SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

General Luna Road, Baguio City Philippines 2600

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AUDITING THEORY
FIRST SEMESTER SY 2020-
2021
AT02 – System of Quality Controls

1. A firm should establish and maintain a system of quality control to provide it with reasonable assurance that
(I) the firm and its personnel comply with professional standards and applicable legal and regulatory requirements
(II) reports issued by the firm or engagement partners are appropriate in the circumstances

A. I only
B. II only
C. Both I and II
D. Neither I nor II
2. Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality control
policies and procedures (ethical requirements; human resources; engagement performance)?
A. No; yes; no
B. Yes; no; no
C. Yes; yes; yes
D. No; no; yes
3. As defined in PSQC 1, is a process comprising an ongoing consideration and evaluation of the firm’s
system of quality control, including a periodic inspection of a selection of completed engagements, designed to provide the
firm with reasonable assurance that its system of quality control is operating effectively
A. Monitoring
B. Inspection
C. Engagement quality control view
D. Supervision
4. Which element of a system of quality control is addressed by the establishment of policies and procedures designed to provide
the firm with reasonable assurance that it has sufficient personnel with the competence, capabilities, and commitment to ethical
principles?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Human resources
D. Engagement performance
5. In pursuing a firm’s quality control objectives, a firm should adopt policies and procedures to enable it to identify and evaluate
circumstances and relationships that creates threats to independence, and to take appropriate action to eliminate those threats or
to reduce them to an acceptable level by applying safeguards, or, if considered to be appropriate, to withdraw from the
engagement. Which quality control element would this be most likely to satisfy?

A. Ethical requirements
B. Monitoring
C. Human resources
D. Leadership responsibilities for quality within the firm
6. The nature, timing, and extent of an audit firm’s quality control policies and procedures depend on (The CPA firm’s size; The
nature of the CPA firm’s practice; Appropriate Cost Benefit Considerations)
A. Yes; yes; no
B. Yes; yes; yes
C. No; no; no
D. Yes; no; yes

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7. For audits of financial statements of listed entities, the engagement partner should not issue the auditor’s
report until the completion of the
A. Engagement quality control review
B. Management review
C. Engagement team review
D. Engagement partner review
8. Who should take responsibility for the overall quality on each audit engagement?
A. Engagement quality control reviewer
B. Engagement partner
C. Engagement team
D. CPA firm
9. The engagement partner team should take responsibility for the direction, supervision, and performance of the audit engagement
in compliance with professional standards and regulatory of legal requirements, and for the auditor’s report, that is issued to be
appropriate in the circumstances. Supervision includes the following, except
A. Tracking the process of the audit engagement
B. Addressing significant issues arising during the audit engagement, considering their significance, and modifying
the plan approach appropriately
C. Informing the members of the engagement team of their responsibilities
D. Identifying matters for consultation or consideration by more experienced engagement team members during the
audit engagement.
10. PSA 220 requires the engagement partner to consider whether members of the engagement team have complied with the
ethical requirements relating to audit engagements. The Code of Ethics establishes the fundamental principles of professional
ethics, which include
I. Integrity
II. Objectivity
III. Professional competence and due care
IV. Confidentiality
V. Professional Behavior

A. I, II, IV, and V only

B. II, III, IV, and V only
C. I, III, IV, and V only
D. I, II, III, IV, and V
11. For audits of financial statements of listed entities, the engagement partner should
A. Determine that an engagement quality control reviewer has been appointed.
B. Discuss significant matters arising during the audit engagement, including those identified during the engagement quality
control review, with the engagement quality control reviewer.
C. Not issue the auditor’s report until the completion of the engagement quality control review.
D. All of the above
12. The implementation of quality control procedures that are applicable to the individual audit engagement is the responsibility of
the
A. CPA firm
B. Engagement quality control reviewer
C. Engagement team
D. Expert contracted by the firm in connection with the audit engagement
13. A firm’s system of quality control should ordinarily provide for the maintenance of
A. A file of minutes of staff meetings.
B. Updated personnel files
C. Documentation to provide evidence of the operation of each element of its system of quality control
D. Documentation to demonstrate compliance with regulatory requirements
14. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to
evaluate whether the
A. Auditor’s system of quality control has been maintained at a high level
B. Results are consistent with the conclusions to be presented in the auditor’s report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and proficiency as auditors.
15. The following statements relate to the engagement partner’s responsibility to conduct timely reviews of the audit documentation
to be satisfied that sufficient appropriate evidence has been obtained to support the conclusions reached and for the auditor’s
report to be issued. Which is false?
A. The engagement partner’s review of the audit documentation allows significant matters to be resolved on a timely basis to
his/her satisfaction before the auditor’s report is issued.
B. The engagement partner should review all audit documentation
C. The engagement partner should document the extent and timing of the reviews.
 D. The reviews cover critical areas of judgment, especially those relating to difficult or contentious matters identified during
the course of the engagement, significant risks, and other areas the engagement partner considers important.
16. The engagement letter documents and confirms the
 Auditor’s acceptance of the appointment
 Objective and scope of the audit
 Extent of the auditor’s responsibilities to the client
 Form of any reports
A. Yes, Yes, No, Yes
B. Yes, No, Yes, No
C. Yes, Yes, No, No
D. Yes, Yes, Yes, Yes

17. An auditor’s document includes the following:

“We will conduct our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from
material misstatement.”

