The Financial Statement Audit: Client

Acceptance and Planning

material misstatement, whether
due to fraud or error.
1. The auditor may accept or continue an
c. To provide the auditor with access
audit engagement only when the basis
to all information that is relevant to
upon which it is to be performed has
the preparation of the financial
been agreed, through
statements such as records,
I. Establishing whether the
documentation, and other matters.
preconditions for an audit are
d. To provide the auditor with
present.
unrestricted access to persons
II. Confirming that there is a
within the entity from which the
common understanding
auditor determines it necessary to
between the auditor and
obtain audit evidence.
management and, where
appropriate, those charged
with governance of the terms
3. The auditor shall agree the terms of
of the audit engagement.
the audit engagement with
a. I only
management or those charged with
b. II only
governance, as appropriate. The
c. Both I and II
agreed terms shall be recorded in a/an
d. Neither I nor II
a. Engagement letter
b. Letter of audit inquiry
c. Management representation letter
2. An audit is conducted on the premise
d. Confirmation letter
that management and, where
appropriate, those charged with
governance, have acknowledged and
4. The following matters are generally
understand that they have
included in an auditor’s engagement
responsibilities that are fundamental
letter, except
to the conduct of an audit in
a. The factors to be considered in
accordance with PSAs. Which of the
setting preliminary judgments
following is not one of those
about materiality.
responsibilities?
b. The fact that because of the test
a. The preparation of financial
nature and other inherent
statements in accordance with
limitations of an audit, together
relevant pronouncements issued by
with the inherent limitations of
the AASC.
internal control, there is an
b. The establishment and maintenance
unavoidable risk that even some
of an adequate internal control
material misstatements may remain
system that is necessary to enable
undiscovered.
the preparation of financial
c. The scope of the audit
statements that are free from
 d. Management’s responsibility for the d. The preconditions for an audit of
financial statements. the component’s financial
statements are not present.

5. Which of the following statements

would least likely appear in an 7. On recurring audits, the auditor may
auditor’s engagement letter? decide not to send a new engagement
a. Our audit will be made with the letter each period. Which of the
objective of our expressing an following factors may make it
opinion on the financial statements. appropriate to send a new engagement
b. We remind you that the letter?
responsibility for the preparation of
A. B. C. D.
financial statements including
Any revised or special Yes No Yes No
adequate disclosure is that of the
terms of the audit
management of the entity.
engagement
c. After performing our preliminary A recent change of Yes No No Yes
analytical procedures, we will senior management
discuss with you the other A change in legal or Yes Ye Yes Yes
procedures we consider necessary regulatory s
to complete the engagement. requirements
d. Our fees, which will be billed as A significant change in Yes Ye Yes Yes
work progresses, are based on the nature or size of the s
time required by the individuals entity’s business
assigned to the engagement plus
out-of-pocket expenses.
8. The auditor shall not agree to a request
from the entity to change the terms of
the audit engagement or to change the
6. The auditor of a parent entity is also audit engagement to an engagement
the auditor of its component. Which of that conveys a lower level of assurance
the following factors may influence the when there is no reasonable
auditor’s decision whether to send a justification for doing so. Which of the
separate engagement letter to the following may be considered
entity’s component? reasonable justifications for the change
a. Whether a separate auditor’s report in the audit engagement.
is to be issued on the component I. A change in circumstances
b. The component’s management affecting the need for the
does not accept its responsibilities service.
that are fundamental to the II. A misunderstanding as to the
conduct of an audit nature of an audit as originally
c. The financial reporting framework requested.
used by the component is III. A restriction on the scope of
unacceptable the engagement, whether
imposed by management or
cause by other circumstances.
a. I and II only b. II only
b. I and III only c. Both I and II
c. II and III only d. Neither I nor II
d. I, II, and III

12. Which of the following activities should

9. Before the completion of the audit be performed by the auditor at the
engagement, an auditor is requested to beginning of the current audit
change the engagement to one that engagement?
provides a lower level of assurance. If I. Perform procedures regarding the
the auditor concludes that there is a continuance of the client
reasonable justification for the change relationship and the specific audit
in engagement, the report to be issued engagement.
would II. Evaluate compliance with relevant
a. Be that appropriate for the revised ethical requirements, including
terms of engagement independence.
b. Include reference to the original III. Establish an understanding of the
engagement terms of the engagement.
c. Include reference to any procedures a. I and II only
that may have been performed in b. II and III only
the original engagement c. I and III only
d. Not include reference to any d. I, II, and III
procedure that may have been
performed, particularly when the
new engagement is to undertake 13. Adequate planning helps to ensure
agreed-upon procedures. that

