AUDITING AND ASSURANCE PRINCIPLES

QUIZ # 2
ACCEPTING AN ENGAGEMENT

1. Which of the following statements concerning the audit of financial statements is incorrect?
a. The management is responsible for the fair presentation of financial statements that reflect
the nature and operations of the entity.
b. In representing that the financial statements in accordance with the applicable financial
reporting framework, management only explicitly but not implicitly makes assertions
regarding the recognition, measurement, presentation and disclosure of the various
elements of financial statements and related disclosures.
c. The auditor should use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of risks of
material misstatement and the design and performance of further audit procedures.
d. Regardless of the procedures of the procedures selected, the procedures selected should
enable the auditor to gather sufficient appropriate evidence about a particular assertion.

2. PSA 200 provides that an auditor should conduct a background investigation of the prospective
client in order to
a. Determine the capability of the client to pay the audit fees.
b. Minimize the likelihood of association with clients whose management lacks integrity.
c. Discover the auditability of the financial statements of the company.
d. Provide assurance that the client is the leader in the industry.

3. The following are the considerations before accepting an audit engagement, except
a. To determine the whether the auditor has the necessary skills and competence to handle
the engagements.
b. To determine whether there are any threats to the audit team’s independence and
objectivity and if so, whether adequate safeguards can be established.
c. To determine the appropriate opinion to be issued.
d. To determine the whether there are enough qualified personnel to perform the audit.

4. Before accepting a new client, the auditor should make inquiries with the client’s predecessor
auditor regarding the following, except
a. The predecessor’s understanding as to the reasons for the change of auditors.
b. Any disagreements between the auditor and the client.
c. Any facts that might have a bearing on the integrity of the prospective client’s
management.
d. Schedule of the audit procedures to be performed.

5. 9. After accepting the audit engagement, an engagement letter should be prepared which serves
as the contract between the auditor and client. The letter shall set forth the following, except
a. The forms or any reports or other communication that the auditor expects to issue.
b. Audit procedures, audit evidence and sample size to be used by the auditor.
c. The scope and objective of the audit of financial statements.

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 d. The management’s responsibility for the presentation of the financial statements and
client’s responsibility to allow the auditor to have unrestricted access to whatever
records, documentation and information requested in connection with the audit.

6. What is the importance of the engagement letter to both the client and auditor?
a. It provides information about the procedures and audit evidence to be obtained by the
auditor.
b. It assures that unqualified opinion will be issued by the auditor.
c. It minimizes misunderstandings with respect to the engagement and
document/confirm the auditor’s acceptance of the appointment.
d. It eliminates the risk that the auditor will issue an inappropriate opinion.

7. The auditor does not normally send new engagement letter every year for recurring audits.
However, the following factors may cause the auditor to send a new engagement letter, except
a. An increase in the number of the newly accepted clients of the auditing firm.
b. Any indication that the client misunderstands the objective and scope of the audit.
c. A recent change of senior management, board of directors or ownership.
d. A significant change in the nature or size of the client’s business or change in legal
requirements and other government pronouncements.

8. Before accepting an engagement to audit a new client, a CPA is required to obtain

a. A preliminary understanding of the prospective client’s industry and business
b. The prospective client’s signature to the engagement letter
c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client

9. An engagement letter would not normally include

a. Billing arrangement
b. Arrangement concerning client’s assistance
c. Details of the procedure that will be performed
d. Expectation of receiving a representation letter from management

10. In which of the following would the auditor be unlikely to send a new engagement letter to a
continuing client?
a. A change in terms of the engagement
b. A significant change in the nature or size of the client’s business
c. A recent change of client management
d. A recent change in the partner and/or staff in the audit engagement

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

12. An audit conducted on the premise that management, and where appropriate, those charged
with governance, have acknowledged and understood that they have responsibility that are

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 fundamental to the conduct of an audit in accordance with PSAs. Which of the following is not
one of those responsibilities?
a. The preparation of financial statements in accordance with relevant pronouncements
such as PSAs.
b. The establishment and maintenance of an adequate internal control system that is
necessary to enable the preparation of financial statements that are free from material
misstatements, whether due to fraud or error.
c. To provide the auditor with access to all information that is relevant to the preparation
of the financial statements such as records, documentation, and other matters.
d. To provide the auditor with unrestricted access to persons within the entity from which
the auditor determines it necessary to obtain audit evidence.

13. Which of the following statements would least likely appear in an auditor’s engagement letter?
a. Our audit will be made with the objective of our expressing an opinion on the financial
statements.
b. We remind you that the responsibility for the preparation of financial statements
including adequate disclosure is that of the management of the entity.
c. After performing our preliminary procedures, we will discuss with you the other
procedures we consider necessary to complete engagement.
d. Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to the engagement plus out of pocket expenses.

14. An auditor’s engagement letter most likely will include

a. A request for permission to contact the client’s lawyer for assistance in identifying
litigation, claims, and assessments.
b. A reminder that management is responsible for illegal acts committed by employees.
c. The auditor’s preliminary assessment of the risk factors relating to misstatements arising
from fraudulent financial reporting.
d. Management’s acknowledgment of its responsibility for such internal control as it
determines is necessary to enable the preparation of financial statements that are free
from material misstatement.

