WRAP-UP EXERCISES:
 ACCEPTING AN ENGAGEMENT
1. Preliminary knowledge about the client’s business and industry must be obtained
prior to the acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements
2. Which of the following factors most likely would cause an auditor to decline a new
audit engagement?
a. Concluding that the entity’s management probably lacks integrity.
b. An inability to perform preliminary analytical procedures before assessing control
risk
c. An inadequate understanding of the entity’s internal control.
d. The close proximity to the end of the entity’s reporting period.
3. Which of the following circumstances would permit an independent auditor to
accept an engagement after the end of the reporting period?
a. Expectation of the operating effectiveness of controls
b. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests
required by PSAs due to the timing of the acceptance of the engagement
c. Remedy the limitations resulting from accepting the engagement after the end of
the reporting period, such as those relating to the existence of physical inventory.
d. Receipt of an assertion from the predecessor auditor that the entity will be able to
continue as a going concern.
4. A predecessor auditor withdrew from the engagement after discovering that a
client’s financial statements are materially misstated that it would not revise. If asked
by the successor auditor about the termination of the engagement, the predecessor
should
a. Suggest that the successor auditor should obtain the client’s consent to discuss the
reasons
b. Indicate that there was a misunderstanding
c. State that the audit revealed material misstatement that the client would not revise
d. Suggest that the successor auditor ask the client.
5. The purpose of an engagement letter is to:
a. Document the CPA firm’s responsibility to external users of the audited financial
statements
b. Document the terms of the engagement
c. Notify the audit staff of an upcoming engagement so that personnel scheduling can
be facilitated
d. Emphasize management’s responsibility for approving the audit program
6. In audit communication between the predecessor and incoming auditor should be
a. Authorized in an engagement letter
b. Acknowledged in a representation letter
c. Either written or oral
d. Written and included in the working papers
7. The auditor may accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed, through
S1: Establishing whether the preconditions for an audit are present
S2: 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
 AUDIT PLANNING
1. In the planning stage of an audit engagement, the auditor is required to perform
audit procedures to obtain an understanding of the entity and its environment,
including its internal control. These procedures are called.
a. Risk assessment procedures
b. Substantive tests
c. Tests of controls
d. Dual-purpose test
2. In planning the audit engagement, the auditor should consider each of the
following, except
a. The type of opinion that is likely to be expressed.
b. The entity’s accounting policies and procedures
c. Matters relating to the entity’s business and the industry in which it operates
d. Materiality level and audit risk
3. Which of the following is the least likely procedure to be performed in planning a
financial statement audit?
a. Selecting a sample of sales invoices for comparison with shipping documents
b. Coordinating the assistance of entity personnel in data preparation.
c. Reading the current year’s interim financial statements
d. Discussing matters that may affect the audit with firm personnel responsible for
non-audit services to the entity.
4. In connection with planning phase of an audit engagement, which of the following
statements is always correct?
a. A portion of the audit of a continuing client can be performed at interim dates.
b. Final staffing decision must be made prior to completion of the planning stage.
c. Observation of inventory count should be performed at year end.
d. An engagement should not be accepted after the client’s financial year-end
5. What materiality level is used by the auditor in determining which line items in the
financial statements are to be tested?
a. Performance materiality
b. Overall materiality
c. Specific materiality
d. Individual materiality
6. In determining whether the work of the internal auditor is likely to be adequate for
purposes of the audit, the external auditor shall evaluate the internal auditor’s
a. Efficiency and experience
b. Independence and review skills
c. Training and supervisory skills
d. Competence and objectivity
7. Which of the following statements is correct concerning the auditor’s work of an
expert?
a. The auditor is required to perform substantive test procedures to verify the expert’s
assumptions and findings.
b. The auditor should obtain an understanding of the methods and assumptions used
by the expert.
c. The entity should not have an understanding of the nature of the work to be
performed by the expert.
d. The expert should not have an understanding of the auditor’s corroborative use of
the expert’s findings.