A. B. C. D.
Appropriate No Yes Ye No
10. If the auditor is unable to agree to a
attention is s
change of the engagement and is not
devoted to
permitted to continue the original important areas of
engagement, the auditor should the audit
a. Insist on continuing the original Potential problems Ye Yes No No
engagement are identified and s
b. Express a qualified opinion resolved on a
c. Express an adverse opinion timely basis
d. Withdraw from the engagement The audit Ye Yes No No
engagement is s
properly organized
11. Planning an audit involves and managed
I. Establishing the overall audit
strategy for the engagement.
II. Developing an audit plan.
a. I only
14. Which of the following statements a. Selecting a sample of sales invoices
concerning audit planning is incorrect? for comparison with shipping
a. Planning is a discrete phase of an documents.
audit b. Coordinating the assistance of
b. Planning is a continual and iterative entity personnel in data preparation
process c. Reading the current year’s interim
c. In a recurring audit, planning often financial statements
begins shortly after (or in d. Discussing matters that may affect
connection with) the completion of the audit with firm personnel
the previous audit and continues responsible for non-audit services
until the completion of the current to the entity
audit engagement.
d. In planning an audit, the auditor
considers the timing of certain 17. The establishment of an overall audit
planning activities and audit strategy involves
procedures that are to be I. Determining the characteristics
completed prior to the performance of the engagement that define
of further audit procedures. its scope
II. Ascertaining the reporting
objectives of the engagement
15. In performing an audit of financial to plan the timing of the audit
statements, the auditor should obtain and the nature of the
a sufficient knowledge of a client’s communications required
business and industry to III. Considering the important
a. Develop an attitude of professional factors that will determine the
skepticism concerning focus of the engagement
management’s financial statement team’s efforts
assertions. a. I and II only
b. Make constructive suggestions b. II and III only
concerning improvements to the c. I and III only
client’s internal control. d. I, II, and III
c. Evaluate whether the aggregation
of known misstatements causes the
financial statements taken as a 18. Which of the following should be
whole to be materially misstated. included in the audit plan?
d. Understand the events and I. The nature, timing, and extent of
transactions that may have an effect planned risk assessment
on the client’s financial statements. procedures, as determined under
PSA 315 (Identifying and Assessing
the Risks of Material
16. Which of the following is the least Misstatements through
likely procedure to be performed in Understanding the Entity and its
planning a financial statement audit? Environment)
II. The nature, timing, and extent of c. The discussion with the entity’s
planned further audit procedures management concerning the expected
at the assertion level, as communications on the status of audit
determined under PSA 330 (The work throughout the engagement and
Auditor’s Responses to Assessed the expected deliverables resulting from
Risks) the audit procedures.
a. I only d. Audit areas where there is a higher risk
b. II only of material misstatement.
c. Both I and II
d. Neither I nor II
21. In the planning stage of an audit
engagement, the auditor is required to
19. Which of the following matters would perform audit procedures to obtain an
an auditor least likely consider when understanding of the entity and its
setting the direction of the audit? environment, including its internal
a. The selection of the engagement control. These procedures are called
team and the assignment of audit a. Risk assessment procedures
work to the team members b. Substantive tests
b. The engagement budget which c. Tests of controls
includes consideration of the d. Dual-purpose tests
appropriate amount of time to allot
for areas where there may be
higher risks of material 22. In planning the audit engagement, the
misstatement. auditor should consider each of the
c. The availability of client personnel following, except
and data. a. The kind of opinion (unqualified,
d. The manner in which the auditor qualified, or adverse) that is likely to
emphasizes to engagement team be expressed
members the need to maintain a b. The entity’s accounting policies and
questioning mind and to exercise procedures.
professional skepticism in the c. Matters relating to the entity’s
gathering and evaluation of audit business and the industry in which
evidence. it operates
d. Materiality level and audit risk

