CHAPTER 1:

REVIEW QUESTIONS-THEORETICAL

Audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between these assertions and established criteria and
communicating the results thereof. (AAA)
Audit Process is the sequence of different activities involved in an audit.
- Pre-engagement require decision from the auditor whether or not to accept a new client or continue relationship
with an existing one. It requires evaluation of the auditor’s qualification, but also the integrity of management and
auditability of the client’s financial statements.
Primary objective: To minimize the likelihood of being associated to a client whose management lacks integrity.

- Audit planning involves the development of an overall audit strategy, audit plan and audit program. The auditor
will usually obtain more detailed knowledge about the client’s business and industry.
Primary Objective: To assess the different risks associated with the auditor to determine the nature, timing and
extent of further audit procedures.

- Consideration of internal controls involves the study and evaluation of internal controls whether it can prevent,
detect or correct material misstatements in a timely manner.
Primary objective: To establish a basis for reliance on internal controls in determining the nature, timing and
extent of audit procedures to be performed.

- Evidence- Gathering (Substantive testing) Using the information obtained in audit planning and consideration
of internal controls, the auditor performs substantive test to detect material misstatements as a basis in
concluding whether the entity's financial statements are presented fairly in accordance with financial reporting
standards. Substantive procedures could either be analytical procedures or test of details of transactions and
balances. This phase will always be performed by the auditor.
Primary objective: To ascertain the degree of correspondence between the financial statements prepared by
client's management and the financial reporting framework.

- Completing the audit Wrap-up procedures are performed; conclusions reached are reviewed; and an overall
opinion is formed during this phase.
Primary objective: To assist the auditor in assessing whether the conclusion reached is consistent with evidence
gathered.

- Issuance of the audit report In this phase, the auditor drafts and issues the audit report which states the
auditor's opinion regarding the fairness of the financial statements.
Primary objective: To communicate the results of the work of the auditor to various intended users

- Post-audit responsibilities After completion of the audit engagement, the auditor performs procedures to
determine compliance with quality controls and to identify areas for improvement in the current and future audit
engagements.
Primary objective: To assess and evaluate the quality or the audit services delivered by the engagement team.

PRE-ENGAGEMENT
Acceptance of an engagement
In making a decision whether to accept or reject an engagement, the auditor should perform the following:
1. Evaluate preconditions for an audit
Preconditions of an audit is the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where appropriate, those charged
with governance to the premise on which an audit is conducted
2. Evaluate auditability of the prospective client.
3. Investigate the integrity of the client's management through inquiry to appropriate parties or communication with the
predecessor auditor.

Matters to be discussed with predecessor auditor include the following: (RID)

a. The predecessor's understanding as to the Reasons for change in auditors;
b. Information that might bear on the Integrity of the management; and

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 c. Disagreements between the predecessor auditor and management as to accounting principles, auditing
procedures, etc.
d.
Note: Every time communication is made to parties other than the client, the auditor shall seek permission from the client
and document the items discussed.
4. Evaluate compliance with ethical requirements, including independence. Relevant part of the Code of Ethics includes
Part 1, Part 3 and Part 4A.
5. Evaluate of the firm's ability to serve the prospective client.
6. Obtain a preliminary knowledge of the client's business and industry to determine whether the auditor has the degree of
competence required by the engagement.
7. Agree on the terms of the engagement and prepare an engagement letter.

Continuance of an Engagement
To ensure the audit firm's continuing compliance with the continuance procedures, the auditor needs to consider
significant matters that have arisen during the current or previous engagements, and their implications for continuing the
relationship.

Agreeing the Terms of Audit Engagements

The auditor and the client shall agree on the terms of engagement. The agreed terms would need to be recorded in an
audit engagement letter or other suitable form of contract.

It is in the interest of both client and the auditor that the auditor sends an engagement letter, preferably before the
commencement of the engagement to help avoid misunderstandings with respect to the engagement. The engagement
letter documents and confirms:
a. Auditor's acceptance of the engagement
b. Objective and scope of the audit
c. Extent of auditor's responsibilities to the client
d. Form of any reports

Contents of engagement letter

The form and content of audit engagement letters may vary for each client, but they would generally include reference to:
a. The presence of audit risk
b. Unrestricted access to whatever records
c. The financial reporting framework used
d. Objective of the audit
e. The form of any reports or other communication
f. Management's responsibility
g. The scope of the audit

The auditor may also wish to include in the letter:

a. Basis in which fees are computed and any billing arrangements
b. Expectation of receiving representation letter
C. Acknowledgment of management of terms of agreement
d. Arrangements regarding the planning of the audit
e. Description of any other letters or reports

When relevant, the following points could also be made:

- Arrangements concerning the involvement of other auditors and experts in some aspects of the audit;
- Arrangements concerning the involvement of internal auditors and other staff;
-Arrangements to be made with the predecessor auditor, if any, in the case of initial audit engagement;
-Any restriction of the auditor's liability when such possibility exists
-A reference to any further agreements between the auditor and the client.

Audit of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (component), the factors that
influence the decision whether to send a separate engagement letter to the component include the following:
-Who appoints the component auditor;

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 -Legal requirements in relation to audit appointments;
-Degree of ownership by parent;
-Whether a separate auditor's report is to be issued on the component; and
-Degree of independence of the component's management from the parent entity

Recurring Audits
On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be
revised and whether there is a need to remind the client of the existing terms of the engagement. The auditor may decide
not to send a new engagement letter each period.

However, the following factors may make it appropriate to send a new letter:
-Any indication that the client misunderstands the objective and scope of the audit.
-Any revised or special terms of the engagement.
-A recent change of top level management or board of directors.
-A significant change in ownership.
-A significant change in nature or size of the client's business.
-A change in legal or regulatory requirements.
-A change in financial reporting framework adopted in the preparation of the financial statements.
-A change in other reporting requirements.

Acceptance of a Change in Engagement

Is there a reasonable justification?
Yes
a. Stop performing the old engagement
b. Stop referring to the old engagement, except when the new engagement involves agreed-upon procedures
c. Start performing the new engagement
d. Issue a report based on the new engagement

No
a. Continue the original audit engagement
b. When prohibited to continue, withdraw from the audit engagement
Note: Every time withdrawal is made, the auditor should consider the necessity of communicating the reasons to
appropriate level of management.

Circumstances that could lead to Change in Engagement

Circumstances Justifiable?
1. Change in circumstances affecting the need for the service /
2. A misunderstanding as to the nature of the engagement originally requested /
3. A restriction on the scope of the engagement (whether imposed by management x
or caused by circumstances)
4. Change related to information that is incorrect, incomplete or otherwise unsatisfactory x
5. The auditor is unable to obtain sufficient appropriate audit evidence regarding assertions x

REVIEW QUESTIONS-THEORETICAL

1. Which of the following is an incorrect phrase

a. Auditing is a systematic process regarding auditing?
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.

