:

(d) The requirement is to identify the procedure that is least likely to be considered a risk assessment
procedure. Answer (d) is correct because confirmation is a substantive test, rather than a risk assessment
procedure.
Answers (a), (b), and (c) are all risk assessment procedures, as are certain inquiries of others outside the
entity.

13. To obtain an understanding of a continuing client's business, an auditor most likely would

A. Perform test of details of transactions and balances.

B. Reevaluate the client's internal control environment.
C. Review prior year working papers and the permanent file for the client.
D. Read current issues of specialized industry journals.

14. The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial
statements that are materially misstated is:

A. Analytical procedures risk

B. Inherent risk
C. Control risk
D. Audit risk

(C) Audit risk (AR) is the risk (likelihood) that the auditor may unknowingly fail to modify the opinion on financial
statements that are materially misstated (e.g., an unqualified opinion on misstated financial statements.)
15. Which of the following components of audit risk may be assessed in quantitative terms?
I. Inherent risk
II. Control risk
III. Detection risk

A. I and II only
B. I and III only
C. II and III only
D. I, II and III
 CHAPTER 6
END OF CHAPTER QUESTIONS

6-1 TRUE OR FALSE

1. Internal control is effected by those charged with governance, management and other personnel.
2. Most controls are directed at routine or standard transactions which impose a limitation affecting their
effectiveness.
3. Accounting controls promote operational efficiency and adherence to managerial policies.
4. All controls adopted by management of an entity to assist in achieving management's objectives must be
considered in the audit.
5. A common control is uniformly designed and is implemented consistently across a single entity or location or
at different entities or locations.
6. Control environment is the basis on which an effective system of internal control is built and operated in an
organization.
7. The tone at the top regarding the relevance of internal control, including ethical requirements, is established
by management.
8. The organizational structure also establishes the flow of information between levels in an entity.
9. The auditor shall identify the business risks relevant to financial reporting objectives of the entity and decide
on how to manage those risks.
10. Communication and information are vital in making all relevant parties understand internal control
responsibilities and the importance of internal control in achieving objectives.

6-2 TRUE OR FALSE

1. Control activities are designed to detect risks at different levels of the organization to ensure the
achievement of its objectives.
2. At least majority of the five components of internal control must be implemented and be operated effectively
to ensure attainment of objectives.
3. Segregation of duties over cash receipts and recording is an example of an entity-wide control.
4. After assessing the inherent risk, the auditor may judge to proceed directly in performing substantive
procedures without consideration of internal control.
5. In order to test the controls, their design and implementation are being evaluated.
6. Business process narratives, process maps, risk and control matrices are some of the commonly used forms
of control documentation.
7. A gap in internal control may be identified through an effective internal control questionnaire which highlights
strengths and weaknesses of the system through a structured series of questions.
8. If the results of inquiry of entity personnel show no changes in the entity's processes, the prior year
documentation of controls may be carried forward.
9. Test of controls are designed to obtain sufficient and appropriate evidence as to the operating effectiveness
of relevant controls.
10. If an understanding of the design and implementation of a control is obtained, its operating effectiveness
must likewise be evaluated.
11. Inquiry alone is not enough to test the operating effectiveness of controls.
12. If the control risk assessment is set at the maximum level, the auditor is required to document the basis for
such judgment.
13. A material weakness in internal controls is present when a deficiency or combination of deficiencies in
internal control is of sufficient importance to merit the attention of those charged with governance.
14. If a significant deficiency in internal control has been identified, the auditor shall communicate those in
writing to management or to those charged with governance.
15. Obtaining an understanding as to the design and implementation of controls would lead to a conclusion as
to their operating effectiveness.

6-3 MULTIPLE CHOICE QUIZZERS

1. It is a process, effected by those charged with governance, management, and other personnel, designed to
provide reasonable assurance regarding the achievement of objectives in the following categories:

● Effectiveness and efficiency of operations

● Reliability of financial reporting
● Compliance with applicable laws and regulations

A. Internal auditing
B. Internal control
C. Business strategy
D. Accounting process

Reference page: p. 204

2. Which of the following best describes an internal control system?

A. All the policies and procedures adopted by the management of an entity to assist in achieving
management's objective of ensuring, as far as practicable, orderly and efficient conduct of its business,
including adherence to management policies; safeguarding of assets; prevention and detection of fraud and
error; accuracy and completeness of the accounting records; and timely preparation of reliable financial
information.
B. The series of tasks and records of an entity by which transactions are processed as a means of maintaining
financial records. Such systems identify, assemble, analyze, calculate, classify, record, summarize and report
transactions and other events.
C. This includes, but is not limited to, plan of organization and the procedures and records that are concerned
with the decision processes leading to management's authorization of transactions. It promotes operational
efficiency and adherence to managerial policies.
D. This comprises the plan of organization and the procedures and records that are concerned with the
safeguarding of assets and the reliability of financial records. It involves systems of authorization and approval
controls over assets, internal audit and all other financial matters.

