Module 1

Question 1

Which of the ff. is not a component of assurance engagement risk?
*Detection risk
*Control risk
*Business risk
*Inherent risk

Answer 1

Business risk

This is not a component of assurance engagement risk or audit risk, but it is a type of risk a company is exposed to.

Question 2

The risk that the financial statements are likely to be misstated materially, without regard to the effectiveness of internal control
*Detection risk
*Control risk
*Inherent risk
*Audit risk

Answer 2

Inherent risk

Question 3

Which of the following best describes “high level of assurance”?
*It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of any required modifications to be made in the financial statements in order for them to conform of prescribed criteria
* It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria
* It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be satisfied that the subject matter is plausible in the circumstances
* It refers to the professional accountant having obtained evidence based on procedures agreed upon between the practitioner and the intended users to be satisfied that findings be reported to the intended users

Answer 3

It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria

Question 4

The purpose of analytical procedures during the audit planning stage is to:
*Determine whether sales transactions are approved.
*Identify unusual circumstances that the auditor may need to investigate further
*Flag individual transactions for further review
*Aid in planning the observation of physical inventory

Answer 4

Identify unusual circumstances that the auditor may need to investigate further

Question 5

Preliminary judgement about materiality and the amount of audit evidence accumulated are
*Not related
*Inversely related
*Directly related
*Indirectly related

Answer 5

Inversely related

Question 6

Which of the required materiality levels is calculated by multiplying a certain percentage by the appropriate benchmark which is either a component of the entity’s financial statements?
*Specific materiality
*Performance materiality
*Overall materiality
*Planning materiality

Answer 6

Overall materiality

Question 7

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:
*Compliance tests
*Risk assessment activities
*Risk assessment procedures
*Substantive tests

Answer 7

Risk assessment procedures

The purpose of these procedures in the planning phase is to enable the auditor to assess the risks of material misstatement and plan the appropriate audit procedures

Question 8

Which of the ff. is not one of the pre-engagement activities?
*Obtain an engagement letter
*Investigate new clients and existing clients
*Assign partner, manager and staff to the engagement
*Obtain knowledge of the client’s business

Answer 8

Obtain knowledge of the client’s business

This is under after acceptance of the engagement and planning

Question 9

Which of the following is not a reason an auditor obtains understanding of the elements of an entity’s internal control structure in planning an audit?
*In considering the design of substantive tests
*Identify the types of potential misstatements that can occur
*Consider the operating effectiveness of the internal control structure
*Consider factors that affect the risk of material misstatements

Answer 9

Consider the operating effectiveness of the internal control structure

In the planning phase, the auditor obtains preliminary assessment of control risk, but not yet evaluation of the effectiveness. The auditor conduct of tests of
control under risk response phase to evaluate the effectiveness of controls.

Question 10

The concept of materiality as it applies to a financial statement audit:
*Generally involves less professional judgment for public companies
*Is determined, in part, based on how financial statement users may be influenced in making decisions
*Relates primarily to the audit fees involved
*Relates primarily to the quantity of audit procedures performed

Answer 10

Is determined, in part, based on how financial statement users may be influenced in making decisions

Question 11

The main purpose of risk assessment procedure is to:
*All of the above
*Detect material misstatements at the assertion level
*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 level.
*Test the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level

Answer 11

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 level.

Question 12

The risk that the auditor may express an inappropriate opinion on the financial statement is
*Control risk
*Detection risk
*Inherent risk
*Audit risk

Answer 12

Audit risk

Question 13

Inherent risk and control risk are:
*Inversely related to each other
*Directly related to detection risk
*Inversely related to audit risk
*Inversely related to detection risk

Answer 13

Inversely related to detection risk

Question 14

Which of the following audit phases would generally be conducted before all of the others listed below?
*Consideration of internal control systems
*Evaluation of audit evidence
*Gaining an understanding of the client’s industry
*Auditing business processes and related accounts

Answer 14

Gaining an understanding of the client’s industry

Question 15

Audit programs are modified to suit the circumstances of the particular engagement. A complete audit program is usually developed:
*After obtaining an understanding of the control environment, control activities component of the entity’s internal control
*After obtaining an understanding of the entity and its environment, including its internal control and assessed the risks of material misstatement
*When the engagement letter is prepared
*Prior to beginning the actual audit work

Answer 15

After obtaining an understanding of the entity and its environment, including its internal control and assessed the risks of material misstatement

Question 16

The existence of audit risk is recognized by the statement in the auditor’s report that the
*Auditor is responsible for expressing an opinion on the financial statements, which are management’s responsibility
*Financial statements are presented fairly, in all material respects, in accordance with Philippine Financial reporting standards
*Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement
*Audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements

Answer 16

Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement

The term “reasonable assurance” means that assurance is not absolute. The auditor does not guarantee/assure that the statements are 100% free of material misstatements.