8. Which of the following is an aspect of scheduling and controlling the audit
engagement?
a. Including in the engagement letter an estimate of the minimum and maximum
audit fees
b. Writing a conclusion in individual working papers indicating how the results of the
audit will affect the auditor’s report.
c. Performing audit work only after the entity’s books have been closed for the period
under audit.
d. Including in the audit program a column for budgeted and actual time.
9. Competence of personnel is necessary to proper recording of transactions and
supports financial statements that are fairly presented. In reviewing the organization
for necessary competence, which of the following job types would be of least interest
to the auditor?
a. Corporate controller.
b. Vice-president for marketing.
c. Manager of electronic data processing.
d. Chief accountant.
10. The existence of audit risk is recognized by the statement in the auditor’s report
that the
a. Financial statements are presented fairly in all material respects, in accordance
with Philippine Financial reporting standards.
b. Audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
c. Auditor obtains reasonable assurance about whether the financial statements are
free of material misstatement.
d. Auditor is responsible for expressing an opinion on the financial statements, which
are management’s responsibility.
 CONSIDERATION OF INTERNAL CONTROL
1. It is the process designed, implemented and maintained by those charged with
governance, management, and other personnel to provide reasonable assurance about
the achievement of the entity’s objectives.
a. Internal Auditing
b. Internal Control
c. Business Strategy
d. Accounting Process
2. Which of the following statements about internal control is incorrect?
a. Internal control is effected by people
b. Internal control is expected to provide absolute assurance
c. Internal control is a process
d. Internal control is geared to achieving objectives in the overlapping categories of
financial reporting, compliance and operations.
3. The following are components of internal control, except
a. Control activities
b. Entity’s risk assessment process
c. Control environment
d. Business Risk
4. It benefits an entity’s internal control by enabling an entity to
a. Reduce the risk that controls will be circumvented
b. Process large, unusual or non-recurring transactions
c. Rely on systems or programs that are inaccurately processing data
d. Allow unauthorized changes to data in master files.
5. This internal control component is the foundation for all other components. It sets
the tome of the organization, provides discipline and structure, and influences the
control consciousness of employees.
a. Control activities
b. Monitoring of controls
c. Control environment
d. The entity’s risk assessment process
6. Which of the following statements concerning physical controls is incorrect?
a. Access to computer hardware should not be limited to authorized personnel.
b. Physical controls limit access to assets and important records.
c. In systems with online entry of data, many users may have access through remote
input devices.
d. Access often extends beyond the entity’s employees to customers and suppliers
through remote terminals.
7. During the review of a small business client's internal control system, the auditor
discovered that the accounts receivable clerk approves credit memos and has access to
cash. Which of the following controls would be most effective in offsetting this
weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary
ledger.
b. The controller receives the monthly bank statement directly and reconciles the
checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the
amount shown in the ledger.
8. For effective internal control purposes, which of the following individuals should
be responsible for mailing signed checks?
a. Receptionist
b. Treasurer
c. Accounts payable clerk
d. Payroll clerk
9. A system of internal control, regardless of how carefully designed and
implemented, contains certain inherent limitations. Which of the following errors or
irregularities is not caused by an inherent limitation?
a. The president and chief executive officer, with the assistance of the corporate
controller, inflated earnings by recording fictitious sales at year-end.
b. A newly-installed electronic data processing system failed to provide for a
comparison of sales order amount with prior customer balance and credit limit. This
resulted in numerous sales to customers who had already exceeded their credit limits.
c. Numerous recording errors occurred because persons analyzing and recording
transactions did not have the necessary accounting background.
d. A computer programmer and a computer operator conspired to divert funds from
the company to an account controlled by the dishonest employees.