Reference page: p. 206

a. Internal Control System Definition

b. Accounting System
c. Administrative Control
d. Accounting Control
3. Which of the following is not one of the essential concepts of internal controls?

A. It is a process
B. It is effected by those charged with governance, management, and other personnel in an entity
C. It is a means or tool used by management to achieve the entity's objectives
D. It can be expected to provide absolute assurance regarding that the achievement of the entity's objectives

Reference page: p.
4. Internal control can only provide reasonable, not absolute, assurance of achieving entity control objectives.
One of the factors limiting the likelihood of achieving those objectives is that:

A. The auditor's primary responsibility is the detection of fraud.

B. The board of directors is active and independent.
C. The cost of internal control should not exceed its benefits.
D. Management monitors internal control.

Reference page: p. 205 #3

Management usual requirement that a control be cost-effective (Cost-benefit consideration)

5. Which of the following is an example of an inherent limitation in a client's internal control system?

A. The effectiveness of procedures depends on the segregation of employee duties.

B. Procedures are designed to assure the execution and recording of transactions in accordance with
management's authorization.
C. In the performance of most control procedures, there are possibilities of errors arising from mistakes in
judgment.– 5th bullet
D. Procedures for handling large numbers of transactions are processed by information technology (IT)
equipment.

Reference page: p. 205

6. An internal control system that is working effectively

A. Eliminates risk and potential loss of to the entity

B. Cannot be circumvented by management
C. Reduces the need for management the review exception reports on a day-to-day basis
D. Is unaffected by changing circumstances and conditions encountered by the entity

Reference page: p.

7. Which of the following most likely would not be considered an inherent limitation of the potential
effectiveness of an entity's internal control?

A. Incompatible duties.
B. Management override. – 2nd bullet
C. Mistakes in judgment. – 5th bullet
D. Collusion among employees. – 3rd bullet
Reference page: p. 205

8. Which of the following statements best describes "control activities"?

A. The entity's process for identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks, and the results thereof. – Entity’s risk assessment process: when the
auditor shall obtain an understanding
B. The system for transferring information from transaction processing systems to the general ledger or the
financial reporting system.
C. Policies and procedures that help ensure that management directives are carried out.
D. This includes the governance and management functions and the attitudes, awareness, and actions of
those charged with governance and management concerning the entity's internal control and its importance to
the entity. – Control Environment

Reference page: p. 212

Control activities are actions (generally described in policies, procedures, and standards) that help
management mitigate risks in order to ensure the achievement of objectives Control activities may be
preventive or detective in nature and may be performed at all levels of the organization.

9. Which of the following considered control environment elements?

Integrity and ethical Segregation of duties Information processing

values

A Yes Yes No

B Yes No No

C No No Yes

D No Yes Yes

Reference page: p. 208-209 (Elements: IM CPA HO)

10. The information system consists of the following:

A B C D

Infrastructure Yes Yes Yes Yes

(physical and
hardware
components)

Software Yes Yes Yes Yes

People Yes No No

Procedures and Yes Yes No No

Inputs
Reference page: p. 210 (PIISO)
a. People;
b. Input or data;
c. Infrastructure, physical and hardware components);
d. Software (processes and procedures);
e. Output or meaningful information

11. An entity's risk assessment process includes how management:

A B C D

Identifies Risk Yes Yes Yes Yes

Assesses Yes Yes No Yes

significance and
likelihood of
occurrence of these
identified risks

Decides upon Yes No No Depends

actions to manage
these risks

Reference page: p. 210

The auditor shall obtain an understanding of whether the entity has a process for: (IAM)
• Identifying business risks relevant to financial reporting objectives
• Assessing the significance of risks and the likelihood of their Occurrence
• Deciding how to Manage those risks

12. Which of the following statements concerning the relevance of various types of controls to a financial
statement audit is correct?

A. All controls are ordinarily relevant to a financial statement audit.

B. Controls over the reliability of assets and liabilities are of primary importance, while controls over the
reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement
audit, but other controls may also be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.

Reference page: p.

