lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9201

Manila

AUDITING THEORY CPA Review

AN INTRODUCTION TO ASSURANCE, AUDITING AND RELATED SERVICES

References:

• PREFACE TO THE PHILIPPINE STANDARDS ON QUALITY MANAGEMENT, AUDITING, REVIEW,

OTHER ASSURANCE AND RELATED SERVICES
• PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
• FRAMEWORK OF PHILIPPINE STANDARDS ON AUDITING (PSA 120)
• OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN
ACCORDANCE WITH PHILIPPINE STANDARDS ON AUDITING
(PSA 200)

THE AUTHORITY ATTACHING TO PHILIPPINE STANDARDS ISSUED BY THE AASC

Standards Application
1. Philippine Standards on Auditing (PSAs) • Audit of historical financial information
2. Philippine Standards on Review • Review of historical financial information
Engagements (PSREs)
3. Philippine Standards on Assurance • Assurance engagements dealing with
Engagements (PSAEs) subject matters other than historical
financial information
4. Philippine Standards on Related • Compilation engagements
Services (PSRSs) • Engagements to apply agreed-upon
procedures to information
• Other related services engagements as
specified by the AASC

1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement
Standards.
2. Philippine Standards on Quality Management (PSQM) are to be applied for all services falling
under the AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public Sector.

The Authority Attaching to Practice Statements Issued by the AASC

1. Philippine Practice Statements are issued to:

• provide interpretive guidance and practical assistance to professional accountants in
implementing Philippine Standards; and
• promote good practice.
2. Professional accountants should be aware of and consider Practice Statements applicable to
the engagement.
3. A professional accountant who does not consider and apply the guidance included in a
relevant Practice Statement should be prepared to explain how the basic principles and
essential procedures in the AASC’s Engagement Standard(s) addressed by the Practice
Statement have been complied with.

AASC Bulletins, AASC Alerts and Philippine Auditing Practice Notes (PAPN or Notes)

• Issued by the AASC to provide guidance to auditors in the application of PSAs.

• Not part of PSAs and do not change the requirements of relevant PSAs.

PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS

1. The Framework does not itself establish standards or provide procedural requirements for the
performance of assurance engagements.
Page 1 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform
assurance engagements are governed by:
• the Philippine Code of Ethics for Professional Accountants; and
• Philippine Standards on Quality Management (PSQM).

ASSURANCE ENGAGEMENTS

1. <Assurance engagement= means an engagement in which a practitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users other than
the responsible party about the outcome of the evaluation or measurement of a subject matter
against criteria.
2. <Subject matter information= refers to the outcome of the evaluation or measurement of a
subject matter.
3. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users (assertion-
based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party
that has performed the evaluation or measurement that is not available to the intended users.
The subject matter information is provided to the intended users in the assurance report
(direct reporting engagements).

Two Types of Assurance Engagement

1. Reasonable assurance engagement – the objective is a reduction in assurance

engagement risk to an acceptably low level in the circumstances of the engagement as the
basis for a positive form of expression of the practitioner’s conclusion.
2. Limited assurance engagement – the objective is a reduction in assurance engagement
risk to a level that is acceptable in the circumstances of the engagement, but where the risk
is greater than for a reasonable assurance engagement, as a basis for a negative form of
expression of the practitioner’s conclusion.

Scope of the Framework

The following are non-assurance engagements and therefore are not covered by the
Framework:

1. Engagements covered by PSRSs such as agreed-upon procedures engagements and

compilations of financial or other information.
2. The preparation of tax returns where no conclusion conveying assurance is expressed.
3. Consulting (or advisory) engagements, such as management and tax consulting.

Elements of an Assurance Engagement

1. A three-party relationship involving:

• a practitioner;
• a responsible party; and
• intended users.
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance engagement or
a limited assurance engagement.

Page 2 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

AUDIT ENGAGEMENTS

1. As defined by the American Accounting Association, an 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.
2. The following are key concepts obtained from the definition of an audit:
• A systematic process
• It involves objectively obtaining and evaluating evidence about assertions.
• It ascertains the degree of correspondence between assertions and established criteria
• It includes communication of the results to interested users

Types of audit

In compliance with the syllabus in Auditing of the Licensure Examination for CPAs in the
Philippines, the following are the types of audit.

1. As to nature of assertion or data

• Financial statement (FS) audit
• Operational audit
• Compliance audit

2. As to types of auditor
• External audit
• Internal audit
• Government audit

Comparison of the different types of audit

Financial Statements
Operational Audit Compliance Audit
Audit
Assertions Financial statements are Operations are Activities complied with
fairly presented conducted efficiently applicable laws, rules,
and effectively regulations, contracts
or management policy
Suitable GAAP or any other Objective set by the Applicable contracts,
Criteria identified financial management rules, regulations, laws
reporting framework or management policy
Report An opinion whether the Report on efficiency Degree of compliance
financial statements are and effectiveness. This with applicable laws,
fairly presented in will also include rules, regulations, or
conformity with an recommendations to management policy.
identified financial improve operations.
reporting framework
Generally External auditors Internal auditors Government auditors
performed by

OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN

AUDIT IN ACCORDANCE WITH PSAs

1. In conducting an audit of financial statements, the auditor’s OVERALL OBJECTIVES are:

a) To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and
b) To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.

Page 3 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

2. The auditor SHALL:

• Comply with all PSAs relevant to the audit.
• Comply with relevant ethical requirements, including those pertaining to
independence relating to financial statement audit engagements.
• Plan and perform an audit with professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.
• Exercise professional judgment in planning and performing an audit of financial
statements.
• Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low
level.

ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS

1. The objective of a review of financial statements is to enable a practitioner to state whether,

on the basis of procedures which do not provide all the evidence that would be required in an
audit, anything has come to the practitioner’s attention that causes the practitioner to believe
that the financial statements are not prepared, in all material respects, in accordance with an
identified financial reporting framework (negative assurance).
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review
the reliability of an assertion that is the responsibility of one party for use by another party.
3. A review does not ordinarily involve an assessment of accounting and internal control
systems, tests of records and of responses to inquiries by obtaining corroborating evidence
through inspection, observation, confirmation and computation, which are procedures
ordinarily performed during an audit.
4. The level of assurance provided in a review report is less than that given in an audit report.

ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING FINANCIAL

INFORMATION

1. In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out

those procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on FACTUAL FINDINGS.
2. The recipients of the report must form their own conclusion from the report of the auditor.
3. The report is restricted to those parties that have agreed to the procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.

ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

1. In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify, and summarize financial information.
2. It ordinarily entails reducing detailed data to manageable and understandable form without a
requirement to test the assertions underlying that information.
3. The procedures performed are not designed and do not enable the accountant to express any
assurance on the financial information.
4. Users of compiled financial information derive some benefit as a result of the accountant’s
involvement because the service has been performed with due professional skill and care.

SUMMARY
Nature of service Audit Review Agreed-upon Procedures Compilation
Level of assurance High, but not absolute Moderate assurance No assurance No assurance
provided assurance

Report provided Positive assurance on Negative assurance Factual findings of Identification of

assertion (s) on assertion (s) procedures information compiled
(Audit Report) (Review Report) (Compilation Report)

Page 4 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

MULTIPLE CHOICE QUESTIONS

1. The practice of Accountancy includes

I. Practice of Public Accountancy
II. Practice in Commerce and Industry
III. Practice in Education/Academe
IV. Practice in the Government
A. I only.
B. All except IV.
C. All except I.
D. I, II, III, and IV.

2. The Auditing and Assurance Standards Council (AASC) was created by the _________ upon
the recommendation of the __________ to assist the BOA in the establishment and
promulgation of auditing standards in the Philippines?
A. Professional Regulation Commission (PRC); Board of Accountancy (BOA)
B. Professional Regulation Commission (PRC); Commission on Audit (COA)
C. Commission on Audit; Board of Accountancy
D. Office of the President of the Philippines; Professional Regulation Commission (PRC)

3. The Philippine Framework for Assurance Engagements

A. Identifies engagements to which PSAs, PSREs, and PSAEs apply.
B. Defines and describes the elements and objectives of an assurance engagement.
C. Does not establish standards or provide procedural requirements for the performance
of assurance engagements.
D. All of the above.

4. Which of the following engagements are covered by the Framework for Assurance
Engagements?
A. Consulting and agreed-upon procedures engagements
B. Agreed-upon procedures engagements and Financial statement audits.
C. Compliance audits and Financial statement audits.
D. Preparation of tax returns and consulting engagements.

5. The Philippine Standards on Assurance Engagements (PSAEs) are to be applied in

A. Compilation engagements and agreements to apply agreed-upon procedures to
information.
B. The audit or review of historical financial information.
C. Assurance engagements dealing with subject matters other than historical financial
information.
D. Assurance engagements dealing with historical financial information.

6. The Philippine Standards on Quality Management (PSQMs) are to be applied to

A. Assurance engagements only.
B. Review engagements only.
C. Compilation and review engagements only.
D. All services that fall under the AASC’s engagement standards.

7. CPAs in public practice who perform assurance engagements are governed by the following,
except
A. Philippine Standards on Related Services
B. Philippine Framework for Assurance Engagements
C. Code of Ethics for Professional Accountants in the Philippines
D. Philippine Standards on Quality Management

8. The ____________ are issued by the AASC to provide interpretive guidance and practical
assistance to auditors in the implementation of PSAs and to promote good practice.
A. PAPNs
B. PAEPs

Page 5 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

C. PAPSs
D. PREPs

9. Practitioners who perform assurance engagements are governed by the

A. Code of ethics for Professional Accountants in the Philippines
B. The Framework to Assurance Engagements
C. Philippine Standards on Quality Management
D. All of the above.

10. A proposed assurance engagement can be accepted when the practitioner’s preliminary
knowledge about the engagement circumstances indicates that relevant ethical
requirements will be satisfied and
I. The subject matter of the engagement is appropriate.
II. The criteria to be used are suitable and are available to the intended users.
III. The practitioner has access to sufficient appropriate evidence to support the conclusion.
IV. The conclusion is to be contained in a written report.
V. There is a rational purpose for the engagement.
A. I, II, and III only
B. I, II, IV, and V only
C. I, II, III, and IV only
D. I, II, III, IV, and V

11. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The subject matter is the responsibility of either the intended users or the practitioner.
D. The practitioner’s conclusion is to be contained in a written report.

12. Assurance services are best described as

A. Independent professional services that improve the quality of information, or its context,
for decision makers.
B. Services designed for the improvement of operations, resulting in better outcomes.
C. The assembly of financial statements based on information and assumptions of a
responsible party.
D. Services designed to express an opinion on historical financial statements based on the
results of an audit.

13. The following statements relate to the performance of an assurance engagement other than
an audit or review of historical financial information covered by PSAs and PSREs. Which is
incorrect?
A. Those persons who are to perform the engagement should collectively possess the
necessary professional competence.
B. The practitioner should consider materiality and assurance engagement risk when
planning and performing an assurance engagement.
C. The assurance report should be in writing and should contain a clear expression of the
practitioner’s conclusion about the subject matter information.
D. The practitioner is precluded from using the work of persons from other professional
disciplines.

14. Unlike consulting services, assurance services:

A. Improves the quality of information
B. Report on how to use information
C. Make recommendations to management
D. Are two party contracts

15. In an assurance engagement, the responsible party and the intended users
A. Should be from different entities.
B. Should be from the same entity.
C. May be from the same entity or different entities.

Page 6 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

D. Are both responsible for determining the nature, timing and extent of the procedures to
be performed.

16. The subject matter of an assurance engagement may include

Financial Internal Compliance
Information Controls with Regulation
A. Yes Yes Yes
B. No No No
C. Yes No Yes
D. No Yes No

17. How many separate parties are involved in an assurance engagement?

A. 2
B. 3
C. 4
D. 5

18. When performing an assurance service, professional accountants use standards or

benchmarks to evaluate or measure the subject matter of an assurance engagement. These
are referred to in the Philippine Framework for Assurance Engagements as
A. Criteria.
B. Benchmarks.
C. Standards.
D. Yardsticks.

19. Which of the following statements is true concerning evidence in an assurance engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
C. The reliability of evidence is influenced not by its nature but by its source.
D. Obtaining more evidence may compensate for its poor quality.

20. Relevant criteria contribute to conclusion that are

A. Free from bias.
B. Clear and comprehensive.
C. Subject to different interpretations.
D. Useful for decision making.

21. The criteria against which the subject matter of the assurance engagement is to be
evaluated or measured should possess which of the following characteristics?
Relevant Concise Neutral
A. Yes No Yes
B. No Yes No
C. Yes No No
D. No Yes Yes

22. Criteria that are embodied in laws or regulations, or issued by authorized or recognized
bodies of experts that follow a transparent due process are called
A. Suitable criteria
B. Established criteria
C. Specifically developed criteria
D. General criteria

23. Assurance engagement risk is the risk

A. That the practitioner expresses an inappropriate conclusion when the subject matter
information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter information is not
materially misstated.
C. Through loss from litigation, adverse publicity, or other events arising in connection with
a subject matter reported on.

Page 7 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

D. Of expressing an inappropriate conclusion when the subject matter information is either

materially misstated or not materially misstated.

24. The following are components of assurance engagement risk, except

A. Inherent risk
B. Control risk
C. Detection risk
D. Business risk

25. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a
result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.
C. The practitioner may not have the required assurance knowledge and skills to gather
and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming conclusions
based on that evidence.

26. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users. These
engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements

27. What type of assurance engagement is involved when the practitioner expresses a positive
form of conclusion?
A. Limited assurance engagement.
B. Positive assurance engagement.
C. Reasonable assurance engagement.
D. Negative assurance engagement.

28. A practitioner’s assurance report contains the following conclusion:

<Based on our work described in this report, nothing has come to our attention that causes
us to believe that internal control is not effective in all material respects, based on ABC
criteria.=

What type of assurance engagement was performed?

A. Limited assurance engagement.
B. Reasonable assurance engagement.
C. Negative assurance engagement.
D. Positive assurance engagement.

29. Limited assurance is provided for in

A. an audit engagement.
B. a compilation engagement
C. a review engagement.
D. an assurance engagement.

30. The purpose of an audit of financial statements is to

A. Relieve management or those charged with governance of the responsibility for the
preparation and presentation of the financial statements.
B. Obtain an absolute level of assurance that the financial statements as a whole are free
from material misstatement.
C. Enhance the degree of confidence of intended users in the financial statements.
D. Assure the future viability of the entity by expressing an opinion on the entity’s financial
statements.

Page 8 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

31. Which of the following best describes the concept of audit risk?
A. The risk of the auditor being sued because of association with an audit client.
B. The risk that the auditor will provide an unmodified opinion on financial statements that
are, in fact, materially misstated.
C. The overall risk that a material misstatement exists in the financial statements.
D. The risk that auditors use audit procedures that are inappropriate.

32. The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.
A. I and II only
B. II and IV only
C. I, II, and III only
D. I, II, III, and IV

33. The auditor is required to comply with all PSAs relevant to the audit of an entity’s financial
statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
A. I only
B. II only
C. Either I or II
D. Both I and II

34. Independent auditors of financial statements perform audits that reduce and control
A. The business risks faced by investors.
B. Quality reviews performed by other CPA firms.
C. The information risk faced by investors.
D. The complexity of financial statements.

35. The auditor is required to maintain professional skepticism throughout the audit. Which of
the following statements concerning professional skepticism is false?
A. A belief that management and those charged with governance are honest and have
integrity relieves the auditor of the need to maintain professional skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the critical assessment of audit evidence.
D. Professional skepticism is an attitude that includes questioning contradictory audit
evidence obtained.

36. Operational audits generally have been conducted by internal and COA auditors, but may
be performed by certified public accountants. A primary purpose of an operational audit is
to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a company’s
top-level management.
C. Aid to the independent auditor, who is conducting the examination of the financial
statements.
D. A means of assurance that internal accounting controls are functioning as planned.

37. Operational auditing is primarily oriented toward

A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management’s financial records.
C. The verification that a company’s financial statements are fairly presented.
D. Past protection provided by existing internal control.
Page 9 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

38. An objective of a performance audit is to determine whether an entity’s

A. Operational information is in accordance with government auditing standards.
B. Specific operating units are functioning economically and efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.

39. Which of the following terms best describe the audit of a taxpayer’s return by a BIR auditor?
A. Operational audit
B. Compliance audit
C. Internal audit
D. Government audit

40. Governmental auditing often extends beyond examinations leading to the expression of
opinion on the fairness of financial presentation and includes audits of efficiency, economy,
effectiveness, and also
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

41. What is the proper organizational role of internal auditing?

A. To serve as an independent, objective assurance and consulting activity that adds value
to operations.
B. To assist the external auditor in order to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of the audit committee of the board of directors.