2. Set the following phases in proper order:

I. Pre-Engagement V. Planning
II. Internal Controls VI. Post-Audit Responsibilities
III. Evidence-Gathering VII Reporting
IV. Completing the Audit
a. I, II, III, IV, V, VI, VI c. IV. II, III, IV, VII, VI
b. 1. IV, III, II, VII, V, VI d. I. IV. II, III, V, VI, VI

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3. Which of the following procedures is not required to be performed by the auditor?
a. Risk assessment procedures
b. Substantive procedures
c. Tests of control
d. Analytical procedures

4. Which of the following procedures should be performed by the auditor prior to starting an initial audit? I. Perform
procedures regarding the acceptance of the client relationship and the specific audit engagement.
II. Communicate with the previous auditor, where there has been a change of auditors, in compliance with relevant ethical
requirements.
a. I only c. Both I and II
b. II only d. Neither I nor

5. Confirmation of receivable or bank balance is performed during what phase?

a. Studying and evaluating internal controls phase
b. Substantive testing phase
c. Pre-engagement phase
d. Completing the audit phase

6. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client?
a. The client's financial ability.
b. The client's relations with its previous CPA firm.
c. The client's standing in the business community.
d. The client's probability of achieving an unqualified opinion.
7. Management's integrity affects all of the following risks except:
a. Business risk
b. Audit risk
c. Financial reporting risk
d. All of these risks are affected
8. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor
auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination of the engagement with an understanding that all information disclosed
will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures
to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between an auditor and the client.
d. Advise the client of the intention to contact the predecessor auditor and request a permission for the
contact.

9. When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of
the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with
information that will assist the successor in determining whether
a. The company rotates auditors
b. The engagement should be accepted
c. The predecessor's work should be used
d. In the predecessor's opinion, control risk is less than high

10. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding:
a. The predecessor's evaluation of matters of continuing accounting significance
b. Disagreement which the predecessor had with the client concerning auditing procedures and
accounting principles
c. The degree of cooperation the predecessor received concerning the inquiry of the client's legal counsel
d. The predecessor's assessment of inherent risk and judgments about materiality

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11. If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the
successor should:
a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management
b. Accept the engagement but only after an equitable increase in the professional fee
c. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement
d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant
scope limitation

12. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor
auditor should:
a. Keep silent of the denial
b. Disclose the fact that the permission to disclosure is denied by the client
c. Disclose adequately to proposed auditor all noncompliance made by the client
d. Seek legal advice before responding to the proposed auditor

13. Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit
techniques.
b. Management's disregard of its responsibility to maintain an adequate internal control environment.
c. The CPA's inability to determine whether related-party transactions were consummated on terms equivalent to
arm's-length transactions.
d. Management's refusal to permit the CPA to perform substantive tests before the year-end.

14. In deciding whether to accept a new audit client, an auditor considers:

I. Part 1 of the Code of Ethics III. Part 3 of the Code of Ethics
II. Part 2 of the Code of Ethics IV. Part 4 of the Code of Ethics

a. 1& IV only c. II and III only

b. I and III only d. I, III, and I

15. Ultimately, the decision about whether or not an auditor is independent must be made by
a. Auditor
b. Client's management
c. Public
d. Audit committee

16. With regard to independence, which of the following statements is correct?

a. Audit engagements provide assurance to a wide range of potential users; consequently, both
independence in mind and independence in appearance are of particular importance.
b. Only the engagement partner is required by the Code of Ethics to be independent from their assurance clients.
c. In case of audits of financial statements, the Code of Ethics requires member of the assurance team, the firm
but not network firms to be independent of the client.
d. In case of audits of financial statements, the Code of Ethics requires the auditor to be independent from their
assurance team from the start of performing procedures required by the engagement up to the issuance of the
report.

17. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's
financial statements?
a. The operating effectiveness of control procedures
b. The existence of related-party transactions
c. The complexity of the accounting system
d. The adequacy of the accounting records

18. 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 would include the following, except:
a. Reporting the information and its implications to the person/s who appointed
b. Withdraw from the client relationship
c. Withdraw from the engagement

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 d. Issue a disclaimer of opinion
19. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would
need to be recorded in a(n)
a. Memo placed in the permanent section of the working papers
b. Client representation letter
c. Engagement letter
d. Comfort letter

20. Which of the following statements is/are correct?

Statement 1: The auditor and the client should agree on the terms of the engagement. Such an agreement may be in the
form of audit engagement letter or other suitable form of contract
Statement 2: Even in those countries where the scope of the audit is established by law, an engagement letter may be
informative for the client.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect

21. Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally be sent
to the client.
a. Before the commencement of the engagement
b. Before the auditor report is issued
c. After the audit report is issued
d. At the end of the fieldwork

22. An engagement letter is best described as

a. A letter from the company to the auditors specifying management's expectations for completion of the audit on
a timely basis and the fees.
b. A letter from the auditors to company management specifying that management is responsible for the financial
statements, and the auditors will issue an opinion on the financial statements.
c. A letter from the auditors to company management that specifies the responsibilities of both the
company and the auditors in completing the audit and the timing for its completion.
d. A letter from the Board of Directors' audit committee to the auditor that indicates the auditor has been engaged
to perform the audit and the fees to be paid.

23. An engagement letter is prepared with the interest(s) of

a. The auditor only
b. The public
c. The client only
d. Both the client and the auditor

24. Engagement letters are widely used in practice for:

a. Professional engagements of all types
b. Assurance engagements only
c. Related services only
d. Audits only

25. Which of the following matters is generally included in an auditor's engagement letter?
a. The factors to be considered in setting preliminary judgments about materiality
b. Management's vicarious liability for illegal acts committed by its employees
c. Management's responsibility for the entity's compliance with laws and regulations
d. The auditor's responsibility to search for significant internal control deficiencies

26. Arrangements concerning with which of the following are least likely to be included in the engagement letter?
a. Fees and billing
b. A predecessor auditor
c. CPA investment in client securities

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 d. Other services to be provided in addition to the audit

27. An audit engagement letter least likely include:

a. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material
misstatements may remain undiscovered
b. Description of any letters or reports that the auditor expects to submit to the client
c. Identification of specific audit procedures that the auditor needs to undertake
d. Basis on which fees are computed and any billing arrangements

28. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or division (component),
which of need not be considered in deciding whether to send a separate letter to the component?
a. Who appoints the auditor of the component.
b. Legal requirements
c. Number of reports to be prepared during the peak audit season
d. Whether a separate audit report is to be issued on the component

29. Which of the following statements is/are correct?

Statement 1: On recurring audits, the auditor should consider whether circumstances require the terms of the
engagement to be revised and whether there is a need to remind the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established client.
a. Only statement 1 is correct
b. Both statements are correct
c. Only statement 2 is correct
d. Both statements are incorrect

30. On recurring audit engagements, the auditor may decide not to send a new engagement letter each
period. In which of the following situations will there be no need to send a new letter?
a. Revisions or special terms of the engagement
b. Significant change in nature or size of client's business
c. Indications of misunderstanding of the objective and scope of the audit
d. Recent change of middle management and rank and file organizational structure

31. If the auditor concludes that there is reasonable justification for the change in engagement, the report to be issued
would
a. Include reference to the original engagement
b. Be appropriate for the revised terms of the engagement
c. Include reference to any procedures that may have been performed in the original form
d. Not include reference to any procedures that may have been performed, particularly when the new
engagement is to undertake agreed-upon procedures

32. Which of the following statements is/are correct?

Statement 1: Where the terms of the engagement are changed, the auditor and the client should agree on the new terms.
Statement 2: The auditor should not agree to a change of engagement when there is no reasonable justification for doing
so.
Statement 3: If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original
engagement, the auditor should withdraw and consider whether there is any obligation, either contractual or otherwise, to
report to other parties, such as the board of directors or shareholders, the circumstances necessitating the withdrawal.
a. Only one statement is correct c. All statements are correct
b. Only two statements are correct d. All statements are incorrect

33. If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:
a. Withdraw from the engagement.
b. Qualify the report on the original engagement
c. Continue with the revised engagement, but make explicit about the original engagement reference
d. Refuse to agree to management's request on the change of engagement and continue with the original
engagement.