13. Which of the following is a management control method that most likely could improve management's
ability to supervise company activities effectively?
A. Monitoring compliance with internal control requirements imposed by regulatory bodies.
B. Establishing budgets and forecasts to identify variances from expectations.
C. Limiting direct access to assets by physical segregation and protective devices.
D. Supporting employees with the resources necessary to discharge their responsibilities.

Reference page: p.
14. Control activities are the policies and procedures that help ensure that management directives are carried
out. These include activities relating authorization, performance reviews, information processing, physical
controls and segregation of duties. There is proper segregation of duties when an individual who

A. Authorizes a transaction records it. – A. Authorization p. 212

B. Authorizes a transaction maintains custody of the asset that resulted from the transaction. – 3 functions to
be segregated: Custody, Authorization, and Recording p. 212
C. Records a transaction do not compare the accounting record of the asset with the asset itself.
D. Maintains custody of an asset has access to the accounting records for the asset. – 3 functions to be
segregated: Custody, Authorization, and Recording p. 212

Reference page: p. 212

To achieve optimum segregation of duties and responsibilities, the following functions should be
performed by different employees (I CARE)

✓Independent checks
✓ Custody of assets
✓ Authorization of transactions
✓ Recording of transactions
✓ Execution of transactions

15. Under PSA 315, monitoring of controls is an internal control component that involves a process of
assessing the quality of internal control performance over time. It involves assessing the design and operation
of controls on a timely basis and taking necessary corrective actions. Monitoring of controls is accomplished
through ongoing monitoring activities, separate evaluations, or a combination of the two. An entity's ongoing
monitoring activities often include

A. Periodic reporting by the entity's internal auditors about the functioning of internal control
B. Reviewing the purchasing account
C. Periodic audits by the audit committee
D. The audit of the annual financial statements

Reference page: p.

6-4 MULTIPLE CHOICE QUIZZERS

1. In an audit of financial statements, an auditor's primary consideration regarding a control is whether it:

A. Enhances management's decision-making processes.

B. Affects management's financial statement assertions.
C. Reflects management's philosophy and operating style.
D. Provides adequate safeguards over access to assets.

Reference page: p.

2. In planning the audit, the auditor obtains a sufficient understanding of the existing internal control. Which one
of the following is not among the auditor's primary objectives for obtaining such knowledge?
A. Identify types of material misstatements.
B. Consider the factors that affect the risk of material misstatement.
C. Make constructive suggestions to the client for improvement.
D. Design effective substantive tests.

Reference page: p.

Choices A and B are on page 207 (first paragraph in Controls Relevant to the Audit - not exact words
though)

B - The auditor shall design and implement overall responses to address the assessed risks of material
misstatement at the financial statement level.

Choices D page 223 (Perform substantive procedures)

Choices C is incorrect because while providing constructive suggestions to management is desirable,

the audit program is not based on developing constructive suggestions.

3. PSA 315 requires the auditor to obtain an understanding of the client's internal controls

A. For every audit

B. For first-time audits
C. Whenever it would be appropriate
D. Sufficient to find any frauds which may exist

Reference page: p.

4. The primary objective of procedures performed to obtain an understanding of internal control is to provide an
auditor with

A. Information necessary to prepare flowcharts.

B. Evidence to use in reducing detection risk.
C. Knowledge necessary to plan the audit.
D. A basis for modifying tests of controls.

Reference page: p. 204

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

5. The primary purpose of the auditor's consideration of internal control is to provide a basis for

A. Determining whether procedures and records that are concerned with the safeguarding of assets are
reliable.
B. Constructive suggestions to clients concerning deficiencies in internal control.
C. Determining the nature, timing and extent of audit tests to be applied.
D. The expression of an opinion.
Reference page: p.

6. When obtaining knowledge about an entity's internal control, it is important for the auditor to consider the
competence of its employees, because their competence bears directly and importantly upon the

A. Cost-benefit relationship of internal control

B. Comparison of recorded accountability with assets
C. Achievement of the objectives of internal control
D. Timing of substantive tests to be performed

Reference page: p.

The control environment is the foundation of internal control. A commitment to competence is one of the
factors in the control environment.

7. Obtaining an understanding of internal control involves:

A B C D

Design Evaluation Yes Yes Yes Yes

Implementation Yes Yes Yes No

Evaluation

Test of Operating Yes No Yes No

Effectiveness

Reference page: p.

8. In obtaining an understanding of internal control relevant to the audit, an auditor is required to obtain
knowledge about the

A. Effectiveness of the controls that have been implemented.

B. Consistency with which controls are currently being applied.
C. Design of the controls pertaining to internal control components.
D. Controls related to each class of transactions and account balance.