10. Effective internal control requires organizational independence of departments.
Organizational independence would be impaired in which of the following situations?
a. The internal auditors report to the audit committee of the board of directors.
b. The controller reports to the vice president of production.
c. The payroll accounting department reports to the chief accountant.
d. The cashier reports to the treasurer
11. Which of the following controls would be the most appropriate means to ensure
that terminated employees had been removed from the payroll?
a. Mailing checks to employees' residences.
b. Establishing direct-deposit procedures with employees' banks.
c. Reconciling payroll and time-keeping records.
d.. Establishing computerized limit checks on payroll rates.
12. General controls include controls
a. For developing, maintaining, and modifying computer programs
b. That relate to the correction and resubmission of erroneous data
c. Designed to provide reasonable assurance that only authorized users receive output
from processing
d. Designed to provide reasonable assurance that all data submitted for processing
have been properly authorized.
13. Auditing through the computer must be used when
a. Generalized audit software is not available.
b. Processing is primarily online and updating is real-time
c. Input transactions are batched and system logic is straight forward
d. Processing primarily consists of sorting the input data and updating the master file
sequentially.
14. Which of the following assurances is not provided by an application control?
a. Review and approval procedures for new systems are set by policy and adhered to.
b. Authorized transactions are completely processed once and only once
c. Transaction data are complete and accurate
d. Processing results are received by the intended user.
15. These computer programs are enhanced productivity tools that are typically part
of a sophisticated operating systems environment, for example, data retrieval software
or code comparison software.
a. Purpose-written programs
b. System management programs
c. Utility programs
d. Generalized audit software
 PERFORMING SUBSTANTIVE TEST
1. Which of the following statements is most correct regarding primary purpose of
audit procedures?
a. To detect all errors or fraudulent activities as well as illegal activities.
b. To comply with the SEC
c. To gather corroborative evidence about management’s assertions regarding the
client’s financial statements.
d. To determine the amount of errors in the balance sheet accounts in order to adjust
the accounts to actual
2. An auditor may achieve audit objectives related to particular assertions by
a. Performing substantive tests.
b. Adhering to a system of quality control
c. Preparing auditor working papers
d. Increasing the level of detection risk
3. In the context of an audit of financial statements, substantive tests are audit
procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct tests of financial balances, or analytical
procedures.
d. Will increase proportionately with the auditor’s reliance on internal control.
4. The objective of test of details of transactions performed as substantive tests is to
a. Comply with generally accepted auditing standards
b. Attain assurance about the effectiveness and efficiency of client’s operations
c. Detect material misstatements in the financial statements
d. Evaluate whether internal control policies and procedures operated effectively
5. Audit evidence, physical examination and confirmation, may only be obtained
using which of the following types of tests?
a. Tests of controls
b. Tests of transactions
c. Analytical procedures
d. Tests of details of balances
6. The existence of a related party transaction may be indicated when another entity
a. Sells real estate to the corporation at a price that is comparable to its appraised
value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest which equals the current market
rate.
d. Lends to the corporation at a rate of interest which equals the current market rate.
7. Generally accepted auditing standards require the auditor to apply analytical
procedures in both the planning and review stages of the audit. The major reason for
applying analytical procedures as part of audit review is
a. To identify abnormalities that warrant audit attention.
b. To assist the auditor in establishing materiality thresholds.
c. To ascertain that the auditor has gathered adequate evidence to resolve suspicions
arising during the planning stages of the audit.
d. To provide documentary evidence in the event of future litigation.
8. Which of the following is not an example of analytical evidence?
a. Compared inventory turnover by major class with the prior year on a monthly and
quarterly basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined invoices for plant asset additions to determine whether the client had
erroneously recorded ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated significant variations from
budgeted amounts.
9. Of the following audit procedures, which best supports the valuation objective?
a. Performing a lower of cost or market test of the client's inventories.
b. Reviewing a contingent liability footnote for proper wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking.