15. Which of the following is appropriately included in an audit engagement letter?

I. Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements may remain undiscovered.
II. The audit will be made with the objective of expressing an opinion on the financial
statements.
III. An audit also includes assessing the accounting procedures used and significant estimates
made by management.
a. I and II
b. I and III
c. II and III
d. I, II and III

16. According to PSA 210, which of the following statements is correct?

a. The auditor and the client need not agree on the terms of the engagement.

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 b. Where the terms of the engagement are changed, the auditor and the client need not
agree on the new terms if they already agreed on the old terms.
c. The engagement letter assists in the supervision and review of the audit work.
d. The auditor may agree to a change of engagement where there is reasonable
justification for doing so.

17. Which of the following is not correct?

a. It would be a violation of the completeness assertion if the management would record
a sale that did not take place.
b. The completeness assertion deals with matters opposite from those of the existence
assertion.
c. The completeness assertion is concerned with the possibility of omitting items from the
financial statements that should have been included.
d. The existence assertion is concerned with inclusion of amount that should not have been.

18. Which of the following statements is correct?

a. Existence relates to whether the amounts in accounts are understated.
b. Completeness relates to whether balances exist.
c. Existence relates to whether the balances are valid.
d. Occurrence relates to whether the amounts in accounts occurred in the proper year.

19. Which of the following statements is not correct?

a. There are many ways an auditor can accumulate evidence to meet the overall audit
objectives.
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional
responsibility.
c. The cost of accumulating the evidence should be minimized.
d. Gathering evidence and minimizing costs are equally important considerations that affect
the approach the auditor selects.

20. In performing your audit for a privately-held firm, your inquiries have yielded that one of the
company’s owner’s primary motivations is to pay the least amount of income tax that is possible.
Based on this observation, which of this audit objective for ending inventory would the auditor
be most concerned about ascertaining?
a. Completeness
b. Accuracy
c. Rights and obligations
d. Existence

21. Which of the following statements is incorrect regarding inquiry?

a. Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative evidence.
b. Responses to inquiries might provide information that differs significantly from other
information that the auditor has obtained.
c. Responses to inquiries may provide a basis for the auditor to modify or perform additional
audit procedures.
d. Inquiry alone is sufficient to test the operating effectiveness of controls.

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 22. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
a. Substantive tests, documentation of control structure, and tests of controls
b. Documentation of control structure, tests of controls, and substantive tests
c. Documentation of control structure, substantive tests, and tests of controls
d. Tests of controls, documentation of control structure, and substantive tests

23. Which of the following would an auditor least likely perform as part of the auditor’s preliminary
engagement activities?
a. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
b. Evaluate compliance with ethical requirements, including independence.
c. Establish an understanding of the terms of the engagement.
d. Obtain understanding of the legal and regulatory framework applicable to the entity.

24. Which of the following is not one of the reasons why auditor should perform preliminary
engagement activities?
a. To ensure that the auditor maintains the necessary independence and ability to perform the
engagement
b. To help ensure that there are no issues with management integrity that may affect the
auditor’s willingness to continue the engagement
c. To ensure that there is no misunderstanding with the client as to the terms of the engagement
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s
opinion on the financial statements

25. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and
the prospective client were resolved satisfactorily
b. Consideration of whether sufficient competent evidential matter may be obtained to afford
a reasonable basis of opinion
c. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management
d. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests

26. 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 circumstance leading to the termination with the 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 the auditor and the client.
d. Advise the client of the intention to contact the predecessor auditor and request permission
for the contact.

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 27. Upon discovering material misstatements in a client’s financial statements that the client would
not revise, the auditor withdrew from the engagement. If asked by the incoming auditor about
the termination of the engagement, the predecessor auditor should
a. State that he found material misstatements that the client would not revise
b. Suggest that the auditor ask the client
c. Suggest that the incoming auditor obtain the client’s permission to discuss the reasons
d. Indicate that a misunderstanding occurred

28. An incoming auditor most likely would make specific inquiries of the predecessor auditor
regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures

29. In auditing the financial statements of Star Corp, Land discovered information leading Land to
believe that Star’s prior year financial statements, which are audited by Jell, require substantial
revisions. Under these circumstances, Land should
a. Notify Star’s audit committee and stockholders that the prior year’s financial statements
cannot be relied on.
b. Request Star to reissue the prior year’s financial statements with the appropriate revisions.
c. Notify Jell about the information and make inquiries about the integrity of Star’s
management.
d. Request Star to arrange a meeting among the three parties to resolve the matter.

30. When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division
(component), which of the following factors would least likely influence the auditor’s decision to
send separate letter to a component of a parent entity?
a. Geographical location of the component
b. Legal requirements
c. Degree of ownership by parent
d. Degree of independence of component’s management

Prepared by:

Maria Carla R. Mañago, CPA

Instructor

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