Reference page: p. 216

The auditor shall obtain an understanding of the information system, including the related business
processes, relevant to financial reporting, including the: The financial reporting process used to
prepare the entity’s financial statements, including significant accounting estimates and disclosures;

a. Design of the controls.

Evaluating the design of a control involves considering whether the control, individually or in
combination with other controls, is capable of effectively preventing, or detecting and correcting
material misstatements.
9. Control risk assessment procedures include all of the following except

A. Confirmation of bank balances

B. Inspection of documents
C. Observation of procedures
D. Inquiry of client personnel

Reference page: p.

10. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the
substance of controls rather than their form because:

A. The controls may be operating effectively but may not be documented.

B. Management may establish appropriate controls but not act on them.
C. The controls may be so inappropriate that no reliance is contemplated by the auditor.
D. Management may implement controls with costs in excess of benefits.

Reference page: p.

The auditor should obtain sufficient knowledge of the control environment to understand
management's and the board of directors' attitude, awareness, and actions concerning the control
environment, considering both the substance of controls and their collective effect. The auditor should
concentrate on the substance of controls rather than their form, because controls may be established
but not acted upon. For example, management may establish a formal code of conduct but act in a
manner that condones violations of that code.

11. An auditor uses the assessed level of control risk to:

A. Evaluate the effectiveness of the entity's internal control.

B. Identify transactions and account balances where inherent risk is at the maximum.
C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
D. Determine the acceptable level of detection risk for financial statement assertions.

Reference page: p.

Explanation:
Choice “D” is correct. An auditor uses the assessed level of control risk to determine the risk of
material misstatement, which in turn determines the acceptable level of detection risk for financial
statement assertions. Detection risk should bear an inverse relationship to control risk. For example,
the less control risk an auditor believes exists, the greater the level of detection risk he or she can
accept.
Choice “A” is incorrect. The auditor’s evaluation of the effectiveness of the entity’s internal control is
what the auditor uses to assess control risk, not vice versa.
Choice “B” is incorrect. Inherent risk, which is the susceptibility of an assertion to a material
misstatement based upon the nature of the account balance or transaction class, exists independently
from and bears no direct relationship to control risk.
Choice “C” is incorrect. Materiality thresholds for planning and evaluation purposes are based upon
measurements of financial criteria, not the assessed level of control risk.

12. An auditor should obtain sufficient knowledge of an entity's information system, including the related
business processes relevant to financial reporting, to understand the

A. Policies used to detect the concealment of fraud

B. Process used to prepare significant accounting estimates
C. Safeguards used to limit access to computer facilities
D. Produces used to assure proper authorization of transactions.

Reference page: p. 211

The auditor should obtain sufficient knowledge of the client's information system relevant to financial
reporting to understand the types of transactions processed, and how the transactions are initiated,
recorded and summarized. Included in the information system relevant to financial reporting is the
preparation of significant accounting estimates.

The auditor shall obtain an understanding of the information system, including the related business
processes, relevant to financial reporting, including the: The financial reporting process used to
prepare the entity’s financial statements, including significant accounting estimates and disclosures;

13. After obtaining an understanding of an entity's internal control structure and assessing control risk, an
auditor may next:

A. Perform tests of control to verify management's assertions that are embodied in the financial statements.
B. Apply analytical procedures as substantive tests to validate the assessed level of control risk.
C. Consider whether evidential matter is available to support a further reduction in the assessed level of control
risk.
D. Evaluate whether the internal control structure policies and procedures detected material misstatements in
the financial statements.

Reference page: p.

14. In gaining an understanding of internal control, the auditor should perform

A. Test of operating effectiveness and design evaluation - kath, saan mo to nakita sa book or net? Baka
naduling lang ako
B. Evaluation of design and implementation
C. Evaluation of implementation and operating effectiveness
D. Evaluation of design, implementation and operating effectiveness

Reference page: p. 216 (page 214)

When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate
the design and implementation of the controls by performing procedures in addition to inquiry of the
entity’s personnel.
When obtaining an understanding, the auditor focuses on the design and implementation and NOT on
effectiveness.

Effectiveness of the controls is evaluated during tests of controls since procedures performed are not
sufficient to test the controls.

15. Audit evidence concerning proper segregation of duties normally be best obtained by

A. Preparation of a flowchart of duties performed and available personnel.

B. Direct personal observation of the employee who applies control procedures.
C. Making inquiries of co-workers about the employee who applies control procedures.
D. Inspection of third-party documents containing the initials of who applied control procedures.