10. Which of the following is true?
a. Tests of details of balances focus on the ending balances of accounts
b. Tests of details of balances focus on the transactions during the period
c. Tests of details of balances focus on the auditor’s understanding of internal controls
d. Tests of details of balances focus on comparisons of recorded amounts to
expectations developed by the auditor
 AUDIT SAMPLING
1. Audit sampling involves the
a. Selection of all items over a certain amount
b. Application of audit procedures to less than 100% of items within a class of
transactions or an account balance such that all items have a chance of selection.
c. Application of audit procedures to all items that comprise a class of transactions or
an account balance.
d. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error.
2. The two general approaches to audit sampling are:
a. Stratification and value weighted
b. Random and nonrandom
c. Statistical and nonstatistical
d. Precision and reliability
3. The risk of incorrect acceptance and the likelihood of assessing control risk too
low relate to the
a. Effectiveness of the audit
b. Efficiency of the audit
c. Tolerable misstatement
d. Preliminary estimates of materiality levels
4. Which of the following statements is true?
a. Statistical sampling is more convenient to use than nonstatistical sampling
b. Statistical sampling aids the auditor in evaluating results
c. Statistical sampling requires the auditor to make fewer judgmental decisions
d. Statistical sampling will be looked upon by the courts as providing superior audit
evidence
5. The following are advantages of using statistical sampling, except
a. Statistical sampling provides a means for mathematically measuring the degree of
risk that results from examining only part of a population
b. Statistical sampling allows the auditor to greatly reduce substantive testing
c. Statistical sampling allows the auditor to measure the sufficiency of the evidential
matter obtained.
d. Statistical sampling aids in the design of an efficient sample.
6. In attribute sampling, a 5% change in which of the following factors normally will
have the least effect on the size of statistical sample?
a. Expected deviation rate
b. Risk assessing control risk too low
c. Population size
d. Tolerable deviation rate
7. For which of the following audit tests would an auditor most likely use attribute
sampling?
a. Selecting accounts receivable for confirmation of account balances.
b. Examining invoices in support of the valuation of property plant and equipment
additions
c. Making an independent estimate of the amount of FIFO inventory.
d. Inspecting employee time cards for proper approval by supervisors.
8. A number of factors influence the sample size for substantive test of details of an
account balance. All other factors being equal, which of the following would lead to a
larger sample size?
a. Smaller measure of tolerable misstatement
b. Smaller expected frequency errors
c. Greater reliance of analytical procedures
d. Greater reliance on internal control
9. Which of the following statements relating to stratification is incorrect?
a. When performing tests of details of transactions and account balances, the
population is often stratified by monetary value.
b. The results of audit procedures applied to a sample of items within a stratum can be
projected to the entire population.
c. When verifying the valuation assertion for accounts receivable, account balances
may be stratified. By age
d. Stratification reduces the variability of items within each stratum.
10. Audit efficiency may be improved when the sampling unit is defined as the
individual monetary units that comprise the population. This technique is called
a. Stratification
b. Random selection
c. Systematic selection
d. Value weighted selection
 COMPLETING THE AUDIT
1. The purpose of management representation letter is to reduce
a. The possibility of a misunderstanding concerning management’s responsibility for
the financial
statements.
b. The scope of an auditors procedures concerning related party transactions and
subsequent events.
c. Audit risk to an aggregate level of misstatement that could be considered material
d. An auditor’s responsibility to detect material misstatements only to the extent that
the letter is relied on.
2. The written representation shall be in the form of a representation letter addressed
to the
a. Entity’s management
b. Auditor
c. Entity’s chief executive officer
d. Entity’s chief financial officer
3. The primary reason an auditor requests that letters of inquiry be sent to a client’s
attorneys is to provide the auditor with
a. A description and evaluation of litigation, claims, and assessments that existed at
the balance sheet
date.
b. The attorneys opinions of the client’s historical experiences in recent similar
litigation
c. Corroboration of the information furnished by management about litigation, claims,
and assessments.
d. The probable outcome of asserted claims and pending or threatened litigation.