The above passage is most likely from a/an

A. Emphasis-of-matter paragraph of a “subject to” qualified auditor’s report
B. Love letter
C. Engagement letter
D. Management representation letter
18. Which of the 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
B. Management is responsible for making all financial records and related information available to us
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected.
D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider
necessary to complete the engagement
19. The auditor may accept or continue an audit engagement only when the basis upon which it is to be performed has been
agreed, through
I. Establishing whether the preconditions for an audit are present
II. Confirming that there is a common understanding between the auditor and management and, where appropriate,
those charged with governance of the terms of the audit engagement.

A. I only
B. II only
C. Both I and II
D. Neither I nor II
20. An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a
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 engagement
C. Not agree to change of engagement where there is no reasonable justification for doing so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete or otherwise unsatisfactory.
21. A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable
assurance of achieving this basic objective is provided through
A. A system of peer review
B. Continuing professional education
C. System of quality control
D. Compliance with PSA
22. The policies and procedures adopted by a firm designed to provide it with reasonable assurance regarding compliance
with professional standards and regulatory and legal requirements, and appropriateness of reports issued by the firm:
A. Internal Controls
B. Monitoring
C. Code of Ethics
D. Quality Controls
23. PSQC No. 1 applies to , while PSA 220 applies to
A. Assurance engagements, audits
B. Audits, assurance engagements
C. Audits, reviews
D. Assurance, reporting
24. The firm’s leadership includes the following:
 Chief executive officer
 Managing board of partners

A. Yes, No
B. Yes, Yes
C. No, Yes
D. No, No
25. Actions and messages that encourages a culture of quality are communicated through:
A. Training seminars, meetings, formal or informal dialogue, mission statements
B. Newsletters and briefing memoranda, internal documentation and training materials.
C. Partner and staff appraisal procedures
D. All of the above
26. Ethical requirements to which the engagement team and engagement quality control reviewer are subject, which ordinarily
comprise Parts A and B of the Code of Ethics, together with national requirements that are more restrictive
A. Fundamental principles
B. Relevant ethical requirements
C. Client screening criteria
D. Pre-conditions to an audit
27. The following are the fundamental principles of professional ethics, except:
A. Independence
B. Professional competence and due care
C. Objectivity
D. Integrity
28. The firm should obtain written confirmation of compliance with its policies and procedures on independence from
all firm personnel required to be independent by the Code of Ethics at least:
A. Monthly
B. Quarterly
C. Annually
D. Every 3 years
29. By obtaining confirmation and taking appropriate action on information indicating noncompliance, the firm demonstrates the
importance that it attaches to independence and makes the issue current for, and visible to, its personnel. Written confirmation:
A. May be in paper format only
B. May be in electronic format only
C. May be in paper form or electronic form
D. Is not required since oral confirmation will suffice per PSQC1
30. The familiarity threat that may be created by using the same senior personnel on an assurance engagement over a long period of
time and the safeguards that might be appropriate to address such as threat. Accordingly, safeguards may include:
A. Rotation of senior personnel
B. Engagement quality control review
C. Both A and B
D. Neither A nor B
31. The firm should obtain such acceptance and continuance information as it considers necessary in the circumstances such as
when:
A. Accepting an engagement with a new client
B. Deciding whether to continue an existing engagement
C. Accepting a new engagement with an existing client
D. All of the answer
32. With regard to the integrity of a client, matters that the firm considers include the following:
A. The identity and business reputation of the client’s principal owners, key management, related parties
and those charged with its governance
B. The nature of the client’s operations, including its business practices
C. Information concerning the attitude of the client’s principal owners, key management and those charged with its
governance towards such matters as aggressive interpretation of accounting standards and the internal control
environment
D. All of the answers above
33. A CPA, while performing an audit, strives to achieve independence in appearance in order to
A. Reduce risk and liability of the auditor
B. Comply with the requirements of the various regulators
C. To achieve independent in fact
D. Maintain public confidence in the profession
34. A CPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform
services for a current client. The primary purpose for establishing such policies and procedures is
A. To enable the auditor to attest to the integrity or reliability of a client
B. To comply with the quality control standards established by regulatory bodies
C. To lessen the exposure to litigation resulting from failure to detect irregularities in client financial statements
D. To minimize the likelihood of association with clients whose management lacks integrity
35. 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 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 both the engagement and the client relationship
D. Continue the engagement, since the Code of Ethics requires started engagements to be finished regardless of
subsequent developments and information
36. When a firm withdraws from an engagement, the firm may have reportorial responsibilities to the following:
 Appropriate level of management
 Those charged with governance
 Regulatory authorities

A. Yes, Yes, Yes

B. Yes, Yes, No
C. Yes, No, No
D. Yes, No, Yes
37. Personnel issues that must be addressed by the system of quality control include the following, except:
A. Recruitment and performance evaluation
B. Capabilities and competence
C. Career development and promotion
D. Compensation and estimation of personnel needs
E. None of the answer
38. Which of the following methods are most likely to develop capabilities and competence?
A. Professional education
B. Continuing professional development, including training
C. Work experience and coaching by more experienced staff
D. Self-study modules on professional accounting and auditing literature
E. All of the answers
39. Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement performance. This
is often accomplished through
A. Written or electronic manuals
B. Software tools or other forms of standardized documentation
C. Industry or subject-matter-specific guidance materials
D. All of the answers
40. Supervision includes:
A. Tracking the progress of the engagement
B. Considering the capabilities and competence of individual members of client personnel
C. Addressing all issues arising during the engagement and modifying the planned approach appropriately.
D. Identifying for matters for consultation or consideration by less experienced engagement team members during the
engagement
41. Review responsibilities are determined on the basis that experienced team members review the work of
experienced team members.
A. More, more
B. More, less
C. Less, more
D. Less, less
42. Reviewers considered:
A. The work has been performed in accordance with GAAP
B. Consultation with experts has been made for all phases of the engagement
C. The work performed supports the conclusions reached and is appropriately documented
D. Whether the system of quality control is operating effectively and adequately
43. In a certain audit engagement, several key members of the engagement team had differences of opinion regarding a certain
matter. In this case:
A. The engagement partner shall issue a disclaimer of opinion due to a scope limitation
B. An increase in the audit fee will be requested due to the extension of the time required to complete the engagement
C. Documentation will be made regarding the unresolved matter, and the auditor will withdraw from the engagement
altogether
D. The report shall not be issued until the matter is resolved
44. This is a review that provides an objective evaluation of the significant judgments made by the engagement team
and the conclusions reached in formulating the report
A. Engagement quality control review
B. Engagement judgment review procedures
C. Peer review
D. System of quality control
45. An engagement quality control review is required to be performed
A. Immediately after the re-assessment of control risk
B. For all audits of financial statements of listed entities
C. For all types of audits, regardless of the subject matter of the engagement
D. At engagement completion after the report is issued
46. A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, with sufficient and
appropriate experience and authority to objectively evaluate, before the report is issued, the significant judgments the
engagement team made and the conclusions they reached in formulating the report
A. Engagement partner
B. Engagement quality control reviewer
C. Personnel
D. Suitably qualified external person
47. An individual outside the firm with the capabilities and competence to act as an engagement partner, for example a partner of
another firm, or an employee (with appropriate experience) of either a professional accountancy board whose members may
perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an
organization that provides relevant quality control services.
A. Suitably qualified external person
B. Partner
C. Engagement partner
D. Engagement quality control reviewer
48. What aspects are most important in determining the eligibility of engagement quality control reviewers?
A. Technical qualifications and objectivity
B. Integrity and objectivity
C. Competence and independence
D. All of the answers
49. Original paper documentation may be scanned and stored electronically for practical reasons. After scanning, the original
paper document:
A. Shall be discarded following established principles on waste disposal
B. Shall be kept on file for future reference
C. Shall be considered for retention or disposal depending on legal or regulatory requirements and other factors
D. None of these
50. Unless otherwise specified by law, engagement documentation is owned by:
A. The client
B. The firm
C. The client and the firm
D. The Board of Accountancy
51. In the case of an audit, final engagement files should be completely assembled within days after the
date of the audit report.
A. 60
B. 45
C. 30
D. 15
52. The normal retention period for audit engagement documentation is no shorter than from the date of the
audit period.
A. Two years
B. Four years
C. Five years
D. Seven years
 53. A process comprising an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic
inspection of a selection of completed engagements, designed to enable the firm to obtain reasonable assurance that its system
of quality control is operating effectively.
A. Inspection
B. Engagement quality control review
C. Quality review
D. Monitoring
54. Responsibility for the monitoring process is entrusted to:
A. Audit associates
B. Senior associates
C. Managers
D. Partners
55. Monitoring of the firm’s system of quality control is performed by competent individuals and covers:
 Appropriateness of the design of quality controls
 Effectiveness of the operation of quality controls
A. Yes, No
B. No, Yes
C. No, No
D. Yes, Yes
56. In relation to completed engagements, these are procedures designed to provide evidence of
compliance by engagement teams with the firm’s quality control policies and procedures.
A. Inspection
B. Quality control
C. Monitoring
D. Engagement quality control review
57. The inspection of a selection of completed engagements is ordinarily performed on a cyclical basis. Engagements
selected for inspection include at least:
A. one engagement for each engagement partner over an inspection cycle
B. two engagements for each engagement partner over an inspection cycle
C. one engagement for each firm over an inspection cycle
D. two engagements for each firm over an inspection cycle
58. An inspection cycle ordinarily spans no more than years:
A. One
B. Five
C. Three
D. Seven
59. The firm should communicate the results of the monitoring of its quality control system to engagement partners and other
appropriate individuals within the firm at least every:
A. 6 months
B. 12 months
C. 3 years
D. 5 years
60. The firm should establish policies and procedures requiring appropriate documentation to provide evidence of the
operation of each element of its system of quality control. How such matters are documented is based on:
A. PSQC No.1
B. PSA 220
C. Philippine Audit Practice Statements
D. The firm’s decision
61. During the audit of ABC Company, two members of the audit team, Shallie and Pas, were verifying the amount of goodwill
recorded by the client. Shallie felt that the most convincing audit evidence to verify goodwill was a comparison of the
recorded value of assets acquired with the seller’s book value as evidenced by financial statements. However, Pas did not
agree. She felt that the comparison should be made against the insured value of the assets stated in the insurance policies.
Shallie and Pas could not agree on what should be done. What would be the appropriate step that Shallie and Pas should do?

A. Discuss the matter with the client and ask their opinion.
B. Perform both procedures and ensure that everything is properly documented.
C. Seek the help and advice of other senior members of the engagement team to arrive at the most appropriate procedure.
D. Follow Shallie procedures as he is the more senior than Pas.
62. MKC and Co. is a firm of certified public accountants. One of the partners,
Menard, has instructed senior director, Arven, to conduct an inspection (cold review) of two past audits; MBA Corporation and
PHD Corporation. Arven was one of the team members of the MBA engagement team. He had also assisted one of the partners
in performing the hot review of PHD Corporation. If you are Arven, would you conduct the inspection?
A. Yes, as Arven is in a better position to conduct the inspection because of his previous experience with the two
engagements.
B. Yes, PSQC 1 did not mention any prohibition relating to members of the engagement team conducting
inspection
C. No, Arven should not conduct the inspection of these engagements as he has been associated with them is some manner.
D. No, Arven does not have the necessary competence as he is only a director, inspection must be performed by an
audit partner.
63. Samuely and Company is a firm of certified public accountants which has two partners, Samuel and Ely. In the current year the
firm celebrated its fifth in practice, the firm has had a system of quality control from the beginning which has ensured that each
audit is conducted satisfactorily. However, the partners have never monitored the functioning of the quality control system. Is the
firm required to implement policies and procedures in monitoring completed engagement?
A. Yes, PSQC 1 requires that the firm must have policies and procedures in monitoring its quality control policies and
procedures.
B. Yes, but since this firm is composed only of two partners, they can perform the monitoring once every 5 years.
C. No, PSQC1 does not require monitoring within the firm, since the Firm is required to renew its accreditation
with BOA once every three years.
D. No, since the firm is a small practice and PSQC 1 does not require monitoring for small practice.
64. Melan, Celia and Company has just completed its annual independence review, Geraldine, the partner in- charge for
independence is reviewing a completed copy of the independence declaration from and noticed that Ms. Jennilyn, audit manager,
declared that his husband, Jonard, was newly hired as a controller of a Company where Ms. Jennilyn is the engagement manager.
As partner in-charge for independence what is the best course of action to take in this situation?
A. Discuss the matter with Ms. Jennilyn and the Engagement Partner and ensure that all work done by Ms. Jennilyn are
properly reviewed by the Engagement Partner
B. Assigned an Engagement Quality Control Reviewer to ensure that all judgment made by Ms. Jennilyn are reviewed and
ensure she remains objective
C. Transfer Ms. Jennilyn to another engagement to reduce to risk of noncompliance with the independence
requirement
D. Discuss the matter with management and those charged with governance and if they agree to continue with Ms.
Jennilyn as audit manager, then should continue managing the engagement.
65. In performing an acceptance and continuance procedures for a newly accepted engagement, Jeane Rozette, a new partner in
the firm should obtain information relating to:
I. The integrity of the client’s management
II. Independence of the firm
III. Competency to serve the client appropriately

A. I and II only
B. II and III only
C. I and III only
D. I, II and III