Reference page: p.

6-5 MULTIPLE CHOICE QUIZZERS

1. After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the
maximum level for some assertions because the auditor

A. Believes the internal control policies and procedures are unlikely to be effective.
B. Determines that the pertinent internal control components are not well documented.
C. Performs tests of controls to restrict detection risk to an acceptable level.
D. Identifies internal control policies and procedures that are likely to prevent material misstatements.

Reference page: p.

2. After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform
tests of controls. The auditor most likely decided that

A. Additional evidence to support a further reduction in control risk is not available.

B. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
C. An increase in the assessed level of control risk is justified for certain financial statement assertions.
D. There were many internal control weaknesses that could allow errors to enter the accounting system.

Reference page: p.216 and 219

After the understanding of internal control and assessing control risk the auditor should know
whether the preliminary assessment of the control risk is less than high. This would mean that auditors
can identify internal controls relevant tot he assertion which are likely to prevent or detect and correct
a material misstatement, and auditors plan to perform tests of control for the confirmation of the
assessment.

Information obtained by performing risk assessment procedures and related activities may be
used by the auditor as audit evidence to support assessments of the risks of material misstatement.
The auditor also may choose to perform substantive procedures or tests of controls concurrently with
risk assessment procedures because it is efficient to do so.
3. In a financial statement audit, the auditor is required to perform test of controls when

I. The auditor's risk assessment includes expectation of the operating effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion
level.

A. I only
B. II only
C. Either I and II
D. Neither I nor II

Reference page: p.

4. The more the planned reliance of the auditor on the operating effectiveness of internal controls,

A. The more the extent of the auditor's tests of controls.

B. The less the extent of the auditor's tests of controls.
C. The more the reliance of the auditor on information generated by the entity
D. The less the reliance of the auditor on information generated by the entity.

Reference page: p.

5. Tests of controls are used to test whether controls are:

A. Operating effectively
B. Properly documented by the client
C. Placed in operation or implemented
D. Properly incorporated in the financial statements

Reference page: p. 220

6. Which of the following statements is true?

A. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.
B. Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum.
C. The auditor can simultaneously obtain an understanding of internal control and perform tests of controls.
D. After performing tests of controls, the auditor will always assess control risk at maximum.

Reference page: p.219

A.
B. “at maximum” should be below maximum level.
D. “always” assessing control risk may be at maximum level (100%) or at below maximum level.

7. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of
material misstatement at the financial statements level, and at the assertion level for classes of transactions,
account balances, and disclosure. Some of these risks, in the auditor's judgment, require special audit
consideration, such as those that involve fraud or complex transactions. Such risks are called
A. Significant risks
B. Business risks
C. Material risks
D. Audit risks

Reference page: p. 222

8. Which of the following procedures most likely would provide an auditor with evidence about whether an
entity's internal control activities are suitably designed to prevent or detect material misstatements?

A. Reperforming the activities for a sample of transactions.

B. Performing analytical procedures using data aggregated at a high level.
C. Vouching a sample of transactions directly related to the activities.
D. Observing the entity's personnel applying the activities.

Reference page: p.

D - is correct. Observation and Inspection may be used to evaluate the design of controls. Observation
of entity personnel applying control activities is a procedure that would likely provide evidence about the
design of the activities

A - is incorrect. Reperforming control activities provides the auditor with evidence about the operating
effectiveness of specific control activities, not the design effectiveness.

B - is incorrect. Analytical procedures would not provide the auditor with evidence about the design of
specific control activities.

C - is incorrect. Vouching a sample of transactions directly related to control activities would not provide
the auditor with evidence about the design of specific control activities.

9. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit
goals most likely would significantly influence an entity's control environment when

A. The audit committee is active in overseeing the entity's financial reporting policies.
B. External policies established by parties outside the entity affect its accounting practices.
C Management is dominated by one individual who is also a shareholder.
D. Internal auditors have direct access to the board of directors and entity management.

Reference page: p.

C - is correct because these noted factors tend to have an especially significant influence on the control
environment when management is dominated by one or a few individuals. Such a circumstance allows
management to effectively implement aggressive financial reporting and emphasize meeting profit
goals.

10. An advantage of using systems flowcharts to document information about internal control instead of using
internal control questionnaires is that systems flowcharts:
A. Identify internal control weaknesses more prominently.
B. Provide a visual depiction of client's activities.
C. Indicate whether control activities are operating effectively.
D. Reduce the need to observe client's employees performing routine tasks.