Question 17

The auditor gathers information about a new client’s business and industry in order to obtain:
*Information about engagement risk
*An understanding of how economic events and transactions affect the company’s financial statements
*Information regarding whether the client is engaging in financial statement fraud
*An understanding of the client’s internal control system for financial reporting

Answer 17

An understanding of how economic events and transactions affect the company’s financial statements

Question 18

Risk assessment procedures include the following except:
*Inquiry
*Inspection and observation
*Analytical procedures
*Reperformance

Answer 18

Reperformance

Question 19

Which of the following statements concerning materiality is incorrect?
*When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole
*The auditor shall also determine materiality levels to those particular classes of transactions, account balances or disclosures.
*Determining materiality levels does not involve the use of professional judgement
*The materiality level for the financial statements as a whole determined in the planning stage of the audit may be affected by changes in the circumstances of the engagement

Answer 19

Determining materiality levels does not involve the use of professional judgement

Question 20

Which of the following topics is not normally included in an engagement letter?
*A description for the responsibility for the detection of fraud
*The auditors’ estimate of the fee for the engagement
*Limitations on the scope of the audit
*The auditor’s preliminary assessment of internal control

Answer 20

The auditor’s preliminary assessment of internal control

Question 21

An auditor assesses control risk because it
*Is relevant to the auditor’s understanding of the control environment
*Indicates to the auditor where inherent risk may be the greatest
*Affects the level of detection risk that the auditor may accept
* Provides assurance that the auditor’s materiality levels are appropriate

Answer 21

Affects the level of detection risk that the auditor may accept

The higher the control risk (and inherent risk), the lower is the level of detection risk that the auditor must achieve in order to keep audit
risk at an acceptable level.

Question 22

Which of the ff. procedures would a CPA ordinarily perform during audit planning?
*Perform audit sampling
*Review the client’s bank reconciliation
*Obtain understanding of the client’s business and industry
*Obtain client’s representation letter

Answer 22

Obtain understanding of the client’s business and industry

After obtaining understanding of the client’s business and industry, the auditor may nd the need to make adjustments to the audit plan before implementing the audit plan

Question 23

The primary concern when a successor auditor is required to communicate with the predecessor auditor is:
*To save the successor auditor time and money in gathering data
*Information will help the successor auditor determine whether there are issues about management integrity
*To learn about a client by examining predecessor’s working papers
*To enable the auditor to perform a more e

Answer 23

Information will help the successor auditor determine whether there are issues about management integrity

Question 24

Which of the following is not a reason for using analytical review procedures in the planning phase?
*To identify areas with higher risks and determine the magnitude of errors in the financial statements
*To assess the entity’s ability to continue as a going concern
*To highlight changes from the prior year to the current year so that trends can be identified which will influence the development of the audit program
*To identify areas with no unusual fluctuations so that fewer detailed tests may be performed on those accounts

Answer 24

To assess the entity’s ability to continue as a going concern

See PSA 315 A7-A8.

Question 25

Before accepting an engagement to audit a new client, an auditor is required to:
*Discuss the management representation letter with the client’s audit committee
*Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan
*Make inquiries of the predecessor auditor after obtaining consent of the prospective client
*Obtain a copy of the client’s financial statements

Answer 25

Make inquiries of the predecessor auditor after obtaining consent of the prospective client

This is primarily to obtain information that might have a bearing towards the integrity of client’s management

Question 26

Which of the ff. would the firm least consider in making a decision to accept or retain a client?
*The integrity of client’s management
*Its decision on whether to provide assurance services or non-assurance services
*Its competence in providing the service
*Its ability to comply with ethical requirements

Answer 26

Its decision on whether to provide assurance services or non-assurance services

Question 27

The auditor is required to determine different levels of materiality: a) materiality for the financial statements as a whole, b) specific materiality and:
*Performance materiality
*Planning materiality
*Overall materiality
*Materiality for particular classes of transactions, account balances or disclosure

Answer 27

Performance materiality

Question 28

The risk of material misstatement refers to:
*Inherent risk
*Combination of inherent risk and control risk
*Control risk and detection risk
*Control risk and acceptable audit risk

Answer 28

Combination of inherent risk and control risk

Question 29

Which of the ff. is not normally one of the preliminary engagement activities?
*Inquiring from predecessor auditor
*Preparing an engagement letter
*Deciding whether to accept or reject an audit engagement
*Making a preliminary estimate of materiality

Answer 29

Making a preliminary estimate of materiality

Question 30

Audit programs should be designed so that
*Most of the required procedures can be performed as interim work.
*The audit evidence gathered supports the auditor’s conclusions
*The auditor can make constructive suggestions to management.
*Inherent risk is assessed at a su ciently low level.

Answer 30

The audit evidence gathered supports the auditor’s conclusions