4. Which of the following conditions or events most likely would cause an auditor to
have substantial doubt
about an entity’s ability to continue as a going concern?
a. Cash flows from operating activities are negative.
b. Stock dividends replace annual cash dividends
c. Significant related party transactions are pervasive
d. Research and development projects are postponed.
5. Which of the following procedures should an auditor ordinarily perform regarding
subsequent events?
a. Review the cutoff bank statements for several months after the year-end
b. Compare the latest available interim financial statements with the financial
statements being audited
c. Send second requests to the client’s customers who failed to respond to initial
accounts receivable
confirmation requests.
e. Communicate material weaknesses in internal control to the client’s audit
committee.
6. The auditor is required to perform procedures designed to obtain sufficient
appropriate audit evidence to identify all events that may require adjustment of, or
disclosure in, the financial statements up to the
a. Date of the auditor’s report
b. Date of approval of the financial statements
c. Date of the financial statements are issued
d. Date of the financial statements
7. Which of the following audit procedures is most likely to assist an auditor in
identifying related party
transactions?
a. Inspecting communications with law firms for evidence of unreported contingent
liabilities.
b. Reviewing accounting records for nonrecurring transactions recognized near the
balance sheet date.
c. Retesting ineffective controls previously reported to the audit committee.
d. Sending second requests for unanswered positive confirmations of accounts
receivable
8. Which of the following procedures should be performed by the auditor to determine
the completeness of
information provided by those charged with governance and management identifying
the names of all
known related parties?
S1: Review prior year’s working papers for names of known related parties.
S2: Inquire as to the affiliation of those charged with governance and officers with
other entities.
S3: Review minutes of the meetings of shareholders and those charged with
governance
a. All statements are true
b. 2 statements are true
c. Only 1 statement is true
 ISSUING A REPORT
1. Which of the following parties is responsible for the fairness of representations
made in financial
statements?
a. Client's management
b. Independent auditor
c. Audit Committee
d. PICPA
2. Which of the following statement is a basic element of the auditor’s report?
a. The auditor is responsible for the preparation and fair presentation of the financial
statements
b. The financial statements are consistent with those of the prior period
c. An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements.
d. The disclosures provide reasonable assurance that the financial statements are free
of material misstatement.
3. If a company’s external auditor expresses an unmodified opinion as a result if 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. The auditor concludes that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework
4. Whenever there is a scope limitation, the appropriate response is to issue a/an
a. Qualified opinion
b. Adverse opinion
c. Disclaimer of opinion
d. Unmodified report, a qualification of scope and opinion or a disclaimer, depending
on materiality
5. When a qualified opinion is expressed, the implication is that the auditor
a. Does not believe the financial statements are presented in accordance with the
applicable financial
reporting framework
b. Does not know if the financial statements are presented in accordance with the
applicable financial
reporting framework.
c. Believes the financial statements are presented fairly.
d. Believes the financial statements are presented fairly “Except for” a specific item of
them
6. The audit report date on an unmodified report indicates
a. The last date on which users may institute a lawsuit against either the client or the
auditor.
b. The last day of the auditor’s responsibility for the review of significant events
occurring after the end of the reporting period.
c. The end of the reporting period
d. The date on which the financial statements were filed with the Securities and
Exchange Commission.
7. In which of the following circumstances would an auditor most likely add an
Emphasis of a Matter
paragraph to the auditor’s report while expressing an unmodified opinion?
a. There is a substantial doubt about the entity’s ability to continue as a going concern
b. Management’s estimates of the effects of future events are unreasonable
c. No depreciation has been provided in the financial statements
d. Certain transactions cannot be tested because of management’s records retention
policy
8. A paragraph included in the auditor’s report that refers to a matter appropriately
presented or disclosed
in the financial statements that, in the auditor’s judgement, is of such importance that
it is fundamental to
users’ understanding of the financial statements is called.
a. Explanatory Paragraph
b. Other Matter Paragraph
c. Basis for Modified Opinion Paragraph
d. Emphasis of Matter Paragraph