Reference page:

B - is correct. System flowcharts provide a visual representation of a series of sequential processes,

that is, of a flow of documents, data, and operations. In many instances a flowchart is preferable to a
questionnaire because a picture is usually more easily comprehended.

A - is incorrect because a systems flowchart can present the flow of information and documents in a
system, but does not specifically identify the weakness.

C - is incorrect because the flowchart does not provide evidence of how effectively controls are actually
operating.

D - is incorrect because the flowchart is useful in documenting the understanding of internal control, but
it does not reduce the need for observation of employees performing tasks if those controls are deemed
necessary.

11. When control risk is assessed at HIGH for all financial statements' assertions, an auditor should document
the auditor's

A B C D

Understanding of Yes Yes Yes Yes

the entity’s internal
control structure

Conclusion that Yes No No Yes

Control Risk is
HIGH

Basis for HIGH Yes No Yes No

Control Risk
Conclusion

Reference page: p.

12. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a
control objective is referred to as:

A. Compensating control
B. Non-routine control
C. Conditional control
D. Offset control
Reference page: p.

13. When a compensating control exists, a weakness in the system:

A. Is no longer a concern because the potential for misstatement has been sufficiently reduced.
B. Is reduced but it is not removed; therefore, it is still of concern to the auditor.
C. Could cause a material loss, so it must be tested using substantive procedures.
D. Is magnified and must be removed from the sampling process and examined in its entity.

Reference page: p.

14. Regardless of the assessed level of control risk, an auditor would perform some

A. Test of controls to determine the operating effectiveness of internal control policies

B. Analytical procedures to verify the design of internal control procedures
C. Substantive test to restrict detection risk for significant classes of transactions
D. Dual-purpose test to evaluate both the risk of monetary misstatement and preliminary control risk

Reference page: p.223

Irrespective of the assessed risks of material misstatement, the auditor shall design and perform
substantive procedures for each material class of transactions, account balance, and disclosure.

15. An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of
the following was not a step in making the assessment?

A. Evaluate the effectiveness of the internal controls with tests of controls

B. Obtain an understanding of the entity's accounting system and control environment.
C. Perform tests of details of transactions to detect material misstatements in the financial statements.
D. Consider whether control activities can have a pervasive effect on financial statement assertions.

Reference page: p.

C - is correct. Tests of details of transactions are used to detect material misstatement in the financial
statements after the auditor has assessed risk, not as part of making this assessment.

A - is incorrect. Tests of controls are required to support the auditors assumption that controls are
operating effectively.

6-6 MULTIPLE CHOICE QUIZZERS

1. As a result of obtaining an understanding of an entity's internal control system, the auditor may become
aware of material weaknesses in the design or implementation of internal control. The auditor is required to
communicate this matter to

A. Those charged with governance or management

B. Chief executive officer
C. Board of Accountancy
D. Securities and Exchange Commission

Reference page: p.

2. This internal component is the foundation for all other components. It set the tone of the organization,
provides discipline and structure, and influences the control consciousness of employees.

A. Control activities
B. Control environment
C. Monitoring of control
D. Entity's risk assessment process

Reference page: p. 208

3. Control activities constitute one of the five components of internal control Which of the following is not
included in this internal control component?

A. An internal audit function

B. Segregation of duties
C. Performance reviews
D. Authorization

Reference page: p.

4. A reason to establish internal control is to:

A. Have a basis for planning the audit

B . Provide reasonable assurance that the objectives of the organization are achieved
C. Encourage compliance with organizational objectives
D. Ensure the accuracy, reliability and timeliness of information

Reference page: p.

B - is correct. According to AU 319, “Internal control is a process, effected by an entity’s board of

directors, management, and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories; reliability of financial reporting, effectiveness and
efficiency of operations, and compliance with applicable laws and regulations”.

C - is incorrect. Encouraging compliance with management’s intentions is subsumed under the overall
purpose of providing reasonable assurance that the objectives of the organization are achieved.

D - is incorrect. Ensuring the accuracy, reliability, and timeliness of information is subsumed under the
overall purpose of providing reasonable assurance that the objectives of the organization are achieved.

5. Internal controls are not designed to provide reasonable assurance that

A. Transactions are executed in accordance with management's authorization

B. Irregularities will be eliminated
C. Access to assets is permitted only in accordance with management's authorization
D. The recorded accountability for assets is compared with the existing assets at reasonable intervals

Reference page: p.