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34. One of the first things that the auditor will do after accepting a new client is:
a. Contact the client's attorney to discover legal obligations
b. Communicate with the predecessor auditor.
c. Study the client's internal control structure.
d. Tour the client's facilities.

35. If a company's external auditor expresses an unqualified opinion as a result of the audit of the company's financial
statements, readers of the audit report can assume that
a. The company is financially sound and the financial statements are accurate
b. The external auditor found no fraud
c. Internal control is effective
d All material disagreements between the company and the auditor about the application of accounting
principles were resolved in the satisfaction of the external auditor.\

CHAPTER 2 : AUDIT PLANNING INTRODUCTION AND RISK ASSESSMENT PROCEDURES

PLANNING AN AUDIT OF FINANCIAL STATEMENTS

The primary objective of the auditor is to plan the audit so that the audit will be performed in an effective manner.
However, adequate planning also leads to an efficient and timely audit engagement.

The Role and Timing of Planning

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.
Adequate planning benefits the audit of financial statements in several ways, including the following:
- Appropriate attention is devoted to important areas
- Potential problems are identified and resolved on a timely basis
- Proper organization and management of the audit engagement leading to an effective and efficient performance
- Work are properly assigned to appropriate engagement team members
- Assistance in coordinating work done by other auditors and experts
- Assistance in facilitating direction, supervision and review

The nature and extent of planning activities will vary according to the: (SECTA)
- Size and complexity of the entity
- Previous Experience with the entity of key engagement team members (partner, manager, and staff-in-charge)
- Changes in circumstances that occur during the audit engagement
- Timing of the Appointment of the independent auditor

Planning as a phase of the audit process

Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or
in connection with) the completion of the previous audit and continues until the completion of the current audit
engagement.

Major Audit Planning Activities

Planning is required regardless whether it is a new engagement or recurring engagement. Planning activities may differ
from one client to another client but normally includes the following:
1. Obtaining an understanding of the client and its environment
2 Determining the need for experts
3. Determining the appropriateness of management use of going concern assumption
4. Establishing materiality and assessing risks
5. Assessing the possibility of non-compliance
6 Identifying related parties
7. Performing preliminary analytical procedures
8 Development of the overall audit strategy and detailed audit plan
9. Preparation of preliminary audit programs.

THE OVERALL AUDIT STRATEGY AND AUDIT PLAN

Overall Audit Strategy

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The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides
the development of the audit plan.

In establishing the overall audit strategy, the auditor shall:

- ldentify the characteristics of the engagement that define its scope;
- Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the
communications required;
- Consider the factors that, in the auditor's professional judgment, are significant in directing the engagement
team's efforts
- Consider the results of preliminary engagement activities and, where practicable, whether knowledge gained on
other engagements performed by the engagement partner for the entity is relevant
- Ascertain the nature, timing and extent of resources necessary to perform the engagement

Audit Plan
After the overall audit strategy has been established, an audit plan can be developed to address the various matters
identified in the overall audit strategy taking into account the need to achieve the audit objectives trough the efficient use
of the auditor's resources.

The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing and extent of audit
procedures to be performed by engagement team members. These procedures may be documented in an audit program

The audit program shall serve as a:

- Set of instructions to assistants involved in the audit; and
- Means to control and record the proper execution of the work.

The audit program also contains:

- The audit objectives for each area; and
- A time budget in which hours are budgeted for the various audit areas or procedures

Changes to Planning Decisions During the Course of the Audit

The overall audit plan and the audit program should be revised as necessary during the course of the audit. Planning is
continuous throughout the engagement because of changes in conditions or unexpected results of audit procedures.

Completion of Overall Strategy and Audit Plan

The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential
processes, but are closely inter- related since changes in one may result in consequential changes to the other. Also,
preferably, a plan shall be initially completed prior to consideration of internal controls or performance of specific
procedures.

Planning documentation
The auditor shall document:
- the overall audit strategy
- the audit plan
- any significant changes made during the audit engagement to the overall strategy or audit plan, and the reasons for such
changes

Additional Considerations in Initial Audit Engagements

After performing preliminary engagement activities, for an initial audit, the auditor may need to expand the planning
activities because he/she does not ordinarily have the previous experience with the entity that is considered when
planning recurring engagements. For initial audits, additional matters the auditor may consider in developing the overall
audit strategy and audit plan include the following:
- Arrangements to be made with the predecessor auditor to review prior years' working papers;
- Any major issues discussed with management in connection with the initial selection as auditors, the
communication of these matters to those charged with governance and how these matters affect the overall audit
strategy and audit plan;
- The planned audit procedures to obtain sufficient appropriate audit evidence regarding opening balances; and
- Other procedures required by the firm's system of quality control for initial audit engagements.

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DIRECTION, SUPERVISION AND REVIEW
The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and
review of their work.

The nature, timing and extent of the direction and supervision or engagement team members and review of their work
vary depending on many factors, including the
- assessed risks of material misstatement;
- size and complexity of the entity;
- the area of audit; and
- capabilities and competence of personnel performing the audit work.

Considerations Specific to Smaller Entities

When an audit is carried out entirely by an audit engagement partner, who may be a sole practitioner, it may be desirable
to consult with other suitably-experienced auditors or the auditor's professional body.

Identifying And Assessing The Risks Of Material Misstatement Through Understanding The Entity And Its
Environment

It is the objective of the auditor to identify and assess risks of material misstatements, whether due to fraud or error, at the
financial statement and assertion levels, through understanding the entity and its environment, including the entity's
internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material
misstatements.

The Required Understanding of the Entity and its Environment

The auditor shall obtain an understanding of the following:
a. Relevant industry, regulatory, and other external factors including the applicable financial reporting framework;
b. The nature of the entity, including its operations; ownership and governance structure; types of investments that the
entity is making and plans to make; and the way the entity is structured and how it is financed;
C. Entity's selection and application of accounting policies, including reasons for changes thereto;
d. Entity's objectives and strategies and those related business risks that may result in risk of material misstatement;

e. The measurement and review of the entity's financial performance; and

f. Internal control (this is covered in the next chapter)

RISK ASSESSMENT PROCEDURES

Risk assessment procedures are audit procedures performed to obtain an understanding of the entity and its environment,
including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels.