42. The internal auditing department’s responsibility for deterring fraud is to

A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.

43. In general, internal auditors’ independence will be greatest when they report directly to the
A. Financial vice-president.
B. Corporate stockholders.
C. Corporate controller.
D. Audit committee of the board of directors.

44. Internal auditors review the adequacy of the company’s internal control system primarily to
A. Help determine the nature, timing, and extent of tests necessary to achieve audit
objectives.
B. Determine whether the internal control system provides reasonable assurance that the
company’s objectives and goals are met efficiently and economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Determine whether the internal control system ensures that financial statements are
fairly presented.

45. A practitioner is associated with financial information when

I. The practitioner attaches a report to that financial information.
II. The practitioner consents to the use of his/her name in a professional connection.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

46. Which of the following attributes is more closely associated with attestation services
performed by a CPA firm than with other lines of professional work?
A. Competence.

Page 10 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

B. Integrity.
C. Keeping informed on current professional developments.
D. Independence.

47. Which of the following procedures is not included in a review engagement of an entity?
A. Inquiries of management
B. Inquiries regarding significant events subsequent to the balance sheet date
C. Any procedures designed to identify relationships among data that appear to be unusual
D. A study and evaluation of internal control

48. The following statements relate to the performance of an assurance engagement other than
an audit or review of historical financial information covered by PSAs and PSREs. Which is
incorrect?
A. Those persons who are to perform the engagement should collectively possess the
necessary professional competence.
B. The practitioner is precluded from using the work of persons from other professional
disciplines.
C. The practitioner should consider materiality and assurance engagement risk when
planning and performing an assurance engagement.
D. The assurance report should be in writing and should contain a clear expression of the
practitioner’s conclusion about the subject matter information.

49. May a practitioner accept an engagement to compile or review the financial statements of
an entity if the practitioner is unfamiliar with the specialized industry accounting principles,
but plans to obtain the required level of knowledge before compiling or reviewing the
financial statements?
Compilation Review
A. Yes No
B. No Yes
C. Yes Yes
D. No No

50. When performing a compilation engagement, the accountant is required to

A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of the
information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.

51. A summary of findings rather than assurance is most likely to be included in a/an
A. Agreed-upon procedures report.
B. Compilation report.
C. Examination report.
D. Review report.

52. An engagement to perform agreed-upon procedures may involve the auditor in performing
certain procedures concerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

53. Which of the following statements concerning consulting services is false?

A. The performance of consulting services for audit clients does not, in and of itself, impair
the auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function of attesting to the
assertions of other parties.
Page 11 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9201

C. Consulting services ordinarily involve external reporting.

D. Most CPAs, including those who provide audit and tax services, also provide consulting
services to their clients.

54. Which of the following is the most appropriate action to be taken by a CPA who has been
asked to perform a consulting services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with others to
obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on the
achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on
Auditing (PSAs).

55. After accepting an assurance engagement, a practitioner is not allowed to change the
engagement to a non-assurance engagement, or from a reasonable assurance engagement
to a limited assurance engagement, except when there is reasonable justification for the
change. Which of the following ordinarily will justify a request for a change in the
engagement?
I. A change in circumstances that affects the intended users’ requirements.
II. A misunderstanding concerning the nature of the engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II

--- END ---

Page 12 of 12 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9202

Manila

AUDITING THEORY CPA Review

• PSQM 1 PHILIPPINE STANDARD ON QUALITY MANAGEMENT 1

Quality Management for Firms that Perform Audits or Reviews of Financial Statements,
or Other Assurance or Related Services Engagements

• PSQM 2 PHILIPPINE STANDARD ON QUALITY MANAGEMENT 2

Engagement Quality Reviews

• PSA 220 QUALITY MANAGEMENT FOR AN AUDIT OF FINANCIAL STATEMENTS

(Revised)

PSQM 1
Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance
or Related Services Engagements

1. This standard deals with a firm’s responsibilities to DESIGN, IMPLEMENT and OPERATE a
system of quality management for audits or reviews of financial statements, or other
assurance or related services.

2. The OBJECTIVE of the firm is to design, implement and operate a system of quality
management that provides the firm with reasonable assurance that:

a) The firm and its personnel fulfill their responsibilities in accordance with professional
standards and applicable legal and regulatory requirements, and conduct engagements in
accordance with such standards and requirements; and
b) Engagement reports issued by the firm or engagement partners are appropriate in the
circumstances.

3. A system of quality management addresses the following EIGHT COMPONENTS:

1) The firm’s risk assessment process;
2) Governance and leadership;
3) Relevant ethical requirements;
4) Acceptance and continuance of client relationships and specific engagements;
5) Engagement performance;
6) Resources;
7) Information and communication; and
8) The monitoring and remediation process.

1. The Firm’s Risk Assessment Process

The firm shall design and implement a risk assessment process to establish quality
objectives, identify and assess quality risks and design and implement responses to
address the quality risks.

2. Governance and leadership

The firm shall establish the following quality objectives that address the firm’s governance
and leadership, which establishes the environment that supports the system of quality
management:
a) The firm demonstrates a commitment to quality through a culture that exists
throughout the firm, which recognizes and reinforces:
i. The firm’s role in serving the public interest by consistently performing quality
engagements;
ii. The importance of professional ethics, values and attitudes;
Page 1 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

iii. The responsibility of all personnel for quality relating to the performance of
engagements or activities within the system of quality management, and their
expected behavior; and
iv. The importance of quality in the firm’s strategic decisions and actions, including
the firm’s financial and operational priorities.
b) Leadership is responsible and accountable for quality.
c) Leadership demonstrates a commitment to quality through their actions and
behaviors.
d) The organizational structure and assignment of roles, responsibilities and authority is
appropriate to enable the design, implementation and operation of the firm’s system
of quality management.
e) Resource needs, including financial resources, are planned for and resources are
obtained, allocated or assigned in a manner that is consistent with the firm’s
commitment to quality.

3. Relevant ethical requirements

The firm shall establish the following quality objectives that address the fulfillment of
responsibilities in accordance with relevant ethical requirements, including those related
to independence:
a) The firm and its personnel:
i. Understand the relevant ethical requirements to which the firm and the firm’s
engagements are subject; and
ii. Fulfill their responsibilities in relation to the relevant ethical requirements to which
the firm and the firm’s engagements are subject.
b) Others, including the network, network firms, individuals in the network or network
firms, or service providers, who are subject to the relevant ethical requirements to
which the firm and the firm’s engagements are subject:
i. Understand the relevant ethical requirements that apply to them; and
ii. Fulfill their responsibilities in relation to the relevant ethical requirements that
apply to them.

4. Acceptance and Continuance of Client relationships and Specific Engagements

The firm shall establish the following quality objectives that address the acceptance and
continuance of client relationships and specific engagements:
a) Judgments by the firm about whether to accept or continue a client relationship or
specific engagement are appropriate based on:
i. Information obtained about the nature and circumstances of the engagement and
the integrity and ethical values of the client (including management, and when
appropriate, those charged with governance) that is sufficient to support such
judgments; and
ii. The firm’s ability to perform the engagement in accordance with professional
standards and applicable legal and regulatory requirements.
b) The financial and operational priorities of the firm do not lead to inappropriate
judgments about whether to accept or continue a client relationship or specific
engagement.

5. Engagement Performance
The firm shall establish the following quality objectives that address the performance of
quality engagements:
a) Engagement teams understand and fulfill their responsibilities in connection with the
engagements.
b) The nature, timing and extent of direction and supervision of engagement teams and
review of the work performed is appropriate.
Page 2 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

c) Engagement teams exercise appropriate professional judgment and, when applicable

to the type of engagement, professional skepticism.
d) Consultation on difficult or contentious matters is undertaken.
e) Differences of opinion are brought to the attention of the firm and resolved.
f) Engagement documentation is assembled on a timely basis after the date of the
engagement report and is appropriately maintained and retained.

6. Resources
The firm shall establish the following quality objectives that address appropriately
obtaining, developing, using, maintaining, allocating and assigning resources in a timely
manner to enable the design, implementation and operation of the system of quality
management.

Human Resources
a) Personnel are hired, developed and retained and have the competence and capabilities
to:
i. Consistently perform quality engagements, including having knowledge or
experience relevant to the engagements the firm performs; or
ii. Perform activities or carry out responsibilities in relation to the operation of the
firm’s system of quality management.
b) Personnel demonstrate a commitment to quality through their actions and behaviors,
develop and maintain the appropriate competence to perform their roles.
c) Individuals are obtained from external sources (i.e., the network, another network
firm or a service provider) when the firm does not have sufficient or appropriate
personnel to enable the operation of firm’s system of quality management or
performance of engagements.
d) Engagement team members are assigned to each engagement, including an
engagement partner, who have appropriate competence and capabilities.
e) Individuals are assigned to perform activities within the system of quality management
who have appropriate competence and capabilities, including sufficient time, to
perform such activities.

Technological Resources
f) Appropriate technological resources are obtained or developed, implemented,
maintained, and used, to enable the operation of the firm’s system of quality
management and the performance of the engagements.

Intellectual Resources
g) Appropriate intellectual resources are obtained or developed, implemented,
maintained, and used, to enable the operation of the firm’s system of quality
management and the consistent performance of quality engagements.

Service Providers
h) Human, technological or intellectual resources from service providers are appropriate
for use in the firm’s system of quality management and in the performance of
engagements.

7. Information and Communication

The firm shall establish the following quality objectives that address obtaining, generating
or using information regarding the system of quality management, and communicating
information within the firm and to external parties on a timely basis to enable the design,
implementation and operation of the system of quality management:
a) The information system identifies, captures, processes and maintains relevant and
reliable information that supports the system of quality management.

Page 3 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

b) The culture of the firm recognizes and reinforces the responsibility of personnel to
exchange information within the firm and with one another.
c) Relevant and reliable information is exchanged throughout the firm and with
engagement teams.
d) Relevant and reliable information is communicated to external parties.

8. Monitoring and Remediation Process

The firm shall establish a monitoring and remediation process to:
a) Provide relevant, reliable and timely information about the design, implementation and
operation of the system of quality management.
b) Take appropriate actions to respond to identified deficiencies such that deficiencies
are remediated on a timely basis.

Designing and Performing Monitoring Activities

• The firm shall design and perform monitoring activities to provide a basis for the
identification of deficiencies.
• The firm shall include the inspection of completed engagements in its monitoring
activities and shall determine which engagements and engagement partners to select.

Evaluating Findings and Identifying Deficiencies

• The firm shall evaluate the findings to determine whether deficiencies exist, including
in the monitoring and remediation process.
• The firm shall evaluate the severity and pervasiveness of identified deficiencies.
• The firm shall design and implement remedial actions to address identified
deficiencies.

EVALUATING THE SYSTEM OF QUALITY MANAGEMENT

• The individual(s) assigned ultimate responsibility and accountability for the system of
quality management shall evaluate, on behalf of the firm, the system of quality
management. The evaluation shall be undertaken as of a point in time, and performed
at least annually.
• The firm shall undertake periodic performance evaluations of the individual(s) assigned
ultimate responsibility and accountability for the system of quality management, and the
individual(s) assigned operational responsibility for the system of quality management.

DOCUMENTATION
a) The firm shall prepare documentation of its system of quality management that is
sufficient to
• Support a consistent understanding of the system of quality management by
personnel.
• Support the consistent implementation and operation of the responses.
• Provide evidence of the design, implementation and operation of the responses.
b) The firm shall establish a period of time for the retention of documentation for the system
of quality management that is sufficient to enable the firm to monitor the design,
implementation and operation of the firm’s system of quality management, or for a longer
period if required by law or regulation.

Page 4 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

PSQM 2
Engagement Quality Reviews

1. ENGAGEMENT QUALITY REVIEW

An objective evaluation of the significant judgments made by the engagement team and the
conclusions reached thereon, performed by the engagement quality reviewer and completed
on or before the date of the engagement report.

2. PSQM 1 requires and engagement quality review for:

a) Audits of financial statements of listed entities;
b) Audits or other engagements for which an engagement quality review is required by law
or regulation;
c) Audits or other engagements for which the firm determines that an engagement quality
review is an appropriate response to address one or more quality risk(s).

3. PSQM 2 deals with:

a) The appointment and eligibility of the engagement quality reviewer; and
b) The engagement quality reviewer’s responsibilities relating to the performance and
documentation of an engagement quality review.

4. The performance of an engagement quality review is undertaken at the engagement level by

the engagement quality reviewer on behalf of the firm.

5. The firm shall establish policies or procedures that set forth the criteria for eligibility to be
appointed as an engagement quality reviewer. Those policies or procedures shall require that
the engagement quality reviewer not be a member of the engagement team, and:
a) Has the competence and capabilities, including sufficient time, and the appropriate
authority to perform he engagement quality review;
b) Complies with relevant ethical requirements;
c) Complies with provisions of law and regulation, if any, that are relevant to the eligibility
of the engagement quality reviewer.

6. In performing the engagement quality review, the engagement quality reviewer shall:
a) Read, and obtain an understanding of, information communicated by:
i. The engagement team regarding the nature and circumstances of the engagement
and the entity; and
ii. The firm related to the firm’s monitoring and remediation process, in particular
identified deficiencies that may relate to, or affect, the areas involving significant
judgments made by the engagement team.
b) Discuss with the engagement partner and, if applicable, other members of the
engagement team, significant matters and significant judgments made in planning,
performing and reporting on the engagement.
c) Based on the information obtained in (a) and (b), review selected engagement
documentation relating to the significant judgments made by the engagement team.
d) For audits of financial statements, evaluate the basis for the engagement partner’s
determination that relevant ethical requirements relating to independence have been
fulfilled.
e) Evaluate whether appropriate consultation has taken place on difficult or contentious
matters or matters involving differences of opinion and the conclusions arising from those
consultations.
f) For audits of financial statements, evaluate the basis for the engagement partner’s
determination that the engagement partner’s involvement has been sufficient and
appropriate throughout the audit engagement such that the engagement partner has the

Page 5 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

basis for determining that the significant judgments made and the conclusions reached
are appropriate given the nature and circumstances of the engagement.
g) Review:
i. For audits of financial statements, the financial statements and the auditor’s report
thereon, including, if applicable, the description of the key audit matters.
ii. For review engagements, the financial statements or financial information and the
engagement report thereon.
iii. For other assurance and related services engagements, the engagement report, and
when applicable, the subject matter information.

7. The engagement quality reviewer shall notify the engagement partner if the engagement
quality reviewer has concerns that the significant judgments made by the engagement team,
or the conclusions reached thereon, are not appropriate.

8. Completion of the Engagement Quality Review

The engagement quality reviewer shall determine whether the requirements of PSQM 2 with
respect to the performance of the engagement quality review have been fulfilled, and whether
the engagement quality review is complete. If so, the engagement quality reviewer shall
notify the engagement partner that the engagement quality review is complete.

8. Documentation

• The firm shall establish policies and procedures that require the engagement quality
reviewer to take responsibility for documentation of the engagement quality review.
• The engagement quality reviewer shall determine that the documentation of the
engagement quality review includes:
a) The names of the engagement quality reviewer and individuals who assisted with the
engagement quality reviewer;
b) An identification of the engagement documentation reviewed.
c) The basis for the engagement quality reviewer’s determination whether the
requirements of PSQM 2 with respect to the performance of the engagement quality
review have been fulfilled, and whether the engagement quality review is complete.
d) The date of completion of the engagement quality review.

PSA 220 (Revised)

Quality Management for an Audit of Financial Statements

1. This PSA deals with the specific responsibilities of the auditor regarding quality management
at the engagement level for an audit of financial statements, and the related responsibilities
of the engagement partner.

2. The engagement partner remains ultimately responsible, and therefore accountable, for
compliance with the requirements of this PSA.

3. The objective of the auditor is to manage quality at the engagement level to obtain reasonable
assurance that quality has been achieved such that:
a) The auditor has fulfilled the auditor’s responsibilities, and has conducted the audit, in
accordance with professional standards and applicable legal and regulatory requirements;
and
b) The auditor’s report issued is appropriate in the circumstances.

Page 6 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

Requirements

Leadership Responsibilities for Managing and Achieving Quality on Audits

• The engagement partner shall take overall responsibility for managing and achieving quality
on the audit engagement, including taking responsibility for creating an environment for the
engagement that emphasizes the firm’s culture and expected behavior of engagement team
members.