6. Which of the following factors would most likely be considered an inherent limitation to an entity's internal
control?

A. The complexity of the information processing system.

B. Human judgment in the decision-making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.

Reference page: p.

B - is correct. While a company performs the control function, it involves the judgment of many
individuals, and their different perspectives on the same problem can be considered as an inherent
limitation of the internal control.

A - is incorrect. The complexity of the information processing system is not an inherent limitation
because if there is a proper hierarchy in the company then the information process will be smooth.

C - is incorrect. It is not compulsory that the board of directors are always ineffective. Sometimes, the
effectiveness of the board of directors becomes the reason for the success of the company.

D - it can be the limitation but not necessarily the inherent one because lack of management incentive
is not general in nature.

7. Risks can arise or change due to circumstances such as the following, except:

A. There is a change in the regulatory or operating environment (l.e. a new law has been passed which
prohibits the use of a chemical which is a main ingredient of the company's major product).
B. New employees have been hired by the company.
C. The company switched from manual information systems to a computerized system.
D. The accounting and financial reporting framework has remained stable for the past five years, and no new
pronouncements have been made.

Reference page: p.

8. Which of the following statements best describes the phrase, "evaluating the design of a control"?

A. Considering whether the control, individually or in combination with other controls, is capable of effectively
preventing, or detecting and correcting, material misstatements.
B. Determining whether the control exists and that the entity is using it.
C. Expressing an opinion as to the effectiveness of a control.
D. Observing the application of specific controls.
Reference page: p.

9. The auditor places primary emphasis on controls

A B C D

Account Balance Yes Yes Yes Yes

Classes of Yes Yes No No

Transactions

Disclosures Yes No No Yes

Reference page: p.

10. An auditor may decide to assess control risk at the maximum level for certain

A. Sufficient evidential matter to support the assertions is likely to be available.

B. Evaluating the effectiveness of policies and procedures is inefficient.
C. More emphasis on tests of controls than substantive tests is warranted.
D. Considering the relationship of assertions to specific account balances is more efficient.

Reference page: p.

11. Test of controls are concerned primarily with each of the following questions, except

A. By whom were the controls applied?

B. How were the controls applied?
C. Were the necessary controls consistently performed?
D. Why were the controls applied?

Reference page: p.

12. Which of the following is the auditor's purpose of further testing internal control procedures?

A. Provide a basis for reducing the assessed level of control risk below that which resulted from the auditor's
initial understanding of internal control.
B. Reduce the risk that errors or fraud which are not prevented or detected by internal control are not detected
by the independent audit.
C. Provide assurance that transactions are executed in accordance with management's authorization and
access to assets is limited by a proper segregation of functions.
D. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in accordance with PFRS.

Reference page: p.

13. Tests of controls may include the following, except:

A. Reperformance of internal control procedures

B. Inquiries about, and observation of, internal controls which leave no audit trail
C. Analytical procedures involving comparison of operating expenses with budget amount
D. Inspection of authorization documentary support to transactions evidencing

Reference page: p.

14. In considering the evidence needed to assess control risk during the period from interim to year-end, all of
the following should be considered except the

A. Significance of the assertion being tested.

B. Specific internal control policies and procedures tested during the interim period.
C. Degree to which the policies and procedures were tested and the test results.
D. Control risk on other assertions.

Reference page: p.

15. Evidence of the performance of control risk assessment procedures includes all of the following except

A. Flowcharts
B. Questionnaires
C. Lead sheets
D. Memoranda

Reference page: p.

6-7 MULTIPLE CHOICE QUIZZERS

1. Which of the following statements regarding auditor documentation of the client's internal control structure is
correct?

A. Documentation must include flowcharts.

B. Documentation must include procedural write-ups.
C. No documentation is necessary although it is desirable.
D. No one particular form of documentation is necessary, and the extent of documentation may vary.

Reference page: p.

2. When obtaining an understanding of the accounting and internal control system the auditor may trace a few
transactions through the accounting system. This technique is:

A. Reperformance
B. Walk-through
C. Control test
D. Validity Test

Reference page: p.217

Specific Audit Procedures

 Tracing transactions through the information system relevant to financial reporting can be done
by performing “walkthrough” tests.

3. Which of the following statements concerning audit risk and its components is incorrect?

A. Regardless of the assessed levels of inherent and control risks, the auditor should always perform some
substantive procedures for material account balances and classes of transactions
B. The higher the assessment of inherent and control risks, the more evidence the auditor obtain from the
performance of substantive procedures
C. The assessed level of inherent risk need not be considered in determining the nature, timing and extent of
substantive procedures required to reduce audit risk to an acceptably low level
D. After obtaining an understanding of the accounting and internal control systems, the auditor should make a
preliminary assessment of control risk, at the assertion level, for each material account balance or class of
transactions

Reference page: p.