Risk Assessment Procedures and Related Activities

The auditor shall:
a. Identify risks throughout the process of obtaining an understanding of the entity and its environment, including relevant
controls that relate to the risks, and consider the classes of transactions, account balances, and disclosures in the
financial statements;
b. Relate the identified risks to what can go wrong at the assertion level;
c. Consider whether the risks are of a magnitude that could result in a material misstatement of the financial statements;
and
d. Consider the likelihood that the risks could result in a material misstatement of the financial statements.

The risk assessment procedures shall include the following:

a. Inquiries of management, and of others within the entity who in the auditor's judgment may have information that is
likely to assist in identifying risks of material misstatement due to fraud or error;
b. Analytical procedures; and
c. Observation and inspection.

Note: Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which
to base the audit opinion.

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Analytical Procedures during Planning Stage
Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among
both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and
relationships that are consistent with other relevant information or that differ from expected values by a significant amount.

Analytical procedure is required to be performed during planning stage and overall review stage of the audit. Analytical
procedures performed during audit planning is designed to:

1. Enhance the auditor's understanding of the entity's business and transactions to help plan the nature, timing, and
extent of substantive auditing procedures that will be used to gather audit evidence.
2. Identify areas that may represent specific risks (such as unusual transactions and events or abnormal/significant
fluctuations in amounts, ratios, or trends) that the auditor may need to investigate further

AUDIT RISK AND MATERIALITY

Materiality and audit risk affect the application of PSA, and are reflected in the auditor's report. The auditor must make
judgments about materiality and audit risk in determining the nature, timing and extent of procedures to apply and in
evaluating the results.

Materiality
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis
of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement.

The concept of materiality recognizes that some matters, but not all, are important for fair presentation of the financial
statements in conformity with PFRS.

In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material.
These judgments provide a basis for:
a. Determining the nature, timing and extent of risk assessment procedures;
b. Identifying and assessing the risks of material misstatement; and
C. Determining the nature, timing and extent of further audit procedures

Using professional judgment, the auditor shall determine the following materiality:
1. Financial statement level materiality the smallest aggregate amount of misstatement applicable to all financial
statements.
2. Assertion level materiality materiality level for individual or particular class of transactions, account balance, or
disclosure where appropriate; this is also known as tolerable misstatement
3. Performance materiality amount or amounts set by the auditor at less than materiality for the financial statements as a
whole, and if applicable, at less than materiality level or levels for particular classes of transactions, account balances or
disclosures

Audit Risk
Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially
misstated.

CHAPTER 2: REVIEW QUESTIONS-THEORETICAL

1. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an effective manner.
b. Planning an audit involves establishing the overall audit strategy for the engagement and developing the audit
plan, in order to reduce audit risk to an acceptably low level.
c. Planning involves the engagement partner and other key members of the engagement team to benefit from
their experience and insight and to enhance the effectiveness and efficiency of the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues until the
finalization of the audit program.

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2. Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed in an effective manner.
Statement 2: The auditor should develop and document an overall audit plan describing the scope and conduct of the
audit.
a. Only statement 1 is correct c. Only statement 2 is correct
b. Both statements are correct d. Both statements are incorrect

3. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
a. Ensuring that appropriate attention is devoted to important areas the audit.
b. Identifying the areas that need a service of an expert
c. Gathering of all corroborating audit evidence.
d. The audit work is completed efficiently.

4. The auditor should plan the audit work so that the audit will be performed in an effective manner. The extent of planning
will vary according to any of the following except:
a Auditor's experience with the entity and knowledge of the business.
b. The nature and complexity of the audit engagement
c. The assessed level of control risk
d. Size of the audit client.

5. The auditors plan should

A B C D
Succeed action Yes Yes No No
Be flexible Yes Yes Yes Yes
Be cost-beneficial Yes No Yes Yes

6. Which of the following statements is/are correct?

Statement 1: Obtaining knowledge of the entity business is an important part of the planning the audit work.
Statement 2: The auditor's knowledge of the entity's business assists in the identification of events, transactions and
practices which may have a material effect on the financial statements.
a. Only statement 1 is correct
b. Both statements are correct.
c. Only statement 2 is correct
d. Both statements are incorrect

7. Which of the following statements is/are correct?

Statement 1: According to PSA 300, the auditor may discuss elements of planning with those charged with governance
and the entity's management.
Statement 2: The audit plan sets the scope, timing and direction of the audit guides the development of the more detailed
overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and includes the nature, timing and extent of
audit procedures to be performed engagement team members to obtain sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.
a. Only 1 statement is correct
b. All statements are correct
c. Only 2 statements are correct
d. All statements are incorrect

8. Which of the following helps prevent misunderstandings during audit planning?

a. Auditor involvement in the preparation of the client's financial records.
b. Client involvement in determining specific audit planning issues.
c. A preliminary meeting conference with the client to discuss fees, timing, client assistance and related issues.
d. Involvement of the client's internal auditors in setting materiality levels and determining the scope of audit tests.

9. Which of the following statements is/are correct?

Statement 1: The overall audit plan and the audit program should not be revised during the course of the audit.

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Statement 2: The auditor should develop and document an audit program setting out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan.
a. Only statement 1 is correct
b. Both statements are correct
c. Only statement 2 is correct
d. Both statements are incorrect

10. In planning the audit engagement, the auditor should consider each of the following except
a. The kind of opinion (unqualified, qualified, or adverse) that is likely to be expressed.
b. Matters relating to the entity's business and the industry in which operates
c. The entity's accounting policies and procedures.
d. Materiality level and audit risk.

11. Which of the following matters should be considered by the auditor in developing the overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting requirements
including changes since the date of the prior audit
b. All of the choices
c. Conditions requiring special attention, such as the existence of the related parties
d. The setting of materiality level for audit purposes

12. In developing the overall audit strategy, the focus of the engagement team's efforts is considered. Which of the
following is not appropriately classified as a factor affecting the focus of the team's efforts?
a. The financial reporting framework on which the financial information to be audited has been prepared,
including any need for reconciliation to another reporting framework.
b. Setting materiality for planning purposes.
c. Audit areas where there is a higher risk of material misstatement.
d. Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal
control.

13. Which of the following is least likely considered by the CPA when he makes an overall audit plan?
a. The nature and timing of reports and other communication with the entity that are expected under the
engagement
b. Identification of complex accounting areas including those involving accounting estimates
c. The effect of information technology on the audit
d. The content of the representation letters.

14. With respect to planning an audit, which of the following statements is always true?
a. An inventory count must be observed at year-end.
b. An engagement should not be accepted after the client's year-end.
c. Final staffing decisions must be made prior to completion of the planning stage.
d. It is acceptable to perform a portion of the audit of a continuing client at interim dates.

15. Which of the following procedures would an auditor most likely perform in planning an audit of financial statements?
a. Inquiring of the client's legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

16. This serves as the set of instructions to assistants involved in the audit and as a means to control and record the
proper execution of the work of the personnel involved in the service.
a. Audit procedures
b. Audit program
c. Audit plan
d. Audit risk model

17. The auditor should design the written audit program, so that:

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 a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

18. In designing audit programs, an auditor should establish specific audit objectives that related primarily to the.
a. Selected audit techniques
b. Financial statement assertions
c. Timing of audit procedures.
d. Cost-benefit gathering evidence

19. The auditor should document the overall audit strategy and the audit plan, including significant changes made during
the audit engagement. Which of the following statements on documentation is incorrect?
a. Documentation of the overall audit strategy may be made in the form of a memorandum that contains key
decisions regarding the overall scope, timing and conduct of the audit.
b. The auditor may use standard audit programs or audit completion checklists, but such programs and checklists
need to be tailored to the particular client.
c. The auditor's documentation of any significant changes to the originally planned overall audit strategy
and to the detailed audit plan need not include the reasons for the significant changes.
d. The form and extent of documentation depend on such matters as the size and complexity of the entity,
materiality, the extent of other documentation, and the circumstances of the specific engagement.