Relevant Ethical Requirements, Including Those Related to Independence

• The engagement partner shall have an understanding of the relevant ethical requirements,
including those related to independence, that are applicable given the nature and
circumstances of the audit engagement.
• If matters come to the engagement partner’s attention that indicate that a threat to
compliance with relevant ethical requirements exists, the engagement partner shall evaluate
the threat and take appropriate action.
• The engagement partner shall remain alert throughout the audit engagement for breaches of
relevant ethical requirements or the firm’s related policies or procedures by members of the
engagement team.
• Prior to dating the auditor’s report, the engagement partner shall take responsibility for
determining whether relevant ethical requirements, including those related to independence,
have been fulfilled.

Acceptance and Continuance of Client Relationships and Audit Engagements

• The engagement partner shall determine that the firm’s policies or procedures for the
acceptance and continuance of client relationships and audit engagements have been
followed, and that conclusions reached in this regard are appropriate.
• If the engagement team becomes aware of information that may have caused the firm to
decline the audit engagement had that information been known by the firm prior to accepting
or continuing the client relationship or specific engagement, the engagement partner shall
communicate that information promptly to the firm, so that the firm and the engagement
partner can take the necessary action.

Engagement Resources
• The engagement partner shall determine that sufficient and appropriate resources to perform
the engagement are assigned or made available to the engagement team in a timely manner.
• The engagement partner shall determine that members of the engagement team, and any
auditor’s external experts and internal auditors who provide direct assistance who are not
part of the engagement team, collectively have the appropriate competence and capabilities,
including sufficient time, to perform the audit engagement.
• The engagement partner shall take responsibility for using the resources assigned or made
available to the engagement team appropriately, given the nature and circumstances fo the
audit engagement.

Engagement Performance

Direction, Supervision and Review

• The engagement partner shall take responsibility for the direction and supervision of the
members of the engagement team and review of their work.
• The engagement partner shall review audit documentation at appropriate points in time
during the audit engagement, including audit documentation relating to:
a) Significant matters;
b) Significant judgments, including those relating to contentious matters identified during the
audit engagement, and the conclusions reached; and
c) Other matters that, in the engagement partner’s professional judgment, are relevant to
the engagement partner’s responsibilities.
Page 7 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

Consultation
• The engagement partner shall:
a) Take responsibility for the engagement team undertaking consultation on:
i. Difficult or contentious matters and matters on which the firm’s policies or procedures
require consultation; and
ii. Other matters that, in the engagement partner’s professional judgment, require
consultation;
b) Determine that members of the engagement team have undertaken appropriate
consultation during the audit engagement.
c) Determine that the nature and scope of, and conclusions resulting from, such
consultations are agreed with the party consulted; and
d) Determine that conclusions agreed have been implemented.

Engagement Quality Review

• For audit engagements for which an engagement quality review is required, the engagement
partner shall:
a) Determine that an engagement quality reviewer has been appointed;
b) Cooperate with the engagement quality reviewer and inform other members of the
engagement team of their responsibility to do so;
c) Discuss significant matters and significant judgments arising during the audit engagement,
including those identified during the engagement quality review, with the engagement
quality reviewer; and
d) Not date the auditor’s report until the completion of the engagement quality review.

Monitoring and Remediation

• The engagement partner shall take responsibility for:
a) Obtaining an understanding of information from the firm’s monitoring and remediation
process, as communicated by the firm including, as applicable, the information from the
monitoring and remediation process of the network and across the network firms.
b) Determining the relevance and effect on the audit engagement of the information referred
to in (a) and take appropriate action; and
c) Remaining alert throughout the audit engagement for information that may be relevant
to the firm’s monitoring and remediation process and communicate such information to
those responsible for the process.

Documentation
• The auditor shall include in the audit documentation:
a) Matters identified, relevant discussions with personnel, and conclusions reached with
respect to:
i. Fulfillment of responsibilities relating to relevant ethical requirements, including those
related to independence.
ii. The acceptance and continuance of the client relationship and audit engagement.
b) The nature and scope of, and conclusions resulting from, consultations undertaken during
the audit engagement and how such conclusions were implemented.
c) If the audit engagement is subject to an engagement quality review, that the engagement
quality review has been completed on or before the date of the auditor’s report.

Page 8 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

MULTIPLE CHOICE QUESTIONS

1. A firm should design, implement and operate as system of quality management that provides
the firm with reasonable assurance that:
A. The firm and its personnel fulfill their responsibilities in accordance with professional
standards and applicable legal and regulatory requirements, and conduct engagements in
accordance with such standards and requirements.
B. Engagement reports issued by the firm or engagement partners are appropriate in the
circumstances.
C. Both A and B.
D. Neither A nor B.

2. A system of quality management addresses which of the following components?

A. Considering audit risk and materiality.
B. Obtaining, developing, using, maintaining, allocating and assigning resources.
C. Using statistical sampling techniques.
D. Complying with laws and regulations.

3. PSQM 1 applies to all firms that perform:

A. Audits of financial statements only.
A. Reviews of financial statements only.
B. Other assurance or related services engagements only.
C. Audits or reviews of financial statements, or other assurance or related services
engagements.

4. PSQM 1 requires CPA firms to apply a risk-based approach in designing, implementing and
operating the components of the system of quality management. This approach is embedded
in the requirements of PSQM 1 through:
A. Establishing quality objectives.
B. Identifying and assessing risks to the achievement of the quality objectives.
C. Designing and implementing responses to address the quality risks.
D. All of the above.

5. The partner or other individual, appointed by the firm, who is responsible for the engagement
and its performance, and for the report that is issued on behalf of the firm is the _________.
A. Engagement partner.
B. Engagement quality reviewer.
C. Team leader.
D. Managing partner.

6. The firm’s system of quality management should include policies and procedures that address
each of the following components, except
A. Governance and leadership.
B. Control environment.
C. Relevant ethical requirements.
D. Information and communication.

7. The requirement to promote a culture of quality is most closely associated with which of the
following quality management components?
A. Engagement performance.
B. Relevant ethical requirements.
C. Governance and leadership.
D. Monitoring and remediation process.

8. In pursuing a CPA firm’s quality management objectives, a CPA firm may maintain records
indicating which partners or staff of the CPA firm were previously employed by the CPA firm’s
clients. Which quality management component is this procedure most likely to satisfy?
A. Supervision. C. Experience requirements.
B. Professional relationship. D. Relevant ethical requirements.

Page 9 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

9. The firm shall establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements. The
Code of Ethics for Professional Accountants in the Philippines establishes the fundamental
principles of professional ethics which include the following, except
A. Integrity C. Relevance
B. Objectivity D. Professional behavior

10. A CPA establishes quality management policies and procedures for deciding whether to accept
a new client or continue to perform services to a current client. One purpose for establishing
such policies and procedures is
A. To enable the auditor to attest to the reliability of the client.
B. To satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
C. To provide reasonable assurance that the integrity of the client is considered.
D. To anticipate before performing any field work whether an unmodified opinion can be
expressed.

11. The firm’s ______________ sets out the process the firm is required to follow in implementing
a risk-based approach across the system of quality management.
A. Governance and leadership.
B. Information and communication.
C. Risk assessment process.
D. Monitoring and remediation process.

12. A ___________ is a risk that has a reasonable possibility of occurring and individually, or in
combination with other risks, adversely affecting the achievement of one or more quality
objectives.
A. Quality risk.
B. Business risk.
C. Information risk.
D. Deficiency.

13. ____________ are the desired outcomes in relation to the components of the system of
quality management to be achieved by the firm.
A. Quality risks.
B. Deficiencies.
C. Quality objectives.
D. Quality procedures.

14. In connection with the human resources component, a CPA firm’s system of quality
management should ordinarily provide that all personnel
A. Participate in professional development activities that enable them to fulfill responsibilities
assigned.
B. Possess judgment, motivation, and adequate experience.
C. Seek assistance from persons having appropriate levels of knowledge, judgment, and
authority.
D. Demonstrate compliance with independence policies.

15. In pursuing its quality management objective with respect to assigning personnel to
engagements, a CPA firm may use policies and procedures such as
A. Rotating employees from assignment to assignment on a random basis to aid in the staff
training effort.
B. Requiring timely identification of the staffing requirements of specific engagements so
that enough qualified personnel can be made available.
C. Allowing staff to select the assignments of their choice to promote better client
relationships.
D. Assigning a number of employees to each engagement in excess of the number required
so as not to overburden the staff and interfere with the quality of the audit work
performed.

Page 10 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

16. A requirement that working papers be reviewed by the senior auditor, and any deficiencies
be discussed with the preparer is an example of a quality management procedure in the area
of
A. Engagement performance.
B. Monitoring.
C. Human resources.
D. Leadership responsibility for quality within the firm.

17. The engagement partner should take responsibility for the direction, supervision, and
performance of the audit engagement in compliance with professional standards and
regulatory and legal requirements, and for the auditor’s report that is issued to be appropriate
in the circumstances. Supervision includes the following, except
A. Tracking the progress of the audit engagement.
B. Addressing significant issues arising during the audit engagement, considering their
significance, and modifying the planned approach appropriately.
C. Informing the members of the engagement team of their responsibilities.
D. Identifying matters for consultation or consideration by more experienced engagement
team members during the audit engagement.

18. For audits of financial statements of listed entities, the engagement partner should not issue
the auditor’s report until the completion of the
A. Management Review C. Engagement Partner Review
B. Engagement Team Review D. Engagement Quality Review

19. The statement, <Quality management policies and procedures should be relevant, adequate,
effective, and complied with.= is most closely associated with what quality management
component?
A. Engagement performance
B. Governance and leadership
C. Monitoring
D. Relevant ethical requirements

20. A process comprising an ongoing consideration and evaluation of the firm’s system of quality
management including a periodic inspection of a selection of completed engagements
designed to provide the firm with reasonable assurance that its system of quality management
is operating effectively refers to what quality management element?
A. Internal control.
B. Acceptance and continuance of client relationships and specific engagements.
C. Monitoring.
D. Human resources.

21. Which component of a system of quality management is addressed by the establishment of

policies and procedures designed to provide the firm with reasonable assurance that it has
sufficient personnel with the competence, capabilities, and commitment to ethical principles?
A. Information and communication
B. Governance and leadership
C. Human resources
D. Engagement performance

22. The following are essential components of a system of quality management except
A. Policies and procedures that ensure that monitoring activities are effectively applied.
B. Policies and procedures to ensure that firm personnel are actively engaged in marketing
strategies.
C. Policies and procedures to ensure that the work performed by firm personnel meet
applicable professional standards.
D. Policies to ensure that personnel maintain their independence when performing assurance
services.

23. The least important component in the evaluation of a CPA firm’s system of quality
management would concern its policies and procedures with respect to
A. Assigning personnel to engagement.

Page 11 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

B. Employment (hiring).
C. Confidentiality of audit engagements.
D. Determination of audit fees.

24. An audit firm should implement quality management policies and procedures designed to
ensure that all audits are conducted in accordance with PSAs or relevant national standards
or practices. These policies and procedures should be implemented
A. At the audit firm level only.
B. On individual audits only.
C. Either at the audit firm level or on individual audits.
D. Both at the audit firm level and on individual audits.

25. Who should take responsibility for the overall quality on each audit engagement?
A. Engagement partner C. CPA firm
B. Engagement team D. Engagement quality reviewer

26. The implementation of quality management procedures that are applicable to the individual
audit engagement is the responsibility of the
A. CPA firm
B. Engagement quality control reviewer
C. Engagement team
D. Expert contracted by the firm in connection with the audit engagement

27. The engagement partner should be satisfied that appropriate procedures regarding the
acceptance and continuance of client relationships and specific audit engagements have been
followed, and that conclusions reached in this regard are appropriate and have been
documented. Acceptance and continuance of client relationships and specific audit
engagements include considering:
I. The integrity of the principal owners, key management, and those charged with
governance of the entity.
II. Whether the engagement team is competent to perform the audit engagement and has
the necessary time and resources.
III. Whether the firm and the engagement team can comply with ethical requirements.
A. I only C. II and III only
B. I and II only D. I, II, and III

28. For audits of financial statements of listed entities, the engagement partner should
A. Determine that an engagement quality reviewer has been appointed.
B. Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality review, with the engagement quality reviewer.
C. Not issue the auditor’s report until the completion of the engagement quality review.
D. All of the above

29. Typically, an external auditor first gets supervisory experience at what level of authority?
A. Senior. C. Manager.
B. Supervisor. D. Partner.

30. The audit work performed by each assistant should be reviewed by personnel of at least equal
competence to determine whether it was adequately performed and to evaluate whether the
A. Firm’s system of quality management has been maintained at a high level.
B. Work performed and the results obtained have been adequately documented.
C. Audit procedures performed are approved in the professional standards.
D. Audit procedures performed are in accordance with Philippine Standards on Auditing
(PSAs).

31. The following statements relate to the engagement partner’s responsibility to conduct timely
reviews of the audit documentation to be satisfied that sufficient appropriate evidence has
been obtained to support the conclusions reached and for the auditor’s report to be issued.
Which is false?
A. The engagement partner’s review of the audit documentation allows significant matters
to be resolved on a timely basis to his/her satisfaction before the auditor’s report is issued.

Page 12 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9202

B. The engagement partner should review all audit documentation.

C. The engagement partner should document the extent and timing of the reviews.
D. The reviews cover critical areas of judgment, especially those relating to difficult or
contentious matters identified during the course of the engagement, significant risks, and
other areas the engagement partner considers important.

32. Which of the following quality objectives addresses the engagement performance component
of a system of quality management?
A. Consultation on difficult or contentious matters is undertaken and the conclusions agreed
are implemented.
B. Personnel are hired, developed and retained and have the competence and capabilities to
consistently perform quality engagements.
C. Appropriate technological resources are obtained or developed, implemented, maintained,
and used, to enable the operation of the firm’s system of quality management and the
performance of engagements.
D. The culture of the firm recognizes and reinforces the responsibility of personnel toe
exchange information with the firm and with one another.

33. A firm’s system of quality management should ordinarily provide for the maintenance of
A. A file of minutes of staff meetings.
B. Updated personnel files.
C. Documentation of its system of quality management that is sufficient to support a
consistent understanding of the system of quality management by personnel.
D. Documentation to demonstrate compliance with regulatory requirements.

34. The firm shall obtain written confirmation of compliance with its policies and procedures on
independence from all firm personnel required to be independent by relevant ethical
requirements
A. At least annually
B. At least monthly
C. At least semi-annually
D. At the completion of each engagement

35. Under PSQM 1, an appropriate time limit within which to complete the assembly of the final
engagement file is ordinarily _______________ after the date of the engagement report.
A. not more than 60 days
B. not more than 30 days
C. not more than 10 days
D. not more than 5 days.

--- END ---

Page 13 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9203

Manila

AUDITING THEORY CPA Review

AGREEING THE TERMS OF AUDIT ENGAGEMENTS

(PSA 210)

1. The objective of the auditor is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed, through:

a) Establishing whether the preconditions for an audit are present; and

b) Confirming that there is a common understanding between the auditor and management and
where appropriate, those charged with governance of the terms of the audit engagement.

Preconditions for an audit –

a) The use by management of an acceptable financial reporting framework in the preparation of the
financial statements; and
b) The agreement of management and, where appropriate, those charged with governance to the
premise on which an audit is conducted.

2. Audit Engagement Letters

The agreed terms of the audit engagement shall be recorded in an audit engagement letter
or other suitable form of written agreement and shall include:
a) The objective and scope of the audit of the financial statements;
b) The responsibilities of the auditor;
c) The responsibilities of management;

d) Identification of the applicable financial reporting framework for the preparation of the financial
statements; and
e) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.

3. Acceptance of a Change in Engagement

1. An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result from:
A. A change in circumstances affecting the need for the service;
B. A misunderstanding as to the nature of an audit or related service originally requested; or
C. A restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
3. A change would not be considered reasonable if it appeared that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory.
4. Before agreeing to change an audit engagement to a related service, an auditor would
also consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the engagement
and if the audit work performed complies with the PSAs applicable to the changed
engagement, the report issued would be that appropriate for the revised terms of
engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
Page 1 of 4 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9203

a. The original engagement; or

b. Any procedures that may have been performed in the original engagement, except where the
engagement is changed to undertake agreed-upon procedures.
7. Where the terms of the engagement are changed, the auditor and the client should agree
on the new terms.
8. The auditor should not agree to a change of engagement where there is no reasonable
justification for doing so.
9. 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, contractual or otherwise, to report to other parties, such as the
board of directors or shareholders, the circumstances necessitating the withdrawal.