4. After documenting internal control in an audit engagement, the auditor may perform tests on:

A. Those controls that the auditor plans to rely on.

B. Those controls in which deficiencies or weaknesses were identified.
C. Those controls that have a material effect on the balances in the financial statements.
D. Those controls that were reviewed (selected on a random basis).

Reference page: p.

5. If no changes have occurred since the controls were last tested, a CPA should

A. Rely on the prior year audit's assessment of internal controls and use this assessment in the current year.
B. Test the operating effectiveness of such controls at least once in fourth audit. every
C. Rely entirely on the performance of substantive audit procedures.
D. Test the operating effectiveness of such controls at least once in every third audit

Reference page: p.

6. The development of constructive suggestions to clients for improvements in internal control is

A. A requirement of the auditor's consideration of internal control

B. A desirable by-product of an audit engagement
C. Addressed by the auditor only during a special engagement
D. As important as establishing a basis for reliance upon the internal control structure.

Reference page: p.

7. The period between retesting of operating effectiveness of internal controls that didn't change since last
tested and do not address significant risks must

A. Not exceed 1 year

B. Not exceed 2 years
C. Not exceed 3 years
D. A matter of professional judgment

Reference page: p.

8. Before an auditor can assess control risk at below maximum level, the auditor must first obtain reasonable
assurance that the controls are properly designed, implemented and operating effectively. This assurance is
best obtained through:

A. Inquiry of process owners

B. Performance of substantive analytical procedures
C. Performance of substantive tests
D. Inspection of documents

Reference page: p.216 and 219

After the understanding of internal control and assessing control risk the auditor should know whether
the preliminary assessment of the control risk is less than high. If yes, the auditor should perform test
of control or substantive tests to confirm its assessment and identify whether the controls are
operating effectively.

9. Techniques in assessing control risk normally include

A. Inquiry and analytical procedures

B. Observation and inquiry
C. Inspection and reperformance
D. Confirmation and comparison

Reference page: p.

10. The following are considered inherent limitations to the operating effectiveness of entity's internal control,
except

A. Collusion among employees

B. Management override
C. Nature of controls
D. Incompatible duties

Reference page: p. 205

a. The possibility of circumvention of controls through Collusion with parties outside the entity or
with the employees of the entity
b. The possibility that a person responsible for exercising control could abuse that responsibility

11. An auditor recognizes the concept of reasonable assurance when considering internal control. This concept
pertains to
A. Possible ineffectiveness due to wrong application of judgment and human error
B. The cost of an entity's internal control should not exceed the expected benefits to be derived from it
C. Establishment and maintenance of internal control is an important responsibility of management
D. Adequacy of safeguards over access to assets and records

Reference page: p.

12. Segregation of incompatible duties calls for separation of the functions of

A. Custody, authorization, and disbursement

B. Execution, authorization and recording
C. Authorization, payment and reporting
D. Custody, execution and recording

Reference page: p. 212

I CARE
Independent Checks or internal audits
Custody of Assets
Authorization of transactions
Recording of Transactions
Execution of Transactions

13. A misappropriation of assets is suspected by the auditor wherein employees purchase merchandise from
approved vendors without recording the purchase and receipt of the goods. After payment of invoices, the
employees destroy the invoices and related voucher packages. In order to gather evidence regarding the
employee fraud, which is the most likely population of audit interest

A. Approved vouchers
B. Vendor's Invoices
C. Debits to bank statement
D. Purchase orders

Reference page: p.

14. The auditor is required to

A. Document the understanding of the entity's internal control

B. Evaluate the appropriateness of the control in addressing a risk of material misstatement
C. Inquire about the competence of the control owner
D. Identify significant deficiencies in the internal control system

Reference page: p.217

PSA 315 requires auditors to document the key elements of the understanding obtained regarding the
following:
● Each of the aspects of the entity and its environment
● Each of the internal control components
● Sources of information from which the understanding was obtained
 ● Risk assessment procedures performed

15. What is the primary objective of the auditor's procedures to obtain an understanding of internal control?

A. To obtain evidence in assessing inherent risk

B. To provide the auditor with necessary understanding to assess the risks of material misstatement
C. To serve as basis of modification of test of controls
D. To evaluate the consistency of application of control policies

Reference page: p.