20. Audit procedures may be classified as risk assessment procedures and further audit procedures. Which of the
following best describes risk assessment procedures?
a. These procedures are used detect material misstatements at the assertion level.
b. These procedures include tests of details of classes of transactions, account balances, and disclosures and
analytical procedures.
c. These procedures test the operating effectiveness of controls in preventing detecting and correcting, material
misstatements at the assertion level.
d. These are procedures for obtaining an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial statement and assertion
levels.

21. The audit program should contain the following, except:

a. Audit objective
b. Set of planned audit procedures
c. Time budget for the various audit areas
d. The combined assessed level of inherent and control risk

22. Which of the following procedures is not performed as a part of planning an audit engagement?
a. Reviewing working papers of the prior year. c. Designing an audit program
b. Performing analytical procedures d. Test of controls

23. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit procedures is
usually the least costly to perform?
a. Tests of balances
b. Analytical procedures
c. Tests of transactions
d. Tests of controls

24. Analytical procedures are required:

A B C D
 As a risk assessment procedure performed during planning Yes Yes Yes Yes
 As a substantive test procedure during evidence gathering Yes Yes No No
 As an overall review at audit completion No Yes No Yes

25. Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests

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 b. Providing assurance that potential misstatements will be identified.
c. Enhancing the auditor's understanding of the client's business.
d. Assuming the adequacy of the available evidential matter.

26. Which of the following procedures would an auditor least likely perform planning a financial statement audit?
a. Coordinating the assistance of personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
c. Selecting a sample of vendor's invoices for comparison to receiving report
d. Reading the current year's interim financial statements.

27. Audit risk has three components: inherent risk, control risk and detection risk. Which of the following statements is
correct?
a. Detection risk is a function of the efficiency of an audit procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
c. The risk that material misstatement will not prevent or detected on a timely basis by internal control can be
reduced to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of the
auditor.

28. Some accounts balances, such as those for retirement benefits and finance lease, are the results of complex
calculations. The susceptibility to material misstatements in these types of accounts is referred to as
a. Audit risk
b. Control risk
c. Detection risk
d. Inherent risk

29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk area are:
a. Elements of audit risk while detection risk is not.
b. Changes at the auditor's discretion while detection risk is not.
c. Functions of the client and its environment while detection risk is not
d. Considered at the individual account balance level while detection risk is not.

30. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both quantitative
and qualitative judgments.
d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable
person who will rely on the financial statements.

31. There is an inverse relationship that exist between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatement
b. Preliminary judgments about materiality levels
c. Assurance provided by substantive tests
d. Risk of misapplying audit process

32. In considering materiality for planning purposes, Ash, auditor believes that misstatements aggregating P60, 000 would
have material effect on an entity's income statement, but that misstatements would have to aggregate P40, 000 to
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate:
a. P40, 000
b. P50, 000
c. P60, 000
d. P100, 000

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33. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity's annualized interim financial statements.
c. The results of the internal control questionnaire
d. The contents of the management representation letter.

34. Which of the statements is/are correct?

Statement 1: Planning involves developing an overall strategy for the expected and scope of the audit.
Statement 2: involves directing the efforts of assistants who are involved in accomplishing the objectives of the audit and
determining whether those objectives were accomplished.
a. Only statement 1 is correct
b. Both statements are correct
c. Only statement 2 is correct
d. Both statements are incorrect

35. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client's business
and industry to
a. Develop an attitude of professional skepticism concerning management's financial statement assertions. b.
Make constructive suggestions concerning improvements to the client's internal control.
c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to
be materially misstated.
d. Understand the events and transactions that may have an effect on the client's financial statements

CHAPTER 3: REVIEW QUESTIONS-THEORETICAL

1. It is the process designed and effected 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. Business strategy
c. Internal control
d. Accounting process.

2 Internal controls are not designed to provide reasonable assurance that

a. The recorded accountability for assets is compared with the existing assets at reasonable intervals
b. Access to assets is permitted only in accordance with management's authorization
c. Transactions are authorization executed in accordance with management's
d. Irregularities will be eliminated

3. This is a basic concept of internal control which recognizes that the cost of internal control should not exceed the
benefits expected to be derived from it:
a. Management by exception.
b. Limited liability
c. Management responsibility
d. Reasonable assurance

4. An internal control system that is working effectively

a. Eliminates risk and potential loss of to the entity
b. Cannot be circumvented by management
c. Reduces the need for management the review exception reports on a day-to-day basis
d. Is unaffected by changing circumstances and conditions encountered by the entity

5. Which of the following is an example of an inherent limitation in a client's internal control system?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance with
management's authorization.

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 c. In the performance of most control procedures, there are possibilities of errors arising from mistakes in
judgment.
d. Procedures for handling large numbers of transactions are processed by information technology (IT)
equipment.

6. Which of the following statements best describes "control environment?

a. Policies and procedures that help ensure that management directives are carried out.
b. The system for transferring information from transaction processing systems to the general ledger or the
financial reporting system.
c. The entity's process for identifying business risks relevant to financial reporting objectives and deciding about
actions to address those risks and the results thereof.
d. This includes the governance and management functions and the attitudes, awareness, and actions of
those charged with governance and management concerning the entity's internal control and its
importance to the entity.

7. Which of the following considered control environment elements?

Commitment to Competence Detection Risk Organizational Structure
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes

8. An entity's risk assessment process includes how management:

A B C D
 Identifies risk Yes Yes No Yes
 Assess significance and likelihood of occurrence of these identified risks Yes Yes Yes No
 Decides upon actions to manage these risks Yes No Yes No

9. Risks can arise or change due to circumstances such as the following except:
a. There is a change in the regulatory or operating environment (.e. a new law has been passed which prohibits
the use of a chemical which is a main ingredient of the company's major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five years, and no
new pronouncements have been made.

10. As part of a periodic planning exercise, Cedric Naranjo Company discovers that a political dispute may interfere with
the company's supply sources. This is an example of:

a. Control environment c. Control activities

b. Risk assessment d. Monitoring of controls

11. Control activities constitute one of the five components of internal control. Which of the following is not included in this
internal control component?
a. Segregation of duties c. An internal audit function
b. Performance reviews d. Authorization

12. Control activities are the policies and procedures that help ensure that management directives are carried out. These
include activities relating authorization, performance reviews, information processing, physical controls and segregation of
duties. There is proper segregation of duties when an individual who
a. Authorizes a transaction records it.
b. Maintains custody of an asset has access to the accounting records for the asset
c. Authorizes transaction maintains custody of the asset that resulted from the transaction.
d. Records a transaction do not compare the accounting record of the asset with the asset itself.

13. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing the
quality of internal control performance over time. It involves assessing the design and operation of controls on a timely

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basis and taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring
activities, separate evaluations, or a combination of the two. An entity's ongoing monitoring activities often include
a. Periodic reporting by the entity's internal auditors about the functioning of internal control
b. The audit of the annual financial statements
c. Periodic audits by the audit committee
d. Reviewing the purchasing account
14. The primary purpose of the auditor's consideration of internal control is to provide a basis for
a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing and extent of audit tests to be applied
d. The expression of an opinion.

15. Which of the following statements concerning the relevance of various types of controls to a financial statement audit
is correct?
a. All controls are ordinarily relevant to a financial statement audit.
b. Controls over the reliability of assets and liabilities are of primary importance, while controls over the reliability
of financial reporting may also be relevant.
c. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial
statement audit, but other controls may also be relevant.
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
16. PSA 315 Redrafted requires the auditor to obtain an understanding of the client's internal controls
a. For every audit
b. For first-time audits
c. Whenever it would be appropriate
d. Sufficient to find any frauds which may exist

17. When obtaining knowledge about an entity's internal control, it is important for the auditor to consider the competence
of its employees because their competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed
18. Obtaining an understanding of internal control involves:
A B C D
 Evaluating the design of a control Yes Yes Yes No
 Determining whether the control has been implemented Yes Yes No Yes
 Testing the effectiveness of a control Yes No Yes Yes

19. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor
with
a. Information necessary to prepare flowcharts.
b. Evidence to use in reducing detection risk.
c. Knowledge necessary to plan the audit.
d. A basis for modifying test of controls.

20. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the
following except:
a. Make inquiries
b. Make observations
c. Design substantive tests
d. Inspect documents and records

21. After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the maximum
level for some assertions because the auditor
a. Believes the internal control policies and procedures are unlikely to be effective.

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 b. Determines that the pertinent internal control components are not well documented.
c. Performs tests of controls to restrict detection risk to an acceptable level.
d. Identifies internal control policies and procedures that are likely to prevent material misstatements.

22. After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform tests of
controls. The auditor most likely decided that
a. Additional evidence to support a further reduction in control risk is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in planned substantive
tests.
c. An increase in the assessed level of control risk is justified for certain financial statement assertions,
d. There were many internal control weaknesses that could allow errors to enter the accounting system.

23. Information about segregation of duties ordinarily is best obtained by

a. Performing test of transactions that corroborate management's financial statements assertions.
b. Developing audit objectives that reduce control risk.
c. Observing employees as they apply specific controls.
d. Obtaining a flowchart of activities performed by entity personnel.

24. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of material
misstatement at the financial statements level, and at the assertion level for classes of transactions, account balances,
and disclosure. Some of these risks, in the auditor's judgment, require special audit consideration, such as those that
involve fraud or complex transactions. Such risks are called
a. Business risks c. Audit risks
b. Significant risks d. Material risks

25. The auditor's primary objective in obtaining an understanding of the client's control over the purchasing function is to
a. Investigate the recording of unusual transactions regarding raw materials.
b. Determine the reliability of financial reporting by the purchasing function.
c. Observe the annual physical count.
d. Ascertain that raw material paid for are on hand.

26. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of
controls rather than their form because:
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.
27. When obtaining an understanding of the accounting and internal the accounting control system the auditor may trace
a few transactions through the accounting system. This technique is:
a. Reperformance
b. Control test
c. Walk-through
d. Validity test

28. Control risk assessment procedures include all of the following, except
a. Inspection of documents
b. Confirmation of bank balances
c. Observation of procedures
d. Inquiry of client personnel

29. Evidence of the performance of control risk assessment procedures includes all of the following, except:
a. Flowcharts
b. Questionnaires
c. Lead schedule
d. Memoranda

30. Which of the following statements regarding auditor documentation of the client's internal control structure is correct?
a. Documentation must include flowcharts.

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 b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.

31. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
a. Specified controls requiring segregation of duties may be circumvented by collusion.
b. Tests of controls may fail to identify controls relevant to assertions.
c. Material misstatement may exist in the financial statements.
d. Entity policies may be circumvented by senior management.

32. An auditor may decide to assess control risk at the maximum level certain assertions because the auditor believes
a. Evaluating the effectiveness of policies and procedures is inefficient.
b. Sufficient evidential matter to support the assertions is likely to be available.
c. More emphasis on tests of controls than substantive tests is warranted.
d. Considering the relationship of assertions to specific account balances is more efficient.

33. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
a. Assessment of control environment's effectiveness
b. Identification of weaknesses in the system
c. Understanding of the system
d. Assessment of control risk

34. Which of the following statements is true?

a. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.
b. Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum.
c. The auditor can simultaneously obtain an understanding of internal control and perform tests of
controls.
d. After performing tests of controls, the auditor will always assess control risk at maximum.

35. After documenting internal control in an audit engagement, the auditor may perform tests on:
a. Those controls that the auditor plans to rely on.
b. Those controls that were reviewed (selected on a random basis).
c. Those controls in which deficiencies or weaknesses were identified.
d. Those controls that have a material effect on the balances in the

36. In a financial statement audit, the auditor is required to perform test of controls when
I. The auditor's risk assessment includes expectation of the operating effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
a. I only.
b. Either I or II
c. II only
d. Neither I nor II

37. Tests of controls are used to test whether controls are:

a. Properly incorporated in the financial statements
b. Placed in operation or implemented
c. Properly documented by the client
d. Operating effectively

38. Tests of controls may include the following, except:

a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Inspection of documentary support to transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses budget amount

39. An auditor intends to perform test of controls on a client’s control procedures that leaves no audit trail of documentary
evidence. The auditor most likely will test the procedure by
a. Inquiry and inspection

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Statement 2: The auditor should develop and document an audit program setting out the nature, timing and extent
planned audit procedures required to implement the overall audit plan.
a. Only statement 1 is correct
b. Both statements are correct
c. Only statement 2 is correct
d. Both statements are incorrect

10. In planning the audit engagement, the auditor should consider each of the following except
a. The kind of opinion (unqualified, qualified, or adverse) that is likely to be expressed.
b. Matters relating to the entity's business and the industry in which operates
c. The entity's accounting policies and procedures.
d. Materiality level and audit risk.

11. Which of the following matters should be considered by the auditor in developing the overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting requireme
including changes since the date of the prior audit
b. All of the choices
c. Conditions requiring special attention, such as the existence of the related parties
d. The setting of materiality level for audit purposes

12. In developing the overall audit strategy, the focus of the engagement team's efforts is considered. Which of t
following is not appropriately classified as a factor affecting the focus of the team's efforts?
a. The financial reporting framework on which the financial information to be audited has been prepare
including any need for reconciliation to another reporting framework.
b. Setting materiality for planning purposes.
c. Audit areas where there is a higher risk of material misstatement.
d. Volume of transactions, which may determine whether it is more efficient for the auditor to rely on inter
control. 0 0

13. Which of the following is least likely considered by the CPA when he makes an overall audit plan?
 a. The nature and timing of reports and other communication with the entity that are expected under t
engagement
b. Identification of complex accounting areas including those involving accounting estimates
c. The effect of information technology on the audit
d. The content of the representation letters.