MULTIPLE CHOICE QUESTIONS

1. The auditor may accept or continue an audit engagement only when the basis upon which it
is to be performed has been agreed, through
I. Establishing whether the preconditions for an audit are present.
II. Confirming that there is a common understanding between the auditor and management
and, where appropriate, those charged with governance of the terms of the audit
engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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

A. An understanding of the prospective client's industry and business.
B. The prospective client's signature to the representation letter.
C. A preliminary understanding of the prospective client's control environment.
D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

3. Which of the following is not correct regarding the communications between successor and
predecessor auditors?
A. The burden of initiating the communication rests with the predecessor auditor.
B. The burden of initiating the communication rests with the successor auditor.
C. The predecessor auditor must receive their former client’s permission prior to divulging
information to the successor auditor.
D. The predecessor auditor may choose to provide a limited response to a successor auditor.

4. 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

5. Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be performed?
A. Management fails to modify prescribed internal controls for changes in information
technology.
B. Internal control activities requiring segregation of duties are rarely monitored by
management.
C. Management is dominated by one person who is also the majority stockholder.
D. There is a substantial risk of intentional misapplication of accounting principles.

Page 2 of 4 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9203

6. The scope and nature of an auditor’s contractual obligation to a client is ordinarily set forth in
the
A. Management representation letter.
B. Opinion section of the auditor’s report.
C. Engagement letter.
D. Basis for Opinion section of the auditor’s report.

7. An auditor is required to establish an understanding in writing with a client regarding the

services to be performed for each engagement. This understanding generally includes
A. Management’s responsibility for errors and the illegal activities of employees that may
cause material misstatement.
B. The auditor’s responsibility for ensuring that those charged with governance are aware of
any significant deficiencies or material weaknesses in internal control that come to the
auditor’s attention.
C. Management’s responsibility for providing the auditor with an assessment of the risk of
material misstatement due to fraud.
D. The auditor’s responsibility for determining preliminary judgments about materiality and
audit risk factors.

8. The engagement letter documents and confirms the

A B C D
Auditor’s acceptance of the appointment Yes Yes Yes Yes
Objective and scope of the audit Yes No Yes Yes
Extent of the auditor’s responsibilities to the client No Yes No Yes
Form of any reports Yes No No Yes

9. An engagement letter should ordinarily include information on the objectives of the

engagement and
Auditor’s Management’s Limitation of
Responsibilities Responsibilities Engagement
A. Yes Yes No
B. No No No
C. Yes No Yes
D. Yes Yes Yes

10. Which of the following statements would least likely appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-
of-pocket expenses.
B. Management is responsible for making all financial records and related information
available to us.
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not
be detected.
D. After performing our preliminary analytical procedures, we will discuss with you the other
procedures we consider necessary to complete the engagement.

11. The following are usually included in an auditor’s engagement letter, except
A. List of audit procedures to be used in inventory observation.
B. The financial statements are the responsibility of the company’s management.
C. A reference to PFRS.
D. A reference to PSAs.

12. 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.

Page 3 of 4 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9203

13. An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should
A. Withdraw and consider whether there is any obligation to report to other parties the
circumstances necessitating the withdrawal.
B. Issue a report that includes reference to the original engagement and any procedures that
may have been performed in the original engagement.
C. Not agree to a change of engagement where there is no reasonable justification for doing
so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete or
otherwise unsatisfactory.

14. Before the completion of the audit engagement, an auditor is requested to change the
engagement to one that provides a lower level of assurance. If the auditor concludes that
there is a reasonable justification for the change in engagement, the report to be issued would
A. Be that appropriate for the revised terms of engagement.
B. Include reference to the original engagement.
C. Include reference to any procedures that may have been performed in the original
engagement.
D. Not include reference to any procedures that may have been performed, particularly when
the new engagement is to undertake agreed-upon procedures.

15. 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
A. Insist on continuing the original engagement.
B. Express a qualified opinion.
C. Express an adverse opinion.
D. Withdraw from the engagement.

---END---

Page 4 of 4 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9204

Manila

AUDITING THEORY CPA Review

• PSA 300 PLANNING AN AUDIT OF FINANCIAL STATEMENTS

• PSA 315 IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT

PSA 300
PLANNING AN AUDIT OF FINANCIAL STATEMENTS

1. Planning an audit involves:

• establishing the overall audit strategy for the engagement; and

• developing an audit plan.

Preliminary Engagement Activities

2. The auditor shall perform the following activities at the beginning of the current audit
engagement:

• Perform procedures regarding the continuance of the client relationship and the
specific audit engagement.
• Evaluate compliance with ethical requirements, including independence.
• Establish an understanding of the terms of the engagement.

Planning Activities

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

4. The establishment of the overall audit strategy involves:

a) Determining the characteristics of the engagement that define its scope;
b) Ascertaining the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required;
c) Considering the important factors that will determine the focus of the engagement team’s
efforts;
d) Considering the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement partner
for the entity is relevant; and
e) Ascertaining the nature, timing and extent of resources necessary to perform the
engagement.

5. The auditor shall develop an audit plan that shall include a description of:
a) The nature, timing and extent of planned risk assessment procedures, as determined
under PSA 315.
b) The nature, timing and extent of planned further audit procedures at the assertion level,
as determined under PSA 330.
c) Other planned audit procedures that are required to be carried out so that the engagement
complies with PSAs.

Page 1 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

Changes to Planning Decisions During the Course of the Audit

The overall audit strategy and the audit plan shall be updated and changed as necessary during
the course of the audit.

Direction, Supervision and Review

1. The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and review their work.

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

3. The auditor plans the nature, timing and extent of direction and supervision of engagement
team members based on the assessed risk of material misstatement.

Documentation

The auditor shall document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.

Additional Considerations in Initial Audit Engagements

The auditor shall perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
2. Communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.

PSA 315
IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

1. The objective of the auditor is to

• identify and assess the risks of material misstatement, whether due to fraud or error,
at the financial statement and assertion levels
• thereby providing a basis for designing and implementing responses to the assessed
risks of material misstatement.

2. The auditor shall design and perform risk assessment procedures to obtain audit evidence
that provides an appropriate basis for:

a) the identification and assessment of risks of material misstatement, whether due to fraud
or error,
• at the financial statement
• and assertion levels; and

b) the design of further audit procedures in accordance with PSA 330.

Page 2 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

3. The risk assessment procedures shall include the following:

a) Inquiries of management and of other appropriate individuals within the entity,
including individuals within the internal audit function (if the function exists).
b) Analytical procedures.
c) Observation and inspection.

4. Information from Other Sources

In obtaining audit evidence by performing risk assessment procedures, the auditor shall
consider information from:
a) The auditor’s procedures regarding acceptance and continuance of the client
relationship of the audit engagement; and
b) When applicable, other engagements performed by the engagement partner for the
entity.

5. Engagement Team Discussion

• The engagement partner and other key engagement team members shall discuss the
application of the applicable financial reporting framework and the susceptibility of the
entity’s financial statements to material misstatement.

• When there are engagement team members not involved in the engagement team
discussion, the engagement partner shall determine which matters are to be
communicated to those members.

6. Obtaining an Understanding of the Entity and its Environment, the Applicable

Financial Reporting Framework and the Entity’s System of Internal Control

• The auditor shall perform risk assessment procedures to obtain an understanding of:

a) The following aspects of the entity and its environment:

i. The entity’s organizational structure, ownership and governance, and its
business model, including the extent to which the business model integrates
the use of IT;
ii. Industry, regulatory and other external factors;
iii. The measures used, internally and externally, to assess the entity’s financial
performance;

b) The applicable financial reporting framework, and the entity’s accounting policies and
the reasons for any changes thereto;

c) How inherent risk factors affect susceptibility of assertions to misstatement and the
degree to which they do so, in the preparation of the financial statements in
accordance with the applicable financial reporting framework.

• The auditor shall evaluate whether the entity’s accounting policies are appropriate and
consistent with the applicable financial reporting framework.

INTERNAL CONTROL

1. Internal control is the process designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives with regard to:

• Reliability of financial reporting;

• Effectiveness and efficiency of operations; and
• Compliance with applicable laws and regulations.
Page 3 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

2. When obtaining an understanding of controls that are relevant to the audit, the auditor
shall:
• evaluate the design of those controls; and
• determine whether they have been implemented
by performing procedures in addition to inquiry of the entity’s personnel.

COMPONENTS OF INTERNAL CONTROL

1. Control Environment

The control environment 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 in the entity.

Elements of control environment:

a) Communication and enforcement of integrity and ethical values.
b) Commitment to competence.
c) Participation by those charged with governance.
d) Management’s philosophy and operating style.
e) Organizational structure.
f) Assignment of authority and responsibility.
g) Human resource policies and practices.

The auditor shall obtain an understanding of the control environment. As part of obtaining
this understanding, the auditor shall evaluate whether:
a) Management, with the oversight of those charged with governance, has created and
maintained a culture of honesty and ethical behavior; and
b) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control, and whether those other
components are not undermined by deficiencies in the control environment.

2. The Entity’s Risk Assessment Process

The auditor shall obtain an understanding of whether the entity has a process for:
a) Identifying business risks relevant to financial reporting objectives;
b) Estimating the significance of the risks;
c) Assessing the likelihood of their occurrence; and
d) Deciding about actions to address those risks.

3. The information system, including the related business processes, relevant to

financial reporting, and communication

The auditor shall obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:
➢ The classes of transactions in the entity’s operations that are significant to the financial
statements.
➢ The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed, corrected as necessary, transferred to the general
ledger and reported in the financial statements.
➢ The related accounting records, whether electronic or manual, supporting information,
and specific accounts in the financial statements that are used to initiate, record,
process and report transactions; this includes the correction of incorrect information
and how information is transferred to the general ledger.
➢ How the information system captures events and conditions, other than transactions,
that are significant to the financial statements.
Page 4 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

➢ The financial reporting process used to prepare the entity’s financial statements,
including significant accounting estimates and disclosures.
➢ Controls surrounding journal entries, including non-standard journal entries used to
record non-recurring, unusual transactions or adjustments.

The auditor shall obtain an understanding of how the entity communicates financial reporting
roles and responsibilities and significant matters relating to financial reporting, including:
➢ Communications between management and those charged with governance; and
➢ External communications, such as those with regulatory authorities.

4. Control activities relevant to the audit

• Control activities are the policies and procedures to help ensure that management
directives are carried out. Examples of control activities include those relating to the
following:
➢ Authorization
➢ Performance reviews
➢ Information processing
➢ Physical controls
➢ Segregation of duties

• The auditor shall obtain a sufficient understanding of control activities to:

➢ Assess the risks of material misstatement at the assertion level; and
➢ Design further audit procedures responsive to assessed risks.

5. Monitoring of controls

• Monitoring of controls involves assessing the design and operation of controls on a

timely basis and taking the necessary corrective actions modified for changes in
conditions.

• The auditor shall obtain an understanding of the major activities that the entity uses to
monitor internal control over financial reporting, including those related to those control
activities relevant to the audit, and how the entity initiates remedial actions to deficiencies
in its controls.

• If the entity has an internal audit function, the auditor shall obtain an understanding of
the following in order to determine whether the internal audit function is likely to be
relevant to the audit:
a. The nature of the internal audit function’s responsibilities and how the internal audit
function fits in the entity’s organizational structure; and
b. The activities performed, or to be performed, by the internal audit function.

• The auditor shall obtain an understanding of the sources of the information used in the
entity’s monitoring activities, and the basis upon which management considers the
information to be sufficiently reliable for the purpose.

Page 5 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

MULTIPLE CHOICE QUESTIONS

1. Which of the following factors most likely would cause an auditor to decline a new audit
engagement?
A. Concluding that the entity’s management probably lacks integrity.
B. An inability to perform preliminary analytical procedures before assessing control risk.
C. An inadequate understanding of the entity’s internal control.
D. The close proximity to the end of the entity’s reporting period.

2. Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding
A. The predecessor’s assessment of inherent risk and judgments about materiality.
B. The degree of cooperation the predecessor received concerning the inquiry of the client’s
lawyer.
C. The predecessor’s evaluation of matters of continuing accounting significance.
D. Disagreements the predecessor had with the client concerning auditing procedures and
accounting principles.

3. Adequate planning of the audit work helps to ensure that

A B C D
• Appropriate attention is devoted to important areas
of the audit Yes No Yes No
• Potential problems are identified Yes Yes Yes No
• The work is completed expeditiously No Yes Yes No

4. 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. Conditions requiring special attention, such as the existence of related parties.
C. The setting of materiality levels for audit purposes.
D. All of the above.

5. An auditor should design the audit plan so that

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.

6. Audit plans should be designed so that

A. Most of the required procedures can be performed as interim work.
B. Inherent risk is assessed at a sufficiently low level.
C. The auditor can make constructive suggestions to management.
D. The audit evidence gathered supports the auditor’s conclusions.

7. An auditor most likely obtains an understanding of a new client to

A. Make constructive suggestions concerning improvements to the client’s internal control.
B. Develop an attitude of professional skepticism concerning management’s financial
statement assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
D. Identify areas of audit emphasis.

8. Which of the following procedures is the auditor most likely to perform after accepting an
initial audit engagement?
A. Prepare a rough draft of the financial statements and of the auditor’s report.
B. Assess control risk for the assertions embodied in the financial statements.
C. Tour the client’s facilities.

Page 6 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

D. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

9. To obtain an understanding of a continuing client’s business, an auditor most likely would

A. Perform tests of details of transactions and balances.
B. Read internal audit reports.
C. Read specialized industry journals.
D. Reevaluate the risks of material misstatement.

10. The objective of performing analytical procedures as risk assessment procedures in an audit
is to identify
A. Unusual transactions and events.
B. Noncompliance with laws and regulations that went undetected because of internal
control weaknesses.
C. Relate party transactions.
D. Recorded transactions that were properly authorized.

11. A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unmodified opinion has been issued
is the
A. Inherent risk. C. Control risk.
B. Acceptable audit risk. D. Detection risk.

12. Which of the following audit risk components may be assessed in quantitative terms?
Inherent Risk Control Risk Detection Risk
A. Yes No Yes
B. Yes Yes Yes
C. No No No
D. No No Yes

13. A measure of the auditor’s assessment of the likelihood that there are material
misstatements in an account before considering the effectiveness of the client’s internal
control is called
A. Audit risk C. Inherent risk
B. Detection risk D. Control risk

14. Assessing control risk at a low level most likely would involve
A. Performing more extensive substantive tests with larger sample sizes than originally
planned.
B. Reducing inherent risk for most of the assertions relevant to significant account
balances.
C. Changing the timing of substantive tests by omitting interim-date testing and performing
the tests at year-end.
D. Identifying specific controls relevant to specific assertions.

15. An auditor assesses control risk because it

A. Is relevant to the auditor’s understanding of the control environment.
B. Provides assurance that the auditor’s materiality levels are appropriate.
C. Indicates to the auditor where inherent risk may be the greatest.
D. Affects the level of detection risk that the auditor may accept.

16. Which of the following is not a step in an auditor’s assessment of control risk?
A. Evaluate the effectiveness of internal control with tests of controls.
B. Obtain an understanding of the entity’s information system and control environment.
C. Perform tests of details of transactions to detect material misstatements in the financial
statements.
D. Consider whether controls can have a pervasive effect on financial statement assertions.

Page 7 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

17. 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 C. Business strategy
B. Internal control C. Accounting process

18. Which of the following is not one of the three primary objectives of effective internal
control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.

19. In an audit of financial statements, an auditor’s primary consideration regarding an internal

control is whether the control
A. Reflects management’s philosophy and operating style.
B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Relates to operational activities.

20. Which of the following are considered control environment elements?

Commitment Detection Organizational
to Competence Risk Structure
A. No Yes No
B. Yes Yes Yes
C. Yes No Yes
D. No No Yes

21. 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 safeguarding 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.

22. The components of internal control include

A. Monitoring of controls that sets the tone of the organization.
B. A process of managing risks relevant to preparing financial statements.
C. A control environment consisting of policies and procedures to help ensure that
management directives are carried out.
D. Control activities that identify, capture, and exchange information.

23. An auditor should consider two key issues when obtaining an understanding of a client’s
internal controls. These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.

24. Which of the following statements is most correct with respect to separation of duties?
A. Employees should not have temporary and permanent custody of assets.
B. Employees who authorize transactions should not have custody of related assets.
C. It is permissible to allow an employee to open cash receipts and record those receipts.
D. Employees who authorize transactions should have recording responsibility for these
transactions.

Page 8 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

25. Authorizations can be either general or specific. Which of the following is not an example
of a general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager’s authorization for a sales return.
C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.

26. 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.

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

28. An auditor should obtain sufficient knowledge of an entity’s information system, including
the related business processes relevant to financial reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.

29. The primary objective of procedures performed to obtain an understanding of internal

control is to provide an auditor with
A. Knowledge necessary to plan the audit.
B. A basis for modifying tests of controls.
C. Information necessary to prepare flowcharts.
D. Evidence to use in reducing detection risk.

