AT 06-02 – Introduction to Financial Statements Audit and Pre-engagement Activities

1. The subject matter of an audit in general is/are:

a. Financial statements
b. Compliance with laws and regulations
c. Assertions
d. Internal controls

2. The different types of audit according to the nature of assertion or data being evaluated includes
a. Financial statements audit
b. Operational audit
c. Compliance audit
d. All of the above.

3. Statement 1: External audit is a type of audit engagement performed by independent CPAs on a

contractual basis.
Statement 2: To establish the independence of the internal audit function, they must report to the audit
committee or the board of directors.
Statement 3: Government or state auditors may only perform financial statements, operations, and
compliance audits to public entities including government owned and controlled corporations
(GOCCs).
a. All statements are correct.
b. Only one statement is correct.
c. Only two statements are correct.
d. All statements are incorrect.

4. Among the three types of audit according to nature or assertion, uses specifically
developed criteria as compared to established criteria.
a. Financial statements audit
b. Operational audit
c. Compliance audit
d. All of the above.

5. Which of the following types of audit is also referred to as a dual-purpose function, serving both
assurance and consulting purposes?
a. Financial statements audit
b. Operational audit
c. Compliance audit
d. All of the above.

6. Which of the following best defines the objective of a financial statements audit?
a. To conclude whether on the auditor’s opinion, anything has come to his/her attention that
would cause him/her to believe that the financial statements are not prepared in accordance
with a financial reporting framework.
b. To express an opinion whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework.
c. To conclude whether fraud has occurred either in the preparation of the financial statements
or the management of the company’s assets.
d. To express an opinion as to the effectiveness and efficiency of the audit client’s internal
controls.

7. Which of the following statements about the theoretical framework of financial statements audit is
incorrect?
a. All financial data are verifiable through existence of supporting documents and records,
whether in paper or electronic form.

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 b. Auditor should always maintain independence with respect to the financial statements under
audit.
c. No short-term or long-term conflict may exist between the auditor and the client’s
management throughout the engagement.
d. A financial statements audit benefits the public.

8. A limitation on the scope of the financial statements audit that the auditor considers to be material
may lead to a .
a. Qualified opinion or disclaimer of opinion
b. Qualified or adverse opinion
c. Unqualified opinion or disclaimer of opinion
d. Unqualified opinion or adverse opinion

9. An audit engagement is expected to provide only reasonable assurance, which is a high, but not
absolute level of assurance, that the financial statements are free from material misstatements. This is
because of . (Choose the exception.)
a. The use of selective testing.
b. Inherent limitations of internal controls.
c. Lack of segregation of duties.
d. The auditor’s use of judgment.

10. Any event or activity that will result to unfavorable outcome that will prevent the entity from
meeting its goals and objectives are referred to as .
a. Business risk
b. Information risk
c. Risk of material misstatements
d. Audit risk

11. Based on the National Internal Revenue Code (as amended), corporations, companies,
partnerships or persons whose gross annual sales, earnings, receipts or output exceed
, shall have their books of accounts audited and examined yearly by independent
Certified Public Accountants.
a. Php600,000
b. Php1,000,000
c. Php1,919,500
d. Php3,000,000

12. According to the Revised Corporation Code, stock and non-stock corporations, domestic or foreign,
including one person corporations shall submit annual financial statements audited by an
independent certified public accountant, except when the of the
corporation does not exceed Six hundred thousand pesos (Php600,000).
a. Total assets or total liabilities
b. Total assets and total liabilities
c. Total revenues
d. Total net income

13. Which of the following is a category of assertions or representations made by the entity about its
financial statements?
a. Classes of transactions and events
b. Account balances
c. Presentation and disclosure
d. All of the above.

14. Sheldon, an accountant and a member of the internal audit team of Entrego Inc. is tasked to verify in
random a number of purchase transactions from the entity’s accounting information systems. He then
finds the related receiving reports and vendor’s invoices for the said transactions. Which category and
assertion is he verifying?
a. Classes of transactions and events – occurrence

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 b. Classes of transactions and events – completeness
c. Account balances – existence
d. Account balances – completeness

15. All assets, liabilities, and equity interests are included in the financial statements at appropriate
amounts. This includes, for example, depreciation and amortization related to fixed assets and
intangible assets. This assertion referred to is .
a. Valuation and accuracy
b. Valuation and allocation
c. Occurrence and rights and obligations
d. Valuation and occurrence

16. Which of the following is not among management’s responsibilities in the audit of financial
statements?
a. The design, implementation, and monitoring of internal controls to prevent material
misstatements in the financial statements.
b. Providing the auditor with unrestricted access to those within and outside the entity, from
whom the auditor expects to communicate to obtain audit evidence.
c. Assessing the entity’s ability to continue operations for at least 12 months from the end of the
reporting period and using the appropriate basis of accounting based on such assessment.
d. Identifying the appropriate financial reporting framework to be used for financial statements
preparation.