14. With respect to planning an audit, which of the following statements is always true?
a. An inventory count must be observed at year-end.
b. An engagement should not be accepted after the client's year-end.
c. Final staffing decisions must be made prior to completion of the planning stage.
d. It is acceptable to perform a portion of the audit of a continuing client at interim dates.

15. Which of the following procedures would an auditor most likely perform in planning an audit of financial statements?
a. Inquiring of the client's legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

16. This serves as the set of instructions to assistants involved in the audit and as a means to control and record t
proper execution of the work of the personnel involved in the service.
a. Audit procedures
b. Audit program
c. Audit plan
d. Audit risk model

17. The auditor should design the written audit program, so that:

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 a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

18. In designing audit programs, an auditor should establish specific audit objectives that related primarily to the.
a. Selected audit techniques
b. Financial statement assertions
c. Timing of audit procedures.
d. Cost-benefit gathering evidence

19. The auditor should document the overall audit strategy and the audit plan, including significant changes made dur
the audit engagement. Which of the following statements on documentation is incorrect?
a. Documentation of the overall audit strategy may be made in the form of a memorandum that contains k
decisions regarding the overall scope, timing and conduct of the audit.
b. The auditor may use standard audit programs or audit completion checklists, but such programs and checkli
need to be tailored to the particular client.
c. The auditor's documentation of any significant changes to the originally planned overall audit strate
and to the detailed audit plan need not include the reasons for the significant changes.
d. The form and extent of documentation depend on such matters as the size and complexity of the enti
materiality, the extent of other documentation, and the circumstances of the specific engagement.

20. Audit procedures may be classified as risk assessment procedures and further audit procedures. Which of t
following best describes risk assessment procedures?
a. These procedures are used detect material misstatements at the assertion level.
b. These procedures include tests of details of classes of transactions, account balances, and disclosures a
analytical procedures.
c. These procedures test the operating effectiveness of controls in preventing detecting and correcting, mate
misstatements at the assertion level.
d. These are procedures for obtaining an understanding of the entity and its environment, including
internal control, to assess the risks of material misstatement at the financial statement and asserti
levels.

21. The audit program should contain the following, except:

a. Audit objective
b. Set of planned audit procedures
c. Time budget for the various audit areas
d. The combined assessed level of inherent and control risk

22. Which of the following procedures is not performed as a part of planning an audit engagement?
a. Reviewing working papers of the prior year. c. Designing an audit program
b. Performing analytical procedures d. Test of controls

23. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit procedures
usually the least costly to perform?
a. Tests of balances
b. Analytical procedures 0 0
c. Tests of transactions
d. Tests of controls
24. Analytical procedures are required:
A B C D
 As a risk assessment procedure performed during planning Yes Yes Yes Yes
 As a substantive test procedure during evidence gathering Yes Yes No No
 As an overall review at audit completion No Yes No Yes

25. Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests

b. Providing assurance that potential misstatements will be identified.

c. Enhancing the auditor's understanding0 of the0 client's business.
d. Assuming the adequacy of the available evidential matter.
26. Which of the following procedures would an auditor least likely perform planning a financial statement audit?
a. Coordinating the assistance of personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the enti
c. Selecting a sample of vendor's invoices for comparison to receiving report
d. Reading the current year's interim financial statements.

27. Audit risk has three components: inherent risk, control risk and detection risk. Which of the following statements
correct?
a. Detection risk is a function of the efficiency of an audit procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
c. The risk that material misstatement will not prevent or detected on a timely basis by internal control can
reduced to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of
auditor.

28. Some accounts balances, such as those for retirement benefits and finance lease, are the results of comp
calculations. The susceptibility to material misstatements in these types of accounts is referred to as
a. Audit risk
b. Control risk
c. Detection risk
d. Inherent risk

29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk area are:
a. Elements of audit risk while detection risk is not.
b. Changes at the auditor's discretion while detection risk is not.
c. Functions of the client and its environment while detection risk is not
d. Considered at the individual account balance level while detection risk is not.

30. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financ
statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both quantitat
and qualitative judgments.
d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasona
person who will rely on the financial statements.

31. There is an inverse relationship that exist between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatement
b. Preliminary judgments about materiality levels
c. Assurance provided by substantive tests
d. Risk of misapplying audit process

32. In considering materiality for planning purposes, Ash, auditor believes that misstatements aggregating P60, 000 wo
have material effect on an entity's income statement, but that misstatements would have to aggregate P40, 000
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would
expected to detect misstatements that aggregate:
a. P40, 000
b. P50, 000
c. P60, 000
d. P100, 000

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33. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment ab
materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity's annualized interim financial statements.
c. The results of the internal control questionnaire
d. The contents of the management representation letter.

34. Which of the statements is/are correct?

Statement 1: Planning involves developing an overall strategy for the expected and scope of the audit.
Statement 2: involves directing the efforts of assistants who are involved in accomplishing the objectives of the audit a
determining whether those objectives were accomplished.
a. Only statement 1 is correct
b. Both statements are correct
c. Only statement 2 is correct
d. Both statements are incorrect

35. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client's busine
and industry to
a. Develop an attitude of professional skepticism concerning management's financial statement assertions.
Make constructive suggestions concerning improvements to the client's internal control.
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c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole
be materially misstated.
d. Understand the events and transactions that may have an effect on the client's financial statements
CHAPTER 3: REVIEW QUESTIONS-THEORETICAL

1. It is the process designed and effected by those charged with governance, management, and other personnel
provide reasonable assurance about the achievement of the entity's objectives.
a. Internal auditing
b. Business strategy
c. Internal control
d. Accounting process.

2 Internal controls are not designed to provide reasonable assurance that

a. The recorded accountability for assets is compared with the existing assets at reasonable intervals
b. Access to assets is permitted only in accordance with management's authorization
c. Transactions are authorization executed in accordance with management's
d. Irregularities will be eliminated

3. This is a basic concept of internal control which recognizes that the cost of internal control should not exceed t
benefits expected to be derived from it:
a. Management by exception.
b. Limited liability
c. Management responsibility
d. Reasonable assurance

4. An internal control system that is working effectively

a. Eliminates risk and potential loss of to the entity
b. Cannot be circumvented by management
c. Reduces the need for management the review exception reports on a day-to-day basis
d. Is unaffected by changing circumstances and conditions encountered by the entity

5. Which of the following is an example of an inherent limitation in a client's internal control system?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance w
management's authorization.

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 c. In the performance of most control procedures, there are possibilities of errors arising from mistakes
judgment.
d. Procedures for handling large numbers of transactions are processed by information technology (
equipment.

6. Which of the following statements best describes "control environment?

a. Policies and procedures that help ensure that management directives are carried out.
b. The system for transferring information from transaction processing systems to the general ledger or t
financial reporting system.
c. The entity's process for identifying business risks relevant to financial reporting objectives and deciding ab
actions to address those risks and the results thereof.
d. This includes the governance and management functions and the attitudes, awareness, and actions
those charged with governance and management concerning the entity's internal control and
importance to the entity.