30. In obtaining an understanding of internal control relevant to the audit, an auditor is required
to obtain knowledge about the
A. Effectiveness of controls that have been implemented.
B. Consistency with which controls are currently being applied.
C. Design of the controls pertaining to internal control components.
D. Controls related to each class of transactions and account balance.

31. After considering a client’s internal controls, an auditor has concluded that it is well designed
and is functioning as intended. Under these circumstances the auditor would most likely
A. Perform tests of controls to the extent outlined in the audit program.
B. Determine the control procedures that should prevent or detect errors and fraud.
C. Not increase the extent of predetermined substantive tests.
D. Determine whether transactions are recorded to permit preparation of financial
statements in accordance with PFRS.

32. Audit evidence concerning proper segregation of duties normally is best obtained by
A. Direct personal observation of the employee who applies control procedures.
B. Making inquiries of co-workers about the employee who applies control procedures.
C. Preparation of a flowchart of duties performed and available personnel.

Page 9 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

D. Inspection of third-party documents containing the initials of who applied control

procedures.

33. In conducting an audit in accordance with PSAs, the auditor is required to identify and
assess the risks of material misstatement at the financial statement level, and at the
assertion level for classes of transactions, account balances, and disclosures. 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
B. Audit risks
C. Significant risks
D. Material risks

34. As a result of obtaining an understanding of an entity’s internal control system, the auditor
may become aware of material weaknesses in the design or implementation of internal
control. The auditor is required to communicate this matter to
A. Those charged with governance or management
B. Chief executive officer
C. Securities and Exchange Commission
D. Board of Accountancy

35. Which of the following controls most likely would provide reasonable assurance that all
credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis,
the accounts receivable subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account
balances.

36. An auditor tests an entity’s policy of obtaining credit approval before shipping goods to
customers in support of management’s financial statement assertion of
A. Valuation.
B. Completeness.
C. Occurrence.
D. Rights and obligations.

37. Macho Dancer Company uses its sales invoices for posting perpetual inventory records.
Inadequate internal control over the invoicing function allows goods to be shipped but not
invoiced. The inadequate controls could cause what type of misstatement in each of the
following accounts?
Revenues Receivables Inventories
A. Understatement Understatement Understatement
B. Overstatement Overstatement Understatement
C. Understatement Understatement Overstatement
D. Overstatement Overstatement Overstatement

38. Which of the following control activities in an entity’s revenue/receipt cycle would provide
reasonable assurance that all billed sales are correctly posted to the accounts receivable
ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable
control account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.

Page 10 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

39. The auditor’s primary objective in obtaining an understanding of the client’s controls 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 materials paid for are on hand.

40. Effective controls relevant to purchasing of raw materials should usually include all of the
following, except
A. Determining the need for the raw materials prior to preparing the purchase order.
B. Systematic reporting of product changes that will affect raw materials.
C. Obtaining financial approval prior to making a commitment.
D. Obtaining third-party written quality and quantity reports prior to payment for the raw
materials.

41. Which of the following controls is not usually performed in the accounts payable
department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendor’s invoice with the related purchase requisition, purchase order, and
receiving report.

42. The following are appropriate questions on an internal control questionnaire concerning
purchase transactions, except
A. Are all goods received in a centralized receiving department and counted, inspected,
and compared with purchase orders on receipt?
B. Are intact cash receipts deposited daily in the bank?
C. Are prenumbered purchase orders and receiving reports used and accounted for?
D. Are an approved purchase requisition and a signed purchase order required for each
purchase?

43. Which of the following is of least concern to an auditor in assessing the risks of material
misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.

44. To provide assurance that each voucher is submitted and paid only once, an auditor most
likely would examine a sample of paid vouchers and determine whether each voucher is
A. Supported by a vendor’s invoice.
B. Stamped <paid= by the check signer.
C. Prenumbered and accounted for.
D. Approved for authorized purchases.

45. Which of the following is an essential control procedure to ensure the accuracy of the
recorded inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance
with inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test.
D. Establishing a cutoff for goods received and shipped.

46. Effective internal controls over inventories are designed and implemented for the following
reasons, except
A. Inventories typically represent a large component of an entity’s current assets.
B. Inventories are the most liquid asset.
C. Inventories directly affect the financial performance of an entity.

Page 11 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

D. Inventories typically represent a large portion of an entity’s total assets.

47. An auditor generally tests the segregation of duties related to inventory by

A. Personal inquiry and observation.
B. Test counts and cutoff procedures.
C. Analytical procedures and invoice recomputation.
D. Document inspection and reconciliation.

48. Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross
profit rate. Tests reveal that 2% of the peso amount of purchases do not get into inventory
because of breakage and inventory pilferage by employees. The company estimates that
these losses could be reduced to 0.5% of purchases by designing and implementing certain
controls costing approximately P350,000. Should the controls be designed and
implemented?
A. Yes, regardless of cost-benefit considerations, because the situation involves employee
theft.
B. Yes, because the ideal system of internal control is the most extensive one.
C. No, because the cost of designing and implementing the added controls exceeds the
projected savings.
D. Yes, because the expected benefits to be derived exceed the cost of the added controls.

49. Which of the following controls most likely would be implemented to achieve the production
cycle control objective of maintaining accurate inventory records?
A. Periodic inventory counts are used to adjust the perpetual inventory records.
B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
C. Perpetual inventory records are periodically compared with the net realizable value of
individual inventory items.
D. Purchase requisitions, receiving reports, purchase orders, and vendor invoices are
independently matched before payment is approved.

50. An internal control objective concerning property, plant, and equipment (PPE) acquisitions
is that they be recorded at the correct amounts and in the proper period, and properly
classified. In which of the following conditions would an auditor most likely assess a high
level of risk of material misstatement?
A. All material acquisitions of PPE are required to be approved by the board of directors.
B. Most additions are self-constructed by the entity.
C. Recently acquired loans include covenants that preclude further plant acquisitions for 5
years.
D. Gross PPE increased 30% during the current period.

51. Which of the following controls would an entity most likely use in safeguarding against the
loss of trading securities?
A. The independent auditor traces all purchases and sales of trading securities through the
subsidiary ledgers to the general ledger.
B. An independent trust company that has no direct contact with the employees who have
record-keeping responsibilities has possession of the securities.
C. The internal auditor inspects the trading securities in the entity’s safe each year on the
balance sheet date.
D. A designated member of the board of directors controls the securities in a bank safe-
deposit box.

52. The following controls are designed to protect investment securities, except
A. Investment securities should be properly controlled physically in order to prevent
unauthorized usage.
B. Custody over investment securities should be limited to personnel having record-keeping
responsibility over the securities.
C. Securities should be registered in the entity’s name.
D. Access to securities should be vested in two individuals.

Page 12 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9204

53. Effective controls over the payroll function may include

A. Custody of rate authorization records by the supervisor of the payroll department.
B. Preparation of payroll transaction journal entries by an employee who reports to the
supervisor of the personnel department.
C. Verification of agreement of job time tickets with employee clock card hours by a payroll
department employee.
D. Reconciliation of totals on job time tickets with job reports by employees responsible for
those specific jobs.

54. Employees of a manufacturing entity are often required to use time cards and job time
tickets. Which of the following statements concerning the use of these documents is
incorrect?
A. Time reported on job time tickets should be reconciled to time cards.
B. Payroll should be calculated based on job time tickets.
C. Each employee should have only one time card.
D. An employee may have one or many job time tickets in a day.

55. Which of the following personnel department procedures reduces the risk of payroll fraud
and represents an appropriate responsibility for the department?
A. Authorizing the addition or deletion of employees from the payroll.
B. Authorizing overtime hours.
C. Collection and retention of unclaimed paychecks.
D. Distributing paychecks.

--- END --

Page 13 of 13 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9205

Manila

AUDITING THEORY CPA Review

PSA 330
THE AUDITOR’S RESPONSES TO ASSESSED RISKS

Overall Responses

1. The auditor should design and implement overall responses to address the risks of material
misstatement at the financial statement level. Such responses may include:
• Emphasizing to the audit team the need to maintain professional skepticism.
• Assigning more experienced staff or those with special skills or using experts.
• Providing more supervision.
• Incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed.
• Making general changes to the nature, timing, or extent of audit procedures.

Audit Procedures Responsive to Risks of Material Misstatement at the Assertion Level

1. In designing the further audit procedures, the auditor shall:

(a) Consider the reasons for the assessment given to the risk of material misstatement at
the assertion level for each class of transactions, account balance, and disclosure,
including:
i. The likelihood of material misstatement due to the particular characteristics of
the relevant class of transactions, account balance or disclosure (that is, the
inherent risk); and
ii. Whether the risk assessment takes account of relevant controls (that is, the
control risk), thereby requiring the auditor to obtain audit evidence to
determine whether the controls are operating effectively (that is, the auditor
intends to rely on the operating effectiveness of controls in determining the
nature, timing and extent of substantive procedures); and

(b) Obtain more persuasive evidence the higher the auditor’s assessment of risk.

2. Considering the nature, timing, and extent of further audit procedures

The nature of further audit procedures refers to their:

a) Purpose – tests of controls or substantive procedures.
b) Type – inspection, observation, inquiry, confirmation, recalculation, reperformance, or
analytical procedures.

Timing refers to when audit procedures are performed or the period or date to which the
audit evidence applies.

Extent includes the quantity of a specific audit procedure to be performed.

TESTS OF CONTROLS

1. The auditor is required to perform tests of controls when:

a) The auditor’s risk assessment includes an expectation of the operating effectiveness of
controls; or
b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.

Page 1 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9205

2. Tests of the operating effectiveness of controls are performed only on those controls that the
auditor has determined are suitably designed to prevent, or detect and correct, a material
misstatement in an assertion.

3. Testing the operating effectiveness of controls includes obtaining evidence about:

a) How controls were applied at relevant times during the period under audit;
b) The consistency with which they were applied; and
c) By whom or by what means they were applied.

SUBSTANTIVE PROCEDURES

1. Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
• Tests of details of classes of transactions, account balances, and disclosures; and
• Substantive analytical procedures.

2. The auditor’s substantive procedures should include the following audit procedures related to
the financial statement closing process:
• Agreeing or reconciling the financial statements with the underlying accounting records;
and
• Examining material journal entries and other adjustments made during the course of
preparing the financial statements.

3. The auditor should perform audit procedures to evaluate whether the overall presentation of
the financial statements, including the related disclosures, are in accordance with the
applicable financial reporting framework.

Evaluating the sufficiency and appropriateness of audit evidence obtained

1. Based on the audit procedures performed and the audit evidence obtained, the auditor should
evaluate whether the assessments of the risks of material misstatement at the assertion level
remain appropriate.

2. The auditor should conclude whether sufficient appropriate audit evidence has been obtained
to reduce to an acceptably low level the risk of material misstatement in the financial
statements.

3. If the auditor has not obtained sufficient appropriate audit evidence as to a material financial
statement assertion, the auditor shall attempt to obtain further audit evidence. If the auditor
is unable to obtain further audit evidence, the auditor shall express a qualified opinion or a
disclaimer of opinion.

Documentation

1. The auditor shall include in the audit document:

• The overall responses to address the assessed risks of material misstatement at the
financial statement level and the nature, timing, and extent of the further audit
procedures;
• The linkage of those procedures with the assessed risks at the assertion level; and
• The results of the audit procedures.

2. If the auditor plans to use audit evidence about the operating effectiveness of controls
obtained in prior audits, the auditor should document the conclusions reached with regard to
relying on such controls that were tested in a prior audit.

3. The auditor’s documentation shall demonstrate that the financial statements agree or
reconcile with the underlying accounting records.

Page 2 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9205

MULTIPLE CHOICE QUESTIONS

1. Control risk should be assessed in terms of

A. Specific control procedures. C. Financial statement assertions.
B. Types of potential fraud. D. Control environment factors.

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

A. Operating effectively
B. Properly documented by the client
C. Placed in operation or implemented
D. Properly incorporated in the financial statements

3. 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.

4. After considering a client’s internal controls, an auditor has concluded that it is well designed
and is functioning as intended. Under these circumstances the auditor would most likely
A. Perform tests of controls to the extent outlined in the audit program.
B. Determine the control procedures that should prevent or detect errors and fraud.
C. Not increase the extent of predetermined substantive tests.
D. Determine whether transactions are recorded to permit preparation of financial
statements in accordance with PFRS.

5. The audit risk against which the auditor and those who rely on his or her opinion require
reasonable protection is a combination of two separate risks at the assertion level. The first
risk is that balances, classes of transactions, or disclosures contain material misstatements.
The second is that
A. The auditor will reject a correct account balance as incorrect.
B. Material misstatements that occur will not be detected by the audit.
C. The auditor will apply an inappropriate audit procedure.
D. The auditor will apply an inappropriate measure of audit materiality.

6. Which of the following statements about the auditor’s response to assessed risks of material
misstatement in a financial statement audit is true?
A. When the risks of material misstatement are high, an auditor should reduce the amount
of substantive testing.
B. Reliance on internal control may be sufficient to allow the auditor to eliminate substantive
testing for significant transaction classes.
C. When assessing the risks of material misstatement, an auditor should not consider
evidence obtained in prior audits about the operation of controls.
D. Risk assessment procedures performed to obtain an understanding of an entity’s internal
control also may serve as tests of controls.

7. In a financial statement audit, the auditor is required to perform tests of controls when
I. The auditor’s risk assessment includes an 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 C. Either I or II
B. II only D. Neither I nor II

Page 3 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9205

8. After gaining an understanding of internal control and assessing the risks of material
misstatement, 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 is not possible or practicable to reduce the risks of material misstatement at the
assertion level to an acceptably low level with audit evidence obtained only from
substantive test procedures.
C. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.
D. An increase in the assessed level of control risk is justified for certain financial statement
assertions.

9. Tests of controls are concerned primarily with each of the following questions, except
A. By whom were the controls applied?
B. Were the necessary controls consistently performed?
C. How were the controls applied?
D. Why were the controls applied?

10. How frequently must an auditor test operating effectiveness of controls that appear to
function as they have in past years and on which the auditor wishes to rely in the current
year?
A. Monthly. C. At least every second audit.
B. Annually. D. At least every third audit.

11. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If
the control procedures leave no audit trail of documentary evidence, the auditor most likely
will test the procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.

12. Before assessing control risk at a level lower than the maximum, the auditor obtains
reasonable assurance that controls are in use and operating effectively. This assurance is
most likely obtained in part by
A. Preparing flowcharts and narratives of the entity’s internal control system.
B. Performing substantive test of details of transactions and balances.
C. Analyzing tests of trends and ratios.
D. Inspection of documents.

13. The following statements relate to the use of audit evidence when testing the operating
effectiveness of relevant controls. Which is false?
A. An auditor who obtains sufficient appropriate audit evidence about the operating
effectiveness of controls during the interim period should no longer obtain additional
evidence of operating effectiveness for the remaining period.
B. An auditor may plan to use audit evidence about the operating effectiveness of controls
obtained in prior audits.
C. If an auditor plans to rely on controls that have changed since they were last tested, the
auditor should test the operating effectiveness of such controls in the current audit.
D. Audit evidence pertaining only to a point in time may be sufficient for the auditor’s
purpose, for example, when testing controls over an entity’s physical count of inventories
at year-end.

14. An auditor may decide to assess control risk at the maximum level for certain assertions
because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.

Page 4 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9205

15. Which of the following statements is correct concerning an auditor’s assessment of control
risk?
A. Assessing control risk may be performed concurrently during an audit with obtaining an
understanding of the entity’s internal control.
B. Evidence about the operation of controls in prior audits may not be considered during the
current year’s assessment of control risk.
C. The basis for an auditor’s conclusions about the assessed level of control risk need not be
documented unless control risk is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must provide
that the controls are operating effectively.

16. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk
level that is substantially the same as the planned audit risk level, the auditor would
A. Increase inherent risk. C. Decrease inherent risk.
B. Increase materiality level. D. Decrease detection risk.

17. When an auditor increases the planned assessed level of control risk because certain controls
were determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of details. C. Extent of tests of controls.
B. Level of inherent risk. D. Level of detection risk.

18. Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal control policies.
B. Analytical procedures to verify the design of internal control procedures.
C. Substantive tests to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary
control risk.

19. Which of the following types of evidence would an auditor most likely examine to determine
whether controls are operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorneys’ responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.

20. When an accounting application is processed by computer, an auditor cannot verify the
reliable operation of programmed control procedures by
A. Manually comparing detail transaction files used by an edit program with the program’s
generated error listings to determine that errors were properly identified by the edit
program.
B. Constructing a processing system for accounting applications and processing actual data
from throughout the period through both the client’s program and the auditor’s program.
C. Manually reperforming, as of a moment in time, the processing of input data and
comparing the simulated results with the actual results.
D. Periodically submitting auditor-prepared test data to the same computer process and
evaluating the results.

21. During the consideration of a small business client’s internal control, the auditor discovered
that the accounts receivable clerk approves credit memos and has access to cash. Which of
the following controls would be most effective in offsetting this weakness?
A. The controller reconciles the total of the detail accounts receivable accounts to the amount
shown in the ledger.
B. The controller receives the monthly bank statement directly and reconciles the checking
accounts.
C. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
D. The owner reviews credit memos after they are recorded.

Page 5 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9205

22. In assessing control risk for the purchasing cycle, the auditor will be least influenced by
A. The effectiveness of controls in other cycles, e.g., the sales-receivables-cash receipts
cycle.
B. The existence within the purchasing cycle of internal control strengths that offset
weaknesses.
C. The audit work performed in the purchasing cycle by the company’s internal auditor.
D. The availability of a company manual describing policies and procedures for the
purchasing cycle.

23. Which of the following procedures would an auditor most likely perform to test controls
relating to management’s assertion concerning the completeness of sales transactions?
A. Verify that extensions and footings on the entity’s sales invoices and monthly customer
statements have been recomputed.
B. Compare the invoiced prices on prenumbered sales invoices to the entity’s authorized
price list.
C. Inquire about the entity’s credit granting policies and the consistent application of credit
checks.
D. Inspect the entity’s reports of prenumbered shipping documents that have not been
recorded in the sales journal.

24. Which of the following tests of controls most likely would help assure an auditor that goods
shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive prenumbering.

25. An auditor is least likely to test controls that provide for

A. Approval of the purchase and sale of trading securities.
B. Classification of revenue and expense transactions by product line.
C. Segregation of the functions of recording disbursements and reconciling the bank account.
D. Comparison of receiving reports and vendors’ invoices with purchase orders.

26. Which of the following procedures concerning accounts receivable would an auditor most
likely perform to obtain evidential matter in support of an assessed level of controls risk below
the maximum level?
A. Observing an entity’s employee prepare the schedule of past due accounts receivable.
B. Sending confirmation requests to an entity’s principal customers to verify the existence of
accounts receivable.
C. Inspecting an entity’s analysis of accounts receivable for unusual balances.
D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts
receivable.

27. An internal control questionnaire indicates that an approved receiving report is required to
accompany every check request for payment of merchandise. Which of the following
procedures provides the greatest assurance that this control is operating effectively?
A. Select and examine receiving reports and ascertain that the related canceled checks are
dated no earlier than the receiving reports.
B. Select and examine receiving reports and ascertain that the related canceled checks are
dated no later than the receiving reports.
C. Select and examine canceled checks and ascertain that the related receiving reports are
dated no earlier than the checks.
D. Select and examine canceled checks and ascertain that the related receiving reports are
dated no later than the checks.

28. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing, and extent of the
A. Attribute tests C. Tests of controls
B. Compliance tests D. Substantive tests

Page 6 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9205

29. When there are numerous property and equipment transactions during the year, an auditor
who plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at the end of
the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

30. Tests of controls are least likely to be omitted with regard to

A. Accounts believed to be subject to ineffective controls.
B. Accounts representing few transactions.
C. Accounts representing many transactions.
D. Subsequent events.

--- END ---

Page 7 of 7 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9206

Manila

AUDITING THEORY CPA Review

MATERIALITY IN PLANNING AND PERFORMING AN AUDIT

EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT
ANALYTICAL PROCEDURES
RELATED PARTIES
USING THE WORK OF INTERNAL AUDITORS
USING THE WORK OF AN AUDITOR’S EXPERT

PSA 320
MATERIALITY IN PLANNING AND PERFORMING AN AUDIT

1. The auditor’s determination of materiality is a matter of professional judgment, and is

affected by the auditor’s perception of the financial information needs of users of the
financial statements.

2. The concept of materiality is applied by the auditor both

a) In planning and performing the audit; and
b) In evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements and in forming the opinion in the
auditor’s report.

3. 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.

4. THREE DIFFERENT LEVELS OF MATERIALITY (AASC Bulletin Series 001 of 2010)

1. Materiality for the financial statements as a whole –

➢ Determined at the overall financial statement level.

➢ Helps the auditor determine whether the proposed audit adjustments are significant
or not.
➢ Required steps in calculating overall materiality:
1) Identify an appropriate benchmark which could either be an element or
component of the financial statements.
2) Choose an appropriate percentage to be applied to that benchmark.

2. Performance materiality –

➢ Calculated as a certain percentage of overall materiality in order to capture any

uncorrected misstatements, the total amount of which may exceed overall
materiality.
➢ Used in scoping of financial statement line items to be tested by the auditor and
ensures that significant accounts in the financial statements are covered by audit
testing.
➢ In determining performance materiality, an understanding of the following factors
may affect the auditor’s judgment such as:
• nature of the entity’s business and transactions
• risk assessment procedures
• nature and extent of misstatements identified in previous audits
Page 1 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

3. Materiality applied to specific classes of transactions, account balances or

disclosures –

➢ The amount set by the auditor for particular classes of transactions, account
balances or disclosures for which misstatements, well though lower than overall
materiality could reasonably be expected to influence the economic decisions of
users of the financial statements.
➢ In determining the specific materiality, the auditor normally considers the following
factors:
• laws and regulations
• financial reporting framework
• key industry disclosures of the entity
• particular aspects of the entity’s business
• understanding of the view of those charged with governance and management

5. If the auditor becomes aware of information during the audit that would have caused the
determination of a different amount of the benchmark, the auditor should revise the overall
materiality and assess the need to revise performance materiality and specific materiality,
and whether the nature, timing, and extent of further audit procedures remain appropriate.

6. The auditor is required to include in the audit documentation the amounts and the factors
considered in the determination of the materiality levels including the basis for any revisions
to those materiality levels. Audit documentation should demonstrate the judgment and
rationale used by the auditor in determining the materiality levels.

PSA 450
EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT

1. The objective of the auditor is to evaluate:

a) The effect of identified misstatements on the audit; and
b) The effect of uncorrected misstatements, if any, on the financial statements.

2. The auditor SHALL:

• Accumulate misstatements identified during the audit, other than those that are clearly
trivial.
• Determine whether the overall audit strategy and audit plan need to be revised if:
a) the nature of identified misstatements and the circumstances of their occurrence
indicate that other misstatements may exist that, when aggregated with
misstatements accumulated during the audit, could be material; or
b) the aggregate of misstatements accumulated during the audit approaches materiality
determined in accordance with PSA 320 (Revised and Redrafted).
• Communicate on a timely basis all misstatements accumulated during the audit with the
appropriate level of management, unless prohibited by law or regulation. The auditor
shall request management to correct those misstatements.
• Determine whether uncorrected misstatements are material, individually or in aggregate.
• Communicate with those charged with governance uncorrected misstatements and the
effect that they, individually or in aggregate, may have on the opinion in the auditor’s
report, unless prohibited by law or regulation. The auditor shall also communicate with
those charged with governance the effect of uncorrected misstatements related to prior
periods on the relevant classes of transactions, account balances or disclosures, and the
financial statements as a whole.
• Request a written representation from management and, where appropriate, those
charged with governance whether they believe the effects of uncorrected misstatements
are immaterial, individually and in aggregate, to the financial statements as a whole.

Page 2 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

3. The audit documentation shall include:

a) The amount below which misstatements would be regarded as clearly trivial;
b) All misstatements accumulated during the audit and whether they have been corrected;
and
c) The auditor’s conclusion as to whether uncorrected misstatements are material,
individually or in aggregate, and the basis for that conclusion.

PSA 520
ANALYTICAL PROCEDURES

1. <Analytical procedures=
• means evaluations of financial information through analysis of plausible relationships
among both financial and nonfinancial data.
• also encompass such investigation as is necessary of identified fluctuations or
relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount.

2. The objectives of the auditor are:

• to obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
• to design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall opinion conclusion as to whether the financial
statements are consistent with the auditor’s understanding of the entity.

3. Substantive analytical procedures

When designing and performing substantive analytical procedures, either alone or in

combination with tests of details, as substantive procedures in accordance with PSA 330
(Redrafted), the auditor shall:
a) Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and tests of
details, if any, for these assertions;
b) Evaluate the reliability of data from which the auditor’s expectations of recorded
amounts or ratios is developed, taking account of source, comparability, and nature and
relevance of information available, and controls over preparation;
c) Develop an expectation of recorded amounts or ratios and evaluate whether the
expectation is sufficiently precise to identify a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be
materially misstated; and
d) Determine the amount of any difference of recorded amounts from expected values that
is acceptable without further investigation.

4. Analytical procedures that assist when forming an overall conclusion

The auditor shall design and perform analytical procedures near the end of the audit that
assist the auditor when forming an overall conclusion as to whether the financial statements
are consistent with the auditor’s understanding of the entity.

5. If analytical procedures performed in accordance with PSA 520 identify fluctuations or

relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount, the auditor shall investigate such differences by:
a) Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses; and
b) Performing other audit procedures as necessary in the circumstances.

Page 3 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

PSA 550
RELATED PARTIES

1. The auditor shall inquire of management regarding:

a) The identity of the entity’s related parties, including changes from the prior period;
b) The nature of the relationships between the entity and these related parties; and
c) Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.

2. The auditor shall inquire of management and others within the entity, and perform other
risk assessment procedures considered appropriate, to obtain an understanding of the
controls, if any, that management has established to:
a) Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable financial reporting framework;
b) Authorize and approve significant transactions and arrangements with related parties;
and
c) Authorize and approve significant transactions and arrangements outside the normal
course of business.

3. During the audit, the auditor shall remain alert, when inspecting records or documents, for
arrangements or other information that may indicate the existence of related party
relationships or transactions that management has not previously identified or disclosed to
the auditor.

4. The auditor shall share relevant information obtained about the entity’s related parties with
the other members of the engagement team.

5. The auditor shall treat identified significant related party transactions outside the entity’s
normal course of business as giving rise to significant risks.

6. In forming an opinion on the financial statements, the auditor shall evaluate

a) Whether the identified related party relationships and transactions have been
appropriately accounted for and disclosed in accordance with the applicable financial
reporting framework; and

b) Whether the effects of the related party relationships and transactions:

i. Prevent the financial statements from achieving fair presentation (for fair
presentation frameworks); or
ii. Cause the financial statements to be misleading (for compliance frameworks).

7. Unless all of those charged with governance are involved in managing the entity, the auditor
shall communicate with those charged with governance significant matters arising during
the audit in connection with the entity’s related parties.

8. The auditor shall include in the audit documentation the names of the identified related
parties and the nature of the related party relationships.

PSA 610 (Revised)

USING THE WORK OF INTERNAL AUDITORS

1. The external auditor shall determine whether the work of the internal audit function can be
used for purposes of the audit by evaluating the following:
a) The extent to which the internal audit function’s organizational status and relevant
policies and procedures support the objectivity of the internal auditors;
b) The level of competence of the internal audit function; and

Page 4 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

c) Whether the internal audit function applies a systematic and disciplined approach,
including quality control.

2. If the external auditor plans to use the work of the internal audit function, the external
auditor shall discuss the planned used of its work with the function as a basis for
coordinating their respective activities.

3. The external auditor shall read the reports of the internal audit function relating to the work
of the internal audit function that the external auditor plans to use to determine its adequacy
for purposes of the audit.

4. If using internal auditors to provide direct assistance for purposes of the audit is not
prohibited by law or regulation, and the external auditor plans to use internal auditors to
provide direct assistance on the audit, the external auditor shall evaluate the existence and
significance of threats to objectivity and the level of competence of the internal
auditors who will be providing such assistance.

PSA 620
USING THE WORK OF AN AUDITOR’S EXPERT

1. Auditor’s expert – An individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the auditor to assist the auditor
in obtaining sufficient appropriate audit evidence.

2. An auditor’s expert may assist the auditor in:

• Obtaining an understanding of the entity and its environment, including its internal
control.
• Identifying and assessing the risks of material misstatement.
• Determining and implementing overall responses to assessed risks at the financial
statement level.
• Designing and performing further audit procedures.
• Evaluating the sufficiency and appropriateness of audit evidence.

3. When planning to use the work of an auditor’s expert, the auditor shall evaluate the
competence, capability and objectivity of the auditor’s expert.

4. The auditor shall obtain sufficient understanding of the field of the expertise of the auditor’s
expert to enable the auditor to:
• Determine the nature, scope and objectives of that expert’s work for the auditor’s
purposes.
• Evaluate the adequacy of that work for the auditor’s purposes.

5. The auditor shall agree, in writing when appropriate, on the following matters with the
auditor’s expert:
• The nature, scope and objectives of that expert’s work.
• The respective roles and responsibilities of the auditor and that expert.
• The nature, timing and extent of communication between the auditor and that expert,
including the form of any report to be provided by that expert.
• The need for the auditor’s expert to observe confidentiality requirements.

6. The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s
purposes, including:
• The relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence.
• If that expert’s work involve used of significant assumptions and methods, the relevance
and reasonableness of those assumptions and methods in the circumstances.

Page 5 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

• If that expert’s work involves the use of source data that is significant to that expert’s
work, the relevance, completeness, and accuracy of that source data.

7. If the auditor determines that the work of the auditor’s expert is not adequate for the
auditor’s purposes, the auditor shall:
• Agree with that expert on the nature and extent of further work to be performed that
that expert.
• Perform additional audit procedures appropriate to the circumstances.

8. The auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing
an unmodified opinion unless required by law or regulation to do so.

9. If the auditor makes reference to the work of an auditor’s expert in the auditor’s report
because such reference is relevant to an understanding of a modification to the auditor’s
opinion, the auditor shall indicate in the auditor’s report that such reference does not reduce
the auditor’s responsibility for that opinion.

MULTIPLE CHOICE QUESTIONS

1. Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality for the financial statements as a whole?
A. The anticipated sample size of the planned substantive tests.
B. The entity’s year-to-date financial results and position.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.

2. The auditor is required to determine three different levels of materiality: (1) materiality for
the financial statements as a whole, (2) performance materiality, and (3)
A. Overall materiality
B. Planning materiality
C. General materiality
D. Specific materiality

3. What materiality level would be considered by the auditor to determine whether the
proposed adjustments are significant or not?
A. Overall materiality
B. Scoping materiality
C. Specific materiality
D. Performance materiality

4. Which of the following factors are normally considered by the auditor in determining the
appropriate benchmark for the purpose of calculating overall materiality?
I. Components of the entity’s financial statements
II. Laws and regulations
III. Nature of the entity
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

5. Which of the following statements concerning materiality is not correct?

A. When establishing the overall audit strategy, the auditor shall determine materiality for
the financial statements as a whole.
B. If, in the specific circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of lesser amounts
than materiality for the financial statements as a whole could reasonably be expected
to influence the economic decisions of users taken on the basis of the financial

Page 6 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

statements, the auditor shall also determine the materiality level or levels to those
particular classes of transactions, account balances or disclosures.
C. Determining materiality involves the exercise of professional judgment.
D. The materiality level for the financial statements as a whole determined in the planning
stage of the audit should not be affected by changes in the circumstances of the
engagement.

6. The concepts of audit risk and materiality are interrelated and must be considered together
by the auditor. Which of the following is true?
A. Audit risk is the risk that the auditor may unknowingly express a modified opinion when,
in fact, the financial statements are fairly stated.
B. The phrase in the auditor’s report <present fairly, in all material respects, in accordance
with Philippine Financial Reporting Standards= indicates the auditor’s belief that the
financial statements as a whole are not materially misstated.
C. If misstatements are not important individually but are important in the aggregate, the
concept of materiality does not apply.
D. Material fraud but not material errors cause financial statements to be materially
misstated.

7. In evaluating the fair presentation of the financial statements, the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified during the
audit is material. The aggregate of uncorrected misstatements comprises
I. Specific misstatements identified by the auditor including the net effect of uncorrected
misstatements identified during the audit of previous period.
II. The auditor’s best estimate of other misstatements which cannot be specifically
identified.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

8. A client decides not to correct misstatements communicated by the auditor that collectively
are not material and wants the auditor to issue the report based on the uncorrected
numbers. Which of the following statements is correct regarding the financial statement
presentation?
A. The financial statements are free from material misstatement, and no disclosure is
required in the notes to the financial statements.
B. The financial statements are not in accordance with the applicable financial reporting
framework.
C. The financial statements contain uncorrected misstatements that should result in a
qualified opinion.
D. The financial statements are free of material misstatement, but the disclosure of the
proposed adjustments is required in the notes to the financial statements.

9. For audits of financial statements made in accordance with PSAs, the use of analytical
procedures is required to some extent

In the As a In the Final

Planning Stage Substantive Test Review Stage
A. No Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No No No

10. Analytical procedures used in planning an audit should focus on identifying

A. Material weaknesses of internal control.
B. The predictability of financial data from individual transactions.
C. The various assertions that are embodied in the financial statements.
D. Areas that may represent specific risks relevant to the audit.

Page 7 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

11. Which of the following statements concerning analytical procedures is true?

A. Analytical procedures may be omitted entirely for some financial statement audits.
B. Analytical procedures used in planning the audit should not use nonfinancial information.
C. Analytical procedures usually are effective and efficient for tests of controls.
D. Analytical procedures alone may provide the appropriate level of assurance for some
assertions.

12. Which of the following would not be considered an analytical procedure?

A. Estimating payroll expense by multiplying the number of employees by the average
hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with the actual
population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net
receivables.
D. Developing the expected sales based on the sales trend of the prior five years.

13. Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
A. Inquiring of the client’s legal counsel concerning pending litigation.
B. Comparing the financial statements with anticipated results.
C. Examining computer-generated exception reports to verify the effectiveness of internal
control.
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

14. Analytical procedures may be classified as being primarily

A. Tests of controls.
B. Substantive tests.
C. Tests of ratios.
D. Tests of details of balances.

15. The primary objective of analytical procedures used in the overall review stage of an audit
is to
A. Obtain evidence from details testing to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in assessing the validity of the conclusions reached.
D. Satisfy doubts when questions arise about a client’s ability to continue in existence.

16. Analytical procedures used in the overall review stage of an audit generally include
A. Considering unusual or unexpected account balances that were not previously identified.
B. Performing tests of transactions to corroborate management’s financial statement
assertions.
C. Gathering evidence concerning account balances that have not changed from the prior
year.
D. Retesting controls that appeared to be ineffective during the assessment of control risk.

17. When auditing related party transactions, an auditor places primary emphasis on
A. Confirming the existence of the related parties.
B. Verifying the valuation of the related party transactions.
C. Evaluating the disclosure of the related party transactions.
D. Ascertaining the rights and obligations of the related parties.

18. Which of the following auditing procedures most likely would assist an auditor in identifying
related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance
sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.
D. Performing analytical procedures for indications of possible financial difficulties.

Page 8 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

19. Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.

20. After determining that a related party transaction has, in fact, occurred an auditor should
A. Substantiate that related party transactions were consummated on terms equivalent to
those that prevail in arm’s-length transactions.
B. Perform analytical procedures to verify whether similar transactions have occurred, but
were not recorded.
C. Obtain an understanding of the purpose of the transaction.
D. Determine whether a particular transaction would have occurred if the parties had not
been related.

21. Which of the following are included in the activities of the internal audit function?
I. Monitoring of internal control.
II. Examination of financial and operating information.
III Review of operating activities.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

22. The external auditor should obtain a sufficient understanding of the internal audit function
because
A. The understanding of the internal audit function is an important substantive test to be
performed by the external auditor.
B. The audit programs, working papers, and reports of internal auditors may often be used
as a substitute for the work of the external auditor’s staff.
C. The procedures performed by the internal audit staff may eliminate the external
auditor’s need for considering internal control.
D. The work performed by internal auditors may be a factor in determining the nature,
timing, and extent of the external auditor’s procedures.

23. If the external auditor decides that it is efficient to consider how the work performed by the
internal auditors may affect the nature, timing, and extent of audit procedures, he/she
should assess the internal auditors’
A. Efficiency and experience
B. Independence and review skills
C. Training and supervisory skills
D. Competence and objectivity

24. Which of the following factors should an external auditor obtain updated information about
when assessing an internal auditor’s competence?
A. The reporting status of the internal auditor within the organization.
B. The educational level and professional experiences of the internal auditor.
C. Whether policies prohibit the internal auditor from auditing areas where relatives are
employed.
D. Whether the board of directors, audit committee, or owner-manager oversees
employment decisions related to the internal auditor.

25. Which of the following is an incorrect statement concerning the relationship of the internal
auditor and the scope of the external audit of an entity’s financial statements?
A. The external auditor is not required to give consideration to the internal audit function
beyond obtaining a sufficient understanding to identify and assess the risks of material
misstatement of the financial statements and to design and perform further audit
procedures.
B. The internal auditors may determine the extent to which audit procedures should be
employed by the external auditor.
Page 9 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9206

C. Under certain circumstances, the internal auditors may assist the external auditor in
performing substantive tests and tests of controls.
D. The nature, timing, and extent of the external auditor’s substantive tests may be
affected by the work of internal auditors.

26. Which of the following is not an auditor’s expert upon whose work an auditor may rely?
A. Actuary
B. Engineer
C. Appraiser
D. Internal auditor

27. Which of the following statements is correct concerning an auditor’s use of the work of an
expert?
A. An auditor may not use an expert in the determination of physical characteristics relating
to inventories.
B. If there is a material difference between an expert’s findings and the assertions in the
financial statements, only an adverse opinion may be issued.
C. If an auditor believes that the determinations made by an expert are unreasonable, only
a qualified opinion may be issued.
D. The work of an expert who is related to the client may be acceptable under certain
circumstances.

28. Which of the following statements is correct concerning the auditor’s use of the work of an
auditor’s expert?
A. The auditor is required to perform substantive test procedures to verify the expert’s
assumptions and findings.
B. The auditor should obtain an understanding of the methods and assumptions used by
the expert.
C. The entity should not have an understanding of the nature of the work to be performed
by the expert.
D. The expert should not have an understanding of the auditor’s corroborative use of the
expert’s findings.

29. If the results of the auditor’s expert’s work do not provide sufficient appropriate audit
evidence or are not consistent with other audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.

30. When issuing an unmodified auditor’s report, the auditor

A. May refer to the work of an auditor’s expert.
B. Should refer to the work of an auditor’s expert to indicate a division of responsibility.
C. Should include in the auditor’s report the identity of the auditor’s expert and the extent
of the expert’s involvement.
D. Should not refer to the expert’s work.

---END---

Page 10 of 10 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9207

Manila

AUDITING THEORY CPA Review

AUDIT EVIDENCE
AUDIT EVIDENCE – SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
EXTERNAL CONFIRMATIONS
AUDITING ACCOUNTING ESTIMATES
AUDIT DOCUMENTATION

PSA 500
AUDIT EVIDENCE

1. The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence.

2. <Audit evidence= is information used by the auditor in arriving at the conclusions on which
the opinion is based, and includes the information contained in the accounting records
underlying the financial statements and other information.

3. Accounting records generally include:

• the records of initial accounting entries and supporting records, such as checks and records of
electronic fund transfers;
• invoices;
• contracts;
• the general and subsidiary ledgers, journal entries and other adjustments to the financial
statements that are not reflected in journal entries; and
• records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.

4. Other information that the auditor may use as audit evidence includes:
• minutes of meetings;
• confirmations from third parties;
• analysts’ reports;
• comparable data about competitors (benchmarking);
• controls manuals;
• information obtained by auditors from such audit procedures as inquiry, observation, and
inspection; and
• other information developed by, or available to, the auditor that permits the auditor to reach
conclusions through valid reasoning.

5. When designing and performing audit procedures, the auditor shall consider the relevance
and reliability of the information to be used as audit evidence.

6. When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes,:
a) evaluate the competence, capabilities and objectivity of that expert;
b) obtain an understanding of the work of that expert; and
c) evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.

7. When using information produced by the entity, the auditor shall evaluate whether the
information is sufficiently reliable for the auditor’s purposes, including as necessary in the
circumstances:
a) Obtaining audit evidence about the accuracy and completeness of the information; and
b) Evaluating whether the information is sufficiently precise and detailed for the auditor’s
purposes.

Page 1 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

8. When designing tests of controls and tests of details, the auditor shall determine means of
selecting items for testing that are effective in meeting the purpose of the audit procedure.
The means available to the auditor for selecting items for testing are:

a) Selecting all items (100% examination). 100% examination may be appropriate

when:
1. The population constitutes a small number of large value items;
2. There is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
3. The repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.

b) Selecting specific items. Specific items selected may include:

1. High value or key items.
2. All items over a certain amount.
3. Items to obtain certain information.

c) Audit sampling. Audit sampling is designed to enable conclusion to be drawn about an

entire population on the basis of testing a sample drawn from it.

9. If audit evidence obtained from one source is inconsistent with that obtained from another,
or the auditor has doubts over the reliability of information to be used as audit evidence, the
auditor shall determine what modifications or additions to audit procedures are necessary to
resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the
audit.

10. The following generalizations can be made about the reliability of audit evidence:

a) Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
b) Audit evidence that is generated internally is more reliable when the related controls
imposed by the entity are effective.
c) Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a control).
d) Audit evidence is more reliable when it exists in a documentary form, whether paper,
electronic, or other medium (for example, a contemporaneously written record of a
meeting is more reliable than a subsequent oral representation of the matters discussed).
e) Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitized or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.

Financial statement assertions

Assertions are representations, explicit or otherwise, with respect to the recognition,

measurement, presentation and dsclosure of information in the financial statements which are
inherent in management reprsenting that the financial statements are presented in accordance
with the applicable financial reporting framework.

Assertions are used by the auditor to consider the different types of potential misstatements that
may occur when identifying, assessing and responding to the risks of material misstatement.

Page 2 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

Assertions may fall into the following categories:

(a) Assertions about classes of transactions and events, and related disclosures, for the
period under audit:

1. Completeness4all transactions and events that should have been recorded have been
recorded, and all related disclosures that should have been included in the financial
statements have been included.
2. Occurrence4transactions and events that have been recorded or disclosed have
occurred, and such transactions and events pertain to the entity.
3. Cutoff4transactions and events have been recorded in the correct accounting period.
4. Accuracy4amounts and other data relating to recorded transactions and events have
been recorded appropriately, and related disclosures have been appropriately measured
and described.
5. Classification4transactions and events have been recorded in the proper accounts.
6. Presentation4transactions and events are appropriately aggregated or disaggregated
and clearly described, and related disclosures are relevant and understandable in the
context of the requirements of the applicable financial reporting framework.

(b) Assertions about account balances, and related disclosures, at the period end:

1. Existence4assets, liabilities, and equity interests exist.

2. Rights and obligations4the entity holds or controls the rights to assets, and liabilities
are the obligations of the entity.
3. Completeness4all assets, liabilities and equity interests that should have been recorded
have been recorded, and all related disclosures that should have been included in the
financial statements have been included.
4. Accuracy, valuation and allocation4assets, liabilities, and equity interests have been
included in the financial statements at appropriate amounts and any resulting valuation
or allocation adjustments have been appropriately recorded, and related disclosures have
been appropriately measured and described.
5. Classification4assets, liabilities, and equity interests have been recorded in the proper
accounts.
6. Presentation4assets, liabilities and equity interests are appropriately aggregated or
disaggregated and clearly described, and related disclosures are relevant and
understandable in the context of the requirements of the applicable financial reporting
framework.

Audit procedures for obtaining audit evidence

1. RISK ASSESSMENT PROCEDURES

Obtain 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.

2. TESTS OF CONTROLS
When necessary or when the auditor has determined to do so, test the operating effectiveness
of controls in preventing, or detecting and correcting, material misstatements at the assertion
level.

3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include substantive analytical
review procedures and tests of details.

Page 3 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

Examples of audit procedures

1. INSPECTION 3 consists of examining records and documents, whether internal or external, in

paper form, electronic form, or other media. Inspection of tangible assets consists of physical
examination of the assets.
2. OBSERVATION 3 consists of looking at a process or procedure being performed by others.
3. INQUIRY 3 consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
4. EXTERNAL CONFIRMATION 3 represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party (the confirming party), in paper form, or by
electronic or other medium.
5. RECALCULATION 3 consists of checking the mathematical accuracy of documents or records.
It may be performed manually or electronically.
6. REPERFORMANCE 3 is the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control, either manually or through
the use of CAATs.
7. ANALYTICAL PROCEDURES 3 consist of evaluations of financial information made by a study
of plausible relationships among both financial and non-financial data. It also encompasses
the investigation of identified fluctuations and relationships that are inconsistent with other
relevant information or deviate significantly from predicted amounts.

PSA 501
AUDIT EVIDENCE – SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS

Inventory
1. When inventory is material to the financial statements, the auditor shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by:

a) Attendance at physical inventory counting, unless impracticable, to:

1) Evaluate management’s instructions and procedures for recording and controlling
the results of the entity’s physical inventory counting;
2) Observe the performance of management’s count procedures;
3) Inspect the inventory; and
4) Perform test counts; and
b) Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.

2. If unable to attend the physical inventory count on the date planned due to unforeseen
circumstances, the auditor shall make or observe some physical counts on an alternative
date, and perform audit procedures on intervening transactions.

3. If attendance at physical inventory counting is impracticable, the auditor shall perform

alternative audit procedures to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory. If it is not possible to do so, the auditor shall modify
the opinion in the auditor’s report in accordance with PSA 705 (Revised and Redrafted),
<Modifications to the Opinion in the Independent Auditor’s Report.=

4. When inventory under the custody and control of a third party is material to the financial
statements, the auditor shall obtain sufficient appropriate audit evidence regarding the
existence and condition of that inventory by performing one or both of the following:
a. Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity.
b. Perform inspection or other audit procedures appropriate in the circumstances.

Page 4 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

Litigation and claims

1. The auditor shall design and perform audit procedures in order to identify litigation and
claims involving the entity which may give rise to a risk of material misstatement, including:
a) Inquiry of management and, where applicable, others within the entity, including in-
house legal counsel;
b) Reviewing minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel; and
c) Reviewing legal expense accounts.

2. If the auditor assesses a risk of material misstatement regarding litigation or claims that
have been identified, or when audit procedures performed indicate that other material
litigation or claims may exist, the auditor shall, in addition to the procedures required by
other PSAs, seek direct communication with the entity’s external legal counsel through a
letter of general inquiry.

3. A letter of general inquiry, prepared by management and sent by the auditor, requests
the entity’s external legal counsel to inform the auditor of any litigation and claims that the
counsel is aware of, together with an assessment of the outcome of the litigation and claims,
and an estimate of the financial implications, including costs involved.

4. If it is considered unlikely that the entity’s external legal counsel will respond appropriately
to a letter of general inquiry, the auditor may seek direct communication through a letter
of specific inquiry, which includes:
• A list of litigation and claims.
• Where available, management’s assessment of the outcome of each of the identified litigation
and claims and its estimate of the financial implications, including costs involved.
• A request that the entity’s external legal counsel confirm the reasonableness of management’s
assessments and provide the auditor with further information if the list is considered by the
entity’s external legal counsel to be incomplete or incorrect.

5. The auditor considers the status of legal matters up to the date of the audit report.

6. If management refuses to give the auditor permission to communicate with the entity’s
lawyers, this would be a scope limitation and should ordinarily lead to a qualified opinion or
a disclaimer of opinion.

Segment information

The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and
disclosure of segment information in accordance with the applicable financial reporting framework
by:

a) Obtaining an understanding of the methods used by management in determining segment

information, and:
(i) Evaluating whether such methods are likely to result in disclosure in accordance with the
applicable financial reporting framework; and
(ii) Where appropriate, testing the application of such methods; and

b) Performing analytical procedures or other audit procedures appropriate in the circumstances.

PSA 505
EXTERNAL CONFIRMATIONS

1. External confirmation 3 Audit evidence obtained as a direct written response to the

auditor from a third party (the confirming party), in paper form, or by electronic or other
medium.

Page 5 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

2. Positive confirmation request 3 A request that the confirming party respond directly to
the auditor indicating whether the confirming party agrees or disagrees with the information
in the request, or providing the requested information.

3. Negative confirmation request 3 A request that the confirming party respond directly
to the auditor only if the confirming party disagrees with the information provided in the
request.

4. When using external confirmation procedures, the auditor shall maintain control over
external confirmation requests, including:
a) Determining the information to be confirmed or requested;
b) Selecting the appropriate confirming party;
c) Designing the confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to the auditor,
and
d) Sending the requests, including follow-up requests when applicable, to the confirming
party.

5. If management refuses to allow the auditor to send a confirmation request, the auditor
shall:
a) Inquires as to management’s reasons for the refusal, and seek audit evidence as to their
validity and reasonableness;
b) Evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
c) Perform alternative procedures designed to obtain relevant and reliable audit evidence.