17. These are procedures designed to obtain an understanding about the entity and its environment,
including its internal controls, to identify and assess the risk of material misstatements at the financial
statements and assertion level.
a. Risk assessment procedures
b. Test of controls
c. Substantive procedures
d. All of the above.

18. Statement 1: Inquiry, inspection, and observation are procedures that are used throughout all phases
of the audit.
Statement 2: Reperformance is a procedure exclusively used for testing the effectiveness of the
entity’s internal controls.
Statement 3: There are some engagements where an auditor does not perform test of controls,
but the auditor will always perform substantive procedures to some extent.
a. All statements are correct.
b. Only one statement is incorrect.
c. Two of the statements are incorrect.
d. All of the statements are incorrect.

19. Which of the following audit procedure is considered as one of the most effective and reliable,
although the most costly?
a. External confirmation
b. Recalculation
c. Analytical procedures
d. Reperformance

20. Which of the following is considered by the auditor in deciding whether or not to accept a new
engagement, or continue with a recurring engagement?
a. Competence, capabilities, time and resources of the auditor
b. Ethical requirements for the auditor
c. Integrity of the prospective client’s management
d. All of the above.

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21. This refers to the avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards applied,
would conclude that a firm’s, or a member of the assurance team’s integrity, objectivity, or
professional skepticism had been compromised.
a. Independence
b. Independence of mind
c. Independence in appearance
d. Implied independence

22. The auditability of a prospective client is best reflected by its .

a. Adequacy of documentation.
b. Cooperation with auditors.
c. Management’s knowledge on PFRS.
d. Board of directors’ qualifications.

23. The preconditions for an audit includes:

a. The use by management of an acceptable financial reporting framework for financial
statements preparation.
b. The acknowledgment of management and those charged with governance of their
responsibilities and the premise on which the audit is conducted.
c. Both A and B.
d. Neither A nor B.

24. If a scope limitation is known to the auditor prior to accepting the engagement and in the auditor’s
judgment, is not potentially pervasive enough to result in a disclaimer of opinion, then the auditor .
a. Shall not accept such a limited engagement as an audit engagement, unless required by law or
regulation to do so.
b. Shall not accept such a limited engagement as an audit engagement.
c. May accept such audit engagement.
d. May accept such audit engagement, provided that the scope limitation is adequately
disclosed in the auditor’s report.

25. The purpose of an audit engagement letter is to avoid misunderstandings between the auditor and the
client’s management. Because of this purpose, the most important content of the engagement letter is
the:
a. Responsibilities of the auditor and management
b. Identification of the financial reporting framework
c. Reference to the form and content of the reports to be issued
d. Agreement as to the manner of billing and amount of professional fees

26. Statement 1: Communication between the successor and predecessor auditor for initial audit
engagements provides the successor with relevant information to decide whether or not to accept the
engagement. If the prospective client refuses to allow the successor to communicate with the
predecessor, it is already enough grounds for the successor to not accept the engagement.
Statement 2: Both the successor and predecessor auditor would request permission from the
prospective client during this communication phase.
Statement 3: If the audit client’s management prohibits the predecessor auditor from responding to
the inquiries of the successor, the predecessor auditor informs the successor of this prohibition.
a. All statements are correct.
b. Two statements are correct.
c. Only one statement is correct.
d. All of the statements are incorrect.

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27. A separate engagement letter for each component in audit of components is not required. However,
the auditor may decide to send a separate engagement letter depending on some factors. Which of the
following is not among these factors?
a. Who appoints the component auditor.
b. Degree of ownership of the parent.
c. Whether a separate report is to be issued to each component.
d. Changes in the auditing firm’s management structure.

28. A new engagement letter not required for recurring engagements. However, the auditor may decide to
send a new engagement letter depending on some factors. Which of the following is not among these
factors?
a. Indications that the client misunderstands the objective and scope of the audit.
b. Changes in the management structure of the audit client.
c. Changes in the legal requirements of the audit client.
d. Changes in the materiality model used by the auditor.

29. If a change in the type of engagement from a higher to a lower level of assurance is not reasonably
justified, the auditor should:
a. Qualify the report on the original engagement.
b. Omit reference to 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.

30. To emphasize auditor independence from management, many corporations follow the practice of:
a. Appointing a partner of the CPA firm conducting the audit to the corporation’s audit
committee.
b. Establishing a policy of discouraging social contract between employees of the corporation
and the staff of the independent auditor.
c. Requesting that a representative of the independent auditor be on hand at the annual
stockholder’s meeting.
d. Having the independent auditor report to an audit committee of outside members of the
board of directors.

*End of Handout*

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