7. Which of the following considered control environment elements?

Commitment to Competence Detection Risk Organizational Structure
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes

8. An entity's risk assessment process includes how management:

A B C D
 Identifies risk Yes Yes No Yes
 Assess significance and likelihood of occurrence of these identified risks Yes Yes Yes No
 Decides upon actions to manage these risks Yes No Yes No

9. Risks can arise or change due to circumstances such as the following except:
a. There is a change in the regulatory or operating environment (.e. a new law has been passed which prohib
the use of a chemical which is a main ingredient of the company's major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five years, and
new pronouncements have been made.

10. As part of a periodic planning exercise, Cedric Naranjo Company discovers that a political dispute may interfere w
the company's supply sources. This is an example of:
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a. Control environment c. Control activities
b. Risk assessment d. Monitoring of controls
11. Control activities constitute one of the five components of internal control. Which of the following is not included in t
internal control component?
a. Segregation of duties c. An internal audit function
b. Performance reviews d. Authorization

12. Control activities are the policies and procedures that help ensure that management directives are carried out. The
include activities relating authorization, performance reviews, information processing, physical controls and segregation
duties. There is proper segregation of duties when an individual who
a. Authorizes a transaction records it.
b. Maintains custody of an asset has access to the accounting records for the asset
c. Authorizes transaction maintains custody of the asset that resulted from the transaction.
d. Records a transaction do not compare the accounting record of the asset with the asset itself.

13. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing t
quality of internal control performance over time. It involves assessing the design and operation of controls on a tim

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basis and taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitor
activities, separate evaluations, or a combination of the two. An entity's ongoing monitoring activities often include
a. Periodic reporting by the entity's internal auditors about the functioning of internal control
b. The audit of the annual financial statements
c. Periodic audits by the audit committee
d. Reviewing the purchasing account
14. The primary purpose of the auditor's consideration of internal control is to provide a basis for
a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing and extent of audit tests to be applied
d. The expression of an opinion.

15. Which of the following statements concerning the relevance of various types of controls to a financial statement au
is correct?
a. All controls are ordinarily relevant to a financial statement audit.
b. Controls over the reliability of assets and liabilities are of primary importance, while controls over the reliabi
of financial reporting may also be relevant.
c. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financ
statement audit, but other controls may also be relevant.
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
16. PSA 315 Redrafted requires the auditor to obtain an understanding of the client's internal controls
a. For every audit
b. For first-time audits
c. Whenever it would be appropriate
d. Sufficient to find any frauds which may exist

17. When obtaining knowledge about an entity's internal control, it is important for the auditor to consider the competen
of its employees because their competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed
18. Obtaining an understanding of internal control involves:
A B C D
 Evaluating the design of a control Yes Yes Yes No
 Determining whether the control has been implemented Yes Yes No Yes
 Testing the effectiveness of a control Yes No Yes Yes

19. The primary objective of procedures performed to obtain an understanding of internal control is to provide an audi
with
a. Information necessary to prepare flowcharts.
b. Evidence to use in reducing detection risk.
c. Knowledge necessary to plan the audit.
d. A basis for modifying test of controls.

20. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of t
following except:
a. Make inquiries
b. Make observations
c. Design substantive tests
d. Inspect documents and records

21. After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the maxim
level for some assertions because the auditor
0 procedures
a. Believes the internal control policies and 0 are unlikely to be effective.
 b. Determines that the pertinent internal control components are not well documented.
c. Performs tests of controls to restrict detection risk to an acceptable level.
d. Identifies internal control policies and procedures that are likely to prevent material misstatements.

22. After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform tests
controls. The auditor most likely decided that
a. Additional evidence to support a further reduction in control risk is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in planned substanti
tests.
c. An increase in the assessed level of control risk is justified for certain financial statement assertions,
d. There were many internal control weaknesses that could allow errors to enter the accounting system.

23. Information about segregation of duties ordinarily0 is best

0 obtained by
a. Performing test of transactions that corroborate management's financial statements assertions.
b. Developing audit objectives that reduce control risk.
 c. Observing employees as they apply specific controls.
d. Obtaining a flowchart of activities performed by entity personnel.

24. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of mate
misstatement at the financial statements level, and at the assertion level for classes of transactions, account balanc
and disclosure. Some of these risks, in the auditor's judgment, require special audit consideration, such as those t
involve fraud or complex transactions. Such risks are called
a. Business risks c. Audit risks
b. Significant risks d. Material risks

25. The auditor's primary objective in obtaining an understanding of the client's control over the purchasing function is to
a. Investigate the recording of unusual transactions regarding raw materials.
b. Determine the reliability of financial reporting by the purchasing function.
c. Observe the annual physical count.
d. Ascertain that raw material paid for are on hand.

26. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance
controls rather than their form because:
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.
27. When obtaining an understanding of the accounting and internal the accounting control system the auditor may tra
a few transactions through the accounting system. This technique is:
a. Reperformance
b. Control test
c. Walk-through
d. Validity test

28. Control risk assessment procedures include all of the following, except
a. Inspection of documents
b. Confirmation of bank balances
c. Observation of procedures
d. Inquiry of client personnel

29. Evidence of the performance of control risk assessment procedures includes all of the following, except:
a. Flowcharts
b. Questionnaires
c. Lead schedule
d. Memoranda

30. Which of the following statements regarding auditor documentation of the client's internal control structure is correct
a. Documentation must include flowcharts.

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 b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.

31. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
a. Specified controls requiring segregation of duties may be circumvented by collusion.
b. Tests of controls may fail to identify controls relevant to assertions.
c. Material misstatement may exist in the financial statements.
d. Entity policies may be circumvented by senior management.

32. An auditor may decide to assess control risk at the maximum level certain assertions because the auditor believes
a. Evaluating the effectiveness of policies and procedures is inefficient.
b. Sufficient evidential matter to support the assertions is likely to be available.
c. More emphasis on tests of controls than substantive tests is warranted.
d. Considering the relationship of assertions to specific account balances is more efficient.

33. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
a. Assessment of control environment's effectiveness
b. Identification of weaknesses in the system
c. Understanding of the system
d. Assessment of control risk

34. Which of the following statements is true?

a. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.
b. Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum.
c. The auditor can simultaneously obtain an understanding of internal control and perform tests
controls.
d. After performing tests of controls, the auditor will always assess control risk at maximum.

35. After documenting internal control in an audit engagement, the auditor may perform tests on:
a. Those controls that the auditor plans to rely on.
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b. Those controls that were reviewed (selected on a random basis).
c. Those controls in which deficiencies or weaknesses were identified.
d. Those controls that have a material effect on the balances in the
36. In a financial statement audit, the auditor is required to perform test of controls when
I. The auditor's risk assessment includes expectation of the operating effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion lev
a. I only.
b. Either I or II
c. II only
d. Neither I nor II

37. Tests of controls are used to test whether controls are:

a. Properly incorporated in the financial statements
b. Placed in operation or implemented
c. Properly documented by the client
d. Operating effectively

38. Tests of controls may include the following, except:

a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Inspection of documentary support to transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses budget amount

39. An auditor intends to perform test of controls on a client’s control procedures that leaves no audit trail of documenta
evidence. The auditor most likely will test the procedure by
a. Inquiry and inspection

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