PSA 540
AUDITING ACCOUNTING ESTIMATES

1. Accounting estimate means an approximation of the amount of an item in the absence of a

precise means of measurement. This term is used for an amount measured at fair value
where there is estimation uncertainty, as well as for other amounts that require estimation.

2. Management is responsible for making accounting estimates and disclosures included in

financial statements.

3. Risk of material misstatement is greater when accounting estimates are involved. Thus,
PSA 540 requires the auditor to obtain sufficient appropriate audit evidence regarding
accounting estimates. The auditor should determine whether accounting estimates included
in the financial statements are:
a) Reasonable in the circumstances
To be considered reasonable in the circumstances, an estimate shall possess the below
characteristics. Assumptions deviating from at least one of the above characteristics will
require the auditor to pay particular attention to such assumptions.
✓ Objective and not susceptible to bias
✓ Consistent with historical patterns (accounting policies adopted by the entity are
consistently applied)
✓ Consistent with industry guidelines
b) Properly accounted for and appropriately disclosed as required

4. To plan the nature timing and extent of the audit procedures, the auditor uses his
understanding of the procedures and methods, including the accounting and internal control
systems, used by management in making the accounting estimates.

The auditor should adopt one or a combination of the following approaches in the audit of
an accounting estimate:
a) review and test the process used by management to develop the estimate
Page 6 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

b) use an independent estimate for comparison with that prepared by management

c) review subsequent events which confirm the estimate made

PSA 230
AUDIT DOCUMENTATION

1. Audit documentation that meets the requirements of PSA 230 and the specific
documentation requirements of other relevant PSAs provides:
• Evidence of the auditor’s basis for a conclusion about the achievement of the overall objective
of the auditor; and
• Evidence that the audit was planned and performed in accordance with PSAs and applicable
legal and regulatory requirements.

2. Audit documentation 3 The record of audit procedures performed, relevant audit

evidence obtained, and conclusions the auditor reached.

3. Audit file 3 One or more folders or other storage media, in physical or electronic form,
containing the records that comprise the audit documentation for a specific engagement.

4. Experienced auditor 3 An individual (whether internal or external to the firm) who has
practical audit experience, and a reasonable understanding of:
• Audit processes;
• PSAs and applicable legal and regulatory requirements;
• The business environment in which the entity operates; and
• Auditing and financial reporting issues relevant to the entity’s industry.

5. The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:
a) The nature, timing, and extent of the audit procedures performed to comply with PSAs and
applicable legal and regulatory requirements;
b) The results of the audit procedures and the audit evidence obtained; and
c) Significant matters arising during the audit, the conclusions reached thereon, and significant
professional judgments made in reaching those conclusions.

6. In documenting the nature, timing and extent of audit procedures performed, the auditor
shall record:
a) The identifying characteristics of the specific items or matters tested;
b) Who performed the audit work and the date such work was completed; and
c) Who reviewed the audit work performed and the date and extent of such review.

7. The auditor shall document discussions of significant matters with management, those
charged with governance, and others, including the nature of the significant matters
discussed and when and with whom the discussions took place.

8. If the auditor identified information that is inconsistent with the auditor’s final conclusion
regarding a significant matter, the auditor shall document how the auditor addressed the
inconsistency.

9. If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant
requirement in a PSA, the auditor shall document how the alternative audit procedures
performed achieve the aim of that requirement, and the reasons for the departure.

10. If, in exceptional circumstances, the auditor performs new or additional audit procedures or
draws new conclusions after the date of the auditor’s report, the auditor shall document:
a) The circumstances encountered;
b) The new or additional procedures performed, audit evidence obtained, and conclusions
reached, and their effect on the auditor’s report; and
c) When and by whom the resulting changes to audit documentation were made and
reviewed.

Page 7 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

Assembly of the final audit file

11. The auditor shall complete the assembly of the final audit file on a timely basis after the
date of the auditor’s report. As PSQM 1 indicates, 60 days after the date of the auditor’s
report is ordinarily an appropriate time limit within which to complete the assembly of the
final audit file.

MULTIPLE CHOICE QUESTIONS

1. All the information used by the auditor in arriving at the conclusion on which the audit opinion
is based. It includes the information contained in the accounting records underlying the
financial statements (underlying accounting data) and other information (corroborating
information).
A. Audit Evidence C. Audit opinion
B. Audit risk D. Audit program

2. Which of the following best describes the primary purpose of audit procedures?
A. To detect fraud
B. To verify the accuracy of account balances
C. To comply with generally accepted accounting principles
D. To gather corroborative evidence to support the audit opinion

3. The appropriateness of evidence available to an auditor is least likely to be affected by the

A. Relevance of such evidence to the financial statement assertion being investigated.
B. Relationship of the preparer of such evidence to the entity being audited.
C. Timeliness of such audit evidence.
D. Sampling method employed by the auditor to obtain a sample of such evidence.

4. Which of the following statements concerning evidential matter is true?

A. Appropriate evidence supporting management’s assertions should be convincing rather
than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence created within
the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding
what evidence should be obtained.
D. A client’s accounting records cannot be considered sufficient evidence to support the
financial statements.

5. Which of the following is an example of <other information= that could be used by an auditor
as evidential matter supporting the financial statements?
A. Worksheets supporting cost allocations.
B. Confirmation of accounts receivable.
C. Special journals.
D. Accounting manuals.

6. Which of the following types of audit evidence provides the least assurance of reliability?
A. Receivable confirmations received from the client's customers.
B. Prenumbered receiving reports completed by the client's employees.
C. Prior months' bank statements obtained from the client.
D. Municipal property tax bills prepared in the client's name.

7. Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client’s internal audit staff held in private
B. Inspection of prenumbered client purchase orders filed in the vouchers payable
department
C. Analytical procedures performed by the auditor on the entity’s trial balance
D. Inspection of bank statements obtained directly from the client’s financial institution

Page 8 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

8. Which of the following is not a basic procedure used in an audit?

A. Risk assessment procedures. C. Tests of controls.
B. Substantive test procedures. D. Tests of direct evidence.

9. Audit procedures may be classified as risk assessment procedures and further audit
procedures. Which of the following does not describes further audit procedures?
A. These procedures test the operating effectiveness of controls in preventing, or detecting
and correcting, material misstatements at the assertion level.
B. These procedures are used to detect material misstatements at the assertion level.
C. 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.
D. These procedures include tests of details of classes of transactions, account balances, and
disclosures and analytical procedures.

10. Which of the following statements appropriately describes inquiry?

A. Physical examination of the assets.
B. Consists of looking at a process or procedures being performed by others.
C. Examining records or documents, whether internal or external, in paper form, electronic
form, or other media.
D. Consists of seeking information from knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.

11. Observation is considered a reliable audit procedure but one that is limited in usefulness.
However, it is used in a number of different situations. Which of the following statements is
true regarding observation as an audit technique?
A. It is the most effective audit methodology to use in filling out internal control
questionnaires.
B. It is the most persuasive methodology to learn how transactions are really processed
during the period under audit.
C. It is the most persuasive audit technique for determining if fraud has occurred.
D. It is most persuasive about the performance of a process but is limited to the moment in
time at which the observation takes place.

12. Which of the following is a false statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives and procedures.
B. Audit objectives should be developed in light of management assertions about the financial
statement components.
C. Selection of tests of financial statement assertions should depend upon the understanding
of internal control.
D. The auditor should resolve any substantial doubt about any of management’s relevant
financial statement assertions.

13. Which of the following is not an assertion relating to classes of transactions?

A. Accuracy. C. Cutoff.
B. Occurrence. D. Consistency.

14. Which of the following is a management assertion regarding account balances at the period
end?
A. Transactions and events that have been recorded have occurred and pertain to the entity.
B. Transactions and events have been recorded in the proper accounts.
C. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
D. Amounts and other data related to transactions and events have been recorded
appropriately.

15. Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year-end accounts receivable.
D. Inflated sales for the year.

Page 9 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

16. Which of the following should be considered by the auditor in deciding which means (or
combination of means) to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency.
A. I only C. Both I and II
B. II only D. Neither I nor II

17. Which of the following statements about specific item testing is false?
A. It is selective.
B. It does not constitute sampling.
C. It can be an efficient means of gathering audit evidence.
D. The results of audit procedures applied to items selected in this way can be projected to
the entire population.

18. According to PSA 530, selecting specific items may include selecting the following, except:
A. All items over a certain amount C. Items to obtain information
B. Low value or non-key items D. Items to test control

19. It will be appropriate to audit all the items that make up a class of transactions or account
balance (100% examination), except
A. When the class of transactions or account balance consists of a large number of small
value items.
B. When the class of transactions or account balance consists of a small number of large
value items.
C. When there is a significant risk of misstatement and other selection methods do not
provide sufficient appropriate audit evidence.
D. When the repetitive nature of a calculation or other process performed automatically by
the client’s computer information system (CIS) makes a 100% examination cost effective.

20. Audit sampling involves the

A. Selection of all items over a certain amount
B. Application of audit procedures to all items that comprise a class of transactions or an
account balance
C. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error
D. Application of audit procedures to less than 100% of items within a class of transactions
or an account balance such that all items have a chance of selection

CONFIRMATION
21. Confirmation is <the process of obtaining and evaluating a direct communication from a third
party in response to a request for information about a particular item affecting financial
statement assertions.= Two assertions for which confirmation of accounts receivable balances
provides primary evidence are
A. Completeness and valuation C. Valuation and rights and obligations
B. Existence and completeness D. Rights and obligations and existence

22. Who signs the confirmation requests?

A. The audit partner C. The appropriate level of management
B. The CEO/CFO of the client D. Both management and the auditor

23. When the recipient has accomplished the confirmation request, replies should be:
A. Sent directly to the auditor
B. Sent directly to the client, after which the client gives the replies to the auditor
C. Sent directly to the auditor, with another copy of the reply going to the client
D. Not sent back since a confirmation request does not necessitate replies

24. Which of the following sets of information does an auditor confirm on one form?
A. Accounts payable and purchase commitments.
B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.

Page 10 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

D. Accounts receivable and accrued interest receivable.

25. In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.

26. Positive confirmation request is not used when:

A. A large number of small balances are involved.
B. The entity’s information systems and internal controls are unreliable or ineffective
C. The information available to corroborate management’s assertion(s) is only available
outside the entity
D. Specific fraud risk factors, such as risk of management override of internal controls,
prevent the auditor from relying on evidence from the entity.

27. The return of positive accounts receivable confirmation without an exception attests to the
A. Collectibility of the accounts receivable.
B. Accuracy of the aging of accounts receivable.
C. Accuracy of the receivables balance.
D. Accuracy of the allowance for bad debts.

28. Which of the following statements is correct concerning the use of negative confirmation
requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
D. Negative confirmation requests are effective when understatements of account balances
are suspected.

29. Which of the following procedures would an auditor most likely perform for year-end accounts
receivable confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to year-end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.

30. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the reporting date to determine
whether the related payables apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the reporting date to
determine whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and
recorded cash payments.
D. Reconciling vendors’ statements to the file of receiving reports to identify items received
just prior to the reporting date.

LITIGATION AND CLAIMS

31. S1: The primary source of information to be reported about litigation, claims, and
assessments is the client’s management.
S2: The primary source for evidence to corroborate the existence of pending litigation is
attorney confirmations.

Page 11 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

A. True, true C. True, false

B. False, false D. False, true

32. The auditor considers the status of legal matters up to

A. The date of the audit report. C. The issuance of financial statements.
B. The reporting date. D. The date of receipt of letter from lawyers.

33. Which of the following procedures might be useful in discovering a contingent liability for a
lawsuit that management is intentionally neglecting to disclose?
A. Inquiries (orally and in writing) of management.
B. Analyzing legal expense and review invoices and statements from outside legal counsel.
C. Reviewing current and previous years’ internal revenue agent reports.
D. Obtaining a letter of representation from management that it is aware of no undisclosed
contingent liabilities.

34. Which of the following is an audit procedure that an auditor most likely would perform
concerning litigation, claims, and assessments?
A. Request the client’s lawyer to evaluate whether the client’s pending litigation, claims, and
assessments indicate a going concern problem.
B. Examine the legal documents in the client’s lawyer’s possession concerning litigation,
claims, and assessments to which the lawyer has devoted substantive attention.
C. Discuss with management its policies and procedures adopted for evaluating and
accounting for litigation, claims, and assessments.
D. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have
been recorded or disclosed in the financial statements.

35. A lawyer’s refusal to respond to a letter of audit inquiry normally requires the auditor to:
A. Issue a qualified opinion or a disclaimer of opinion.
B. Issue an unqualified opinion with an explanatory paragraph.
C. Issue a qualified or adverse opinion.
D. Issue an unqualified opinion.

ACCOUNTING ESTIMATES
36. Which of the following statements is incorrect about accounting estimates?
A. Management is responsible for making accounting estimates included in the financial
statements.
B. When evaluating accounting estimates, the auditor should pay particular attention to
assumptions that are objective and are consistent with industry patterns.
C. The risk of material misstatement is greater when accounting estimates are involved.
D. The evidence available to support an accounting estimate will often be more difficult to
obtain and less conclusive than evidence available to support other items in the financial
statements.

37. In evaluating the assumptions on which the estimate is based, the auditor would need to pay
particular attention to assumptions which are
A. reasonable in light of actual results in prior periods.
B. consistent with those used for other accounting estimates.
C. consistent with management’s plans which appear appropriate.
D. subjective or susceptible to material misstatement.

38. Which of the following is least likely to be an approach followed when auditing the fair values
of assets and liabilities?
A. Review and test management’s process of valuation.
B. Confirm valuation with audit committee members.
C. Independently develop an estimate of the value of the account.
D. Review subsequent events relating to the account.

39. Which of the following procedures would an auditor ordinarily perform first in evaluating
management’s accounting estimates for reasonableness?
A. Obtain an understanding of how management developed its estimates.

Page 12 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

B. Develop independent expectations of management’s estimates.

C. Consider the appropriateness of the key factors in developing the estimates.
D. Test the calculations used by management in developing the estimates.

40. Which of the following would an auditor generally perform to obtain assurance that accounting
estimates are properly accounted for and disclosed?
A. Inquiry of management
B. Make an independent estimate for comparison with client’s estimate
C. Review subsequent events
D. Obtain knowledge about the applicable financial reporting standards related to the
accounting estimate

AUDIT DOCUMENTATION
41. An auditor’s working papers serve mainly to
A. Provide the principal support for the auditor’s report.
B. Satisfy the auditor’s responsibilities concerning the Code of Ethics.
C. Monitor the effectiveness of the CPA firm’s quality control procedures.
D. Document the level of independence maintained by the auditor.

42. Under the requirements of PSA 230, audit documentation must contain sufficient information
to allow what type of auditor to understand the nature, timing, extent, and results of
procedures performed?
A. An experienced audit team member.
B. An experienced auditor having no previous connection with the engagement.
C. Any certified public accountant.
D. An auditor qualified as a peer review specialist.

43. Audit documentation may be recorded on paper or on electronic or other media. The following
are examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning significant matters
D. The entity’s accounting records

44. The current file of the auditor’s working papers generally should include
A. A flowchart of the internal controls
B. A copy of the financial statements
C. Organization charts
D. Copies of bond and note indentures

45. The permanent file portion of the auditor’s working papers generally should include
A. A copy of the engagement letter.
B. A copy of key customer confirmation.
C. Names and addresses of audit staff personnel on the engagements.
D. Time and expense reports.

46. The following are ordinarily excluded from audit documentation:

A B C D
Superseded drafts of working papers and
financial statements Yes No No Yes
Notes that reflect incomplete or preliminary thinking Yes Yes No No
Previous copies of documents corrected for
typographical or other errors Yes Yes Yes Yes
Duplicates of documents Yes No Yes No

47. The completion of the assembly of the final audit file after the date of the auditor’s report
does not ordinarily involve
A. The performance of new audit procedures or the drawing of new conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.

Page 13 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])

 lOMoARcPSD|38681371

CPAR - MANILA AT-9207

D. Signing off on completion checklists relating to the file assembly process.

48. The primary reason auditors cross-index their working papers is to

A. Give the working papers a professional appearance.
B. Explain the use of tick marks.
C. Provide an explanation of the audit steps performed.
D. Provide a trail for the auditor and the reviewer.

49. S1: Working papers are the property of the auditor.

S2: Although portions of or extracts from the working papers may be made available to the
entity at the discretion of the auditor, they may be substitute for the entity’s accounting
records.
A. Only statement one is correct C. Both statements are correct
B. Only statement two is correct D. Both statements are incorrect

--- END ---

Page 14 of 14 Pages

Downloaded by Wuuwid Dudid ([email protected])