20. Which of the following matters would

an auditor most likely consider when 23. Audit programs are modified to suit
establishing the scope of the audit? the circumstances of particular
a. The expected audit coverage, including engagements. A complete audit
the number and location of the entity’s program usually should be developed.
components to be included a. When the engagement letter is
b. The entity’s timetable for reporting, prepared
such as at interim and final stages b. After obtaining an understanding of
the control environment and
 control activities components of the c. Performing audit work only after
entity’s internal control the entity’s books have been closed
c. After the auditor has obtained an for the period under audit
understanding of the entity and its d. Including in the audit program a
environment, including its internal column for budgeted
control and assessed the risks of
material misstatement.
d. Prior to beginning the actual audit 27. In connection with the planning phase
work. of an audit engagement, which of the
following statements is always correct?
a. Final staffing decisions must be
24. In designing written audit programs, an made prior to completion of the
auditor should establish specific audit planning stage
objectives that relate primarily to the b. Observation of inventory count
a. Selected audit techniques should be performed at year-end
b. Cost-benefit of gathering audit c. A portion of the audit of a
evidence continuing audit client can be
c. Timing of audit procedures performed at interim dates
d. Financial statement assertions d. An engagement should not be
accepted after the client’s financial
year-end
25. An audit program should be designed
for each individual audit and should
incorporate steps and procedures to 28. The auditor shall undertake which of
a. Detect and eliminate fraud of any the following activities prior to starting
type an initial audit?
b. Gather sufficient amount of I. Performing procedures required
management information available by PSA 220 (Quality Control for
c. Provide assurances that the an Audit of Financial
objectives of the audit are satisfied Statements) regarding the
d. Ensure that only material items are acceptance of the client
audited relationship and the specific
audit engagement
II. Communicating with the
26. Which of the following is an aspect of predecessor auditor, where
scheduling and controlling the audit there has been a change of
engagement? auditors, in compliance with
a. Including in the engagement letter relevant ethical requirements.
an estimate of the minimum and a. I only
maximum audit fee b. II only
b. Writing a conclusion in individual c. Either I and II
working papers indicating how the d. Both I and II
results of the audit will affect the
auditor’s report
29. Before accepting an audit engagement, a preliminary judgment about
a proposed (successor) auditor should materiality?
make inquiries of the previous a. The contents of the management
(predecessor) auditor regarding the representation letter
previous auditor’s b. The anticipated sample size of the
a. Evaluation of all matters of planned substantive tests
continuing accounting significance c. The entity’s annualized interim
b. Understanding as to the reasons for financial statements.
the change of auditors d. The results of internal control
c. Awareness of the consistency in the questionnaire
application of PAS/PFRS between
periods
d. Opinion of any subsequent events 32. An auditor should consider materiality
occurring since the previous when
auditor’s report was issued. I. Determining the nature,
timing, and extent of audit
procedures.
30. Which of the following statements II. Evaluating the effect of
concerning materiality is not correct? misstatements
a. When establishing the overall audit a. I only
strategy, the auditor shall determine b. II only
materiality for the financial c. Both I and II
statements as a whole. d. Neither I nor II
b. If, in the specific circumstances of
the entity, there is one or more
particular classes of transactions, 33. As defined in the standard, ________
account balances or disclosure, the means the amount or amounts set by
auditor shall also determine the the auditor at less than materiality for
materiality level or levels to those the financial statements as a whole to
particular classes of transactions, reduce to an appropriately low level
account balances, or disclosures. the probability that the aggregate of
c. Determining materiality involves the uncorrected and undetected
exercise of professional judgment misstatements exceeds materiality for
d. The materiality level for the the financial statements as a whole.
financial statements as a whole a. Performance materiality
determined in the planning stage of b. Materiality
the audit should not be affected by c. Lower materiality
changes in the circumstances of the d. Lesser materiality
engagement.

34. A basic premise underlying analytical

31. Which of the following would an procedures is that
auditor most likely use in determining a. Plausible relationships among data
may reasonably be expected to exist
 and continue in the absence of develop from recorded amounts
known conditions to the contrary with ratios developed by
b. These procedures cannot replace management
tests of details of transactions and
balances
c. Statistical tests of financial 37. It is an appraisal activity established
information may lead to the within an entity. Its functions include,
detection of material misstatements among other things, examining,
in the financial statements evaluating, and monitoring the
d. The study of financial ratios is an adequacy and effectiveness of the
acceptable alternative to the accounting and internal control
investigation of unusual systems.
fluctuations. a. External auditing
b. Internal auditing
c. Governmental auditing
35. For all audits of financial statements d. Internal control
conducted in accordance with PSAs,
the use of analytical procedures is
required to some extent 38. The external auditor should obtain a
sufficient understanding of the internal
A. B. C. D.
audit function because
As a risk assessment Yes Yes Yes No
procedure in the a. The understanding of the internal
planning phase audit function is an important
As a substantive test Yes No No Yes substantive test to be performed by
procedure the internal auditor
In the overall review Yes Yes No Yes b. The audit programs, working
of the financial papers, and reports of internal
statements auditors may often be used as a
substitute for the work of the
external auditor’s staff
36. Which of the following statements
c. The procedures performed by the
concerning analytical procedures is
internal audit staff may eliminate
true?
the external auditor’s need for
a. Analytical procedures are more
considering internal control
efficient, but not more effective,
d. The work performed by internal
than tests of details of transactions
auditors may be a factor in
b. Analytical procedures used as risk
determining the nature, timing, and
assessment procedures used data
extent of the external auditor’s
aggregated at a high level
procedures
c. Analytical procedures can replace
tests of controls in gathering audit
evidence to support the assessed
39. Internal auditing can affect the scope
level of control risk
of the external auditor’s audit of
d. Analytical procedures usually
financial statements by
involve comparisons of ratios
 a. Decreasing the external auditor’s adequate for purposes of the audit, the
need to perform detailed tests external auditor shall evaluate the
b. Eliminating the need to observe the internal auditor’s
physical inventory taking a. Efficiency and experience
c. Allowing the external auditor to b. Independence and review skills
limit his/her audit to the c. Training and supervisory skills
performance of substantive test d. Competence and objectivity
procedures
d. Limiting direct testing by the
external auditor to management 42. In assessing the technical competence
assertions not directly tested by of an internal auditor, an external
internal auditing auditor most likely would obtain
information about the
a. