Auditing and Assurance

Concepts and Application

Prelim Quiz 1

Name: ________________________ Score:______________

Course/yr./blk.: _____________ Date:_______________

I. MULTIPLE CHOICE: Write the letter of your choice in capital letters before the
corresponding number. Each choice has an equal chance of being right but you must go

for what is best for you. Choose wisely. 😊

1. Evaluate the following statements: Which of the following statements is/are

I. To ensure appropriate attention is true in relation to risk assessment
devoted to different areas of the audit. procedures?
II. To ensure the audit is completed A. I only
within budget and time restraints. B. II only
Which is/are the main purpose of audit C. Both I and II
planning? D. Neither I nor II
A. I only
B. II only 5. Evaluate the following statements:
C. Both I and II I. Inquiries of management and of other
D. Neither I nor II appropriate individuals within the entity,
including individuals
2. Which of the following statements within the internal audit function (if the
is/are correct with regard to the function exists).
relationship between the audit plan and II. Observation and inspection.
the audit strategy for an external audit Which pertains to the risk assessment
engagement? procedures?
I. The overall audit strategy should be A. I only
more detailed than the audit plan. B. II only
II. The audit strategy should be C. Both I and II
established before the detailed audit plan D. Neither I nor II
is developed
A. I only 6. Which of the following procedures would
B. II only an Auditor least likely perform during the
C. Both I and II planning stage of the audit?
D. Neither I nor II A. Determine the timing of testing
B. Take a tour of the client’s facilities
3. Evaluate the following statements: C. Perform inquiries of outside legal
I. Substantive tests prior to the balance counsel regarding pending litigation
sheet date will be minimized. D. Determine the effect of information
II. The audit procedures selected will technology on the audit
achieve specific audit objectives.
Which is/are the main purpose of audit 7. Which of the following is required
planning? documentation in an audit in accordance
A. I only with PSA?
B. II only A. A flowchart or narrative of the
C. Both I and II information system relevant to financial
D. Neither I nor II reporting describing the recording
and classification of transaction for
4. Evaluate the following statements: financial reporting
I. The auditor shall design and perform B. An audit plan setting forth in detail
risk assessment procedures in a manner the procedures necessary to accomplish the
that is not biased towards engagement’s objectives
obtaining audit evidence that may be C. A planning memorandum establishing the
corroborative or towards excluding audit timing of the audit procedures and
evidence that may be coordinating the assistance
contradictory. of entity personnel
II. When the auditor intends to use D. An internal control questionnaire
information obtained from the auditor’s identifying controls that assure specific
previous experience with the objectives will be achieved
entity and from audit procedures performed
in previous audits, the auditor shall 8. Which is a requirement of PSA 315:
evaluate whether such I. Obtaining an understanding of the
information remains relevant and reliable entity and its environment, and the
as audit evidence for the current audit. Applicable Financial Reporting
Framework.
II. Understanding the Components of the A. Expert. C.
Entity’s System of Internal Control Multiskilled personnel
III. Identifying and assessing the risks B. Quality control reviewer D.
of material misstatement Taxation specialist
A. I only
B. II only 13. Evaluate the following statements:
C. Both I and II only I. Valuations of certain types of assets
D. I, II, and III like land and buildings.
II. Determination of fair values using
9. Which aspects should the auditor’s specialized statistical techniques.
understanding of the entity and its Which task would most likely necessitate
environment cover? for an expert?
I. The entity’s organizational structure, A. I only
ownership and governance, and its business B. II only
model, including the C. Both I and II
extent to which the business model D. Neither I nor II
integrates the use of IT.
II. Industry, regulatory and other 14. In considering materiality for
external factors. planning purposes, an auditor believes
III. The measures used, internally and that misstatements aggregating P10,000
externally, to assess the entity’s would have a material effect on an
financial performance. entity’s profit and loss, but that
A. I only misstatements would have to aggregate
B. II only P20,000 to materially affect the statement
C. Both I and II only of financial position. Which is/are true:
D. I, II, and III I. More procedures are to be performed by
the auditor should materiality be set at
10. Evaluate the following statements: P20,000
I. Assist the auditor with understanding II. Less procedures are to be performed by
the entity’s ability to provide the auditor should materiality be set at
appropriate oversight of its system P10,000
of internal control. A. I only
II. Provide evidence of deficiencies, B. II only
which may indicate an increase in the C. Both I and II
susceptibility of the entity’s D. Neither I nor II
financial statements to risks of material
misstatement. 15. Which of the following statements
Which pertains to the reason why auditors regarding materiality is/are correct?
understand their client’s governance? I. Materiality is always based on
A. I only turnover.
B. II only II. Materiality should only be calculated
C. Both I and II at the planning stage of the audit.
D. Neither I nor II A. I only
B. II only
11. Evaluate the following statements: C. Both I and II
I. Understanding the entity’s objectives, D. Neither I nor II
strategy and business model helps the
auditor to understand the 16. The relationship between materiality
entity at a strategic level, and to and audit risk is:
understand the business risks the entity A. Direct. B. Inverse. C.
takes and faces. Indeterminable. D. None of these.
II. Assists the auditor in identifying
risks of material misstatement, since most 17. Which of the following statements
business risks will eventually regarding materiality is/are correct?
have financial consequences and, I. More evidence is required for a low
therefore, an effect on the financial peso amount than for a high peso amount.
statements. II. The same amount of evidence is
Which pertains to the reason why auditor required for either low or high peso
obtains understanding of the client’s amounts.
business model? A. I only
A. I only B. II only
B. II only C. Both I and II
C. Both I and II D. Neither I nor II
D. Neither I nor II
18. Which of the following is correct
12. A person or firm possessing special concerning requirements about auditor
skill, knowledge and experience in a communications about fraud?
particular field excluding accounting and I. Fraud that involves senior management
auditing. should be reported directly to the audit
committee regardless
of the amount involved. D. I, II, and III.
II. The auditor has no responsibility to
disclose fraud outside the entity under 23. The element of the audit planning
any circumstances. process most likely to be agreed upon with
A. I only the client before implementation
B. II only of the audit strategy is the determination
C. Both I and II of the
D. Neither I nor II A. Evidence to be gathered to provide a
sufficient basis for the auditor’s
19. Which of the following is correct opinion.
concerning requirements about auditor B. Procedures to be undertaken to discover
communications about fraud? litigation, claims, and assessments.
I. Company management changes inventory C. Pending legal matters to be included in
count tags and overstates ending the inquiry of the client’s attorney.
inventory, while D. Timing of inventory observation
understating cost of goods sold. procedures to be performed.
II. The treasurer diverts customer
payments to his personal due, concealing 24. Which of the following is not
his actions by debiting an typically included in initial audit
expense account, thus overstating planning?
expenses. A. Client acceptance/continuation
A. I only decisions.
B. II only B. Determination of the purpose of the
C. Both I and II audit.
D. Neither I nor II C. Obtain an understanding with the
client.
20. With respect to errors and D. Perform analytical procedures as
irregularities, the auditor should plan to substantive tests.
A. Search for errors that would have a
material effect and for irregularities 25. Which of the following is least likely
that would have either considered by the auditor in establishing
material or immaterial effect on the the overall audit strategy and
financial statements. developing the audit plan?
B. Search for irregularities that would A. Understanding of the accounting and
have a material effect and for errors that internal control systems.
would have either B. Risk and materiality.
material or immaterial effect on the C. The involvement of other auditors in
financial statements. the audit of major subsidiaries.
C. Search for errors or irregularities D. The terms of payment pertaining to
that would have a material effect on the other auditors and their respective
financial statements. clients.
D. Discover errors or irregularities that
have either material or immaterial effect 26. Which of the following is not
on the financial considered by the CPA when he makes an
statements. overall audit plan?
A. Identification of complex accounting
21. Analytical procedures used in planning areas including those involving accounting
an audit should help the auditor in: estimates.
A. Reducing the scope of tests of controls B. The effect of information technology on
and substantive tests the audit.
B. Providing assurance that potential C. The content of the representation
material misstatements will be identified letters.
C. Identifying inconsistencies, unusual D. The nature and timing of reports and
transactions or events, and amounts, other communication with the entity that
ratios, and trends that indicate matters are expected under
that may have audit implications. the engagement.
D. Assessing the adequacy of the available
audit evidence 27. This is a listing of all the things
which the auditor will use to gather
22. When are analytical procedures are sufficient appropriate audit evidence:
required to be performed? A. Audit procedures. C. Audit
I. As a risk assessment procedure program.
performed during planning B. Audit plan. D. Audit
II. As a substantive test procedure during risk model.
evidence-gathering
III. As an overall review at audit 28. In designing audit programs, an
completion. auditor should establish specific audit
A. I and II only objectives that related primarily to the
B. I and III only A. Timing of audit procedures C.
C. II only Selected audit techniques.
B. Cost-benefit of gathering evidence B. The discussion should involve all
D. Financial statement assertions. members who participate on the audit team,
including the engagement
29. The audit program should set out the: partner
A. Nature of planned procedures C. C. The discussion should include
Extent of planned procedures consideration of the risk of management
B. Timing of planned procedures D. All override of controls
of the answers. D. The risk assessment discussion should
occur during the overall review stage of
30. Cost-benefit considerations are part the audit
of audit planning. In relation to this,
which of the following audit 35. Which of the following documentation
procedures is usually the least costly to is not required for an audit in accordance
perform? with PSA?
A. Tests of balances. C. A. A written audit plan setting forth the
Analytical procedures. procedures necessary to accomplish the
B. Substantive tests of transactions. audit objectives
D. Tests of controls. B. The basis for the auditor’s decision to
perform tests of controls concurrently
31. The audit program usually cannot be with obtaining an
finalized until the understanding of internal control
A. Consideration of the entity’s internal C. The auditor’s understanding of the
control has been completed. entity’s control activities that help
B. Engagement letter has been signed by ensure achievement of management
the auditor and the client. objectives
C. Reportable conditions have been D. The assessment of the risks of material
communicated to the audit committee. misstatement at both the financial
D. Search for unrecorded liabilities has statements and relevant
been performed and documented. assertion levels

32. The senior auditor responsible for 36. Evaluate the following statements:
coordinating the field work usually I. Audit planning precedes conclusion and
schedules a pre-audit conference with the reporting.
audit team primarily to II. Audit planning precedes substantive
A. Give guidance to the staff regarding testing.
both technical and personnel aspects of Which is/are true?
the audit. A. I only
B. Discuss staff suggestions concerning B. II only
the establishment and maintenance of time C. Both I and II
budgets. D. Neither I nor II
C. Establish the need for using the work
of specialists and internal auditors. 37. Which of the following information may
D. Provide an opportunity to document assist the engagement partner in
staff disagreements regarding technical determining whether conclusions
issues. reached regarding acceptance and
continuance of client relationships and
33. The audit plan generally is modified audit engagements are appropriate?
when I. The integrity and ethical values of the
A. Results of tests of control differ from principal owners, key management and those
expectations. charged with
B. An engagement letter has been signed by governance of the entity.
the auditor and the client. II. Whether the engagement team has the
C. A significant deficiency has been competence and capabilities, including
communicated to the audit committee of the sufficient time, to perform
board of directors. the engagement.
D. The search for unrecorded liabilities A. Both I and II
has been expected during the planning of B. I only
the audit. C. II only
D. Neither I nor II
34. Which one of the following is a true
statement about the required risk 38. Which of the following is/are should
assessment discussion? be included in the engagement letter?
A. The discussion about the susceptibility I. Objective of the audit of the financial
of the entity’s financial statements to statements
material misstatement must II. Identification of the applicable
be held separately from the discussion financial reporting framework for the
about the susceptibility of the entity’s preparation of the financial statements
financial statements to fraud. III. Reference to the expected form and
content of any report
A. I only
B. II only clients.
C. Both I and II A. I only C. Both I and II
D. I, II, and III B. II only D. Neither I nor II

39. Which of the following statements 43. Evaluate the following statements
is/are correct? regarding enhancing auditor’s
I. A Company shall neither allow or independence.
require its independent auditor to prepare I. Appointing a partner of the CPA firm
its financial statements and/or conducting the audit to the corporation’s
any of its supporting documents audit committee.
II. The engagement letter shall contain a II. Having the independent auditor report
provision that the disclosure of certain to an audit committee of outside members
information to the SEC shall not of the board of
constitute a breach of confidentiality nor directors
shall it be a ground for civil, criminal Which is/are appropriate?
or disciplinary proceedings against A. I only
the independent auditor B. II only
III. A Company may request its independent C. Both I and II
auditor to conduct reconciliation of D. Neither I nor II
certain account balances as
long as it is included in the engagement 44. Evaluate the following statements
letter regarding the engagement letter.
A. I only I. State whether the CPA will perform
B. II only audit, review or compilation services.
C. Both I and II II. State any restriction to be imposed on
D. I, II, and III the CPA’s work.
Which is/are included in the engagement
40. Which of the following statements letter?
is/are correct? A. I only
I. A successor auditor should make B. II only
specific inquiries of the predecessor C. Both I and II
auditor regarding disagreements D. Neither I nor II
which the predecessor had with the client
concerning auditing procedures and 45. Evaluate the following statements
accounting principles regarding the engagement letter.
II. If a client refuses to permit the I. Remind management that the primary
predecessor to respond to the successor’s responsibility for the FS rests with
inquiry, then the successor management.
auditor should inquire as to the reasons II. Provide a written record of the
for such refusal and consider the agreement with the client as to the
implications of this in deciding services to be provided.
whether to accept the engagement or not. Which is/are the primary purpose(s) of the
A. I only C. Both I and II document?
B. II only D. Neither I nor II A. I only
B. II only
41. Where the client is changing auditors, C. Both I and II
PSA requires communication between the D. Neither I nor II
predecessor and successor auditors. The
burden of initiating the communication 46. Which of the following is least likely
rests with: to be included in an audit engagement
I. The client letter?
II. The predecessor auditor I. Identification of specific audit
A. I only C. Both I and II procedures that the auditor needs to
B. II only D. Neither I nor II undertake.
II. A reference to the inherent
42. Which of the following statements limitations of an audit that there is an
is/are correct? unavoidable risk that some material
I. Independence must be considered in misstatements may remain undiscovered.
deciding whether to accept a company as an A. I only
audit client. B. II only
II. Only partners and managers are C. Both I and II
required by the Code of Ethics to be D. Neither I nor II
independent from their assurance

47. Which of the following is least likely II. Recent change of middle management and
to result into the auditor sending a new rank and file organizational structure
audit engagement letter? A. I only
I. Revisions or special terms of the B. II only
engagement. C. Both I and II
D. Neither I nor II
48. If a change in the type of engagement 50. Which of the following statement(s)
from higher to lower level of assurance is is/are correct concerning the auditors’
reasonably justified, the report based on objective with respect to opening balances
the revised engagement: in conducting an initial audit engagement
I. Should qualify the opinion due to a I. To obtain sufficient appropriate
scope limitation. evidence about whether the opening
II. Omits reference to the original balances contains misstatements
engagement. that materially affect the current
A. I only period’s financial statements.
B. II only II. To obtain sufficient appropriate
C. Both I and II evidence about whether appropriate
D. Neither I nor II accounting policies reflected in
the opening balances have been
49. If a change in the type of engagement consistently applied in the current
from higher to lower level of assurance is period’s financial statements, or
not justified, the auditor should: changes thereto are appropriately
I. Qualify the report on the original accounted for and adequately presented and
engagement. disclosed in accordance
II. Refuse to agree to management’s with the applicable financial reporting
request on the change of engagement and framework
continue with the original engagement. A. I only
A. I only B. II only
B. II only C. Both I and II
C. Both I and II D. Neither I nor II
D. Neither I nor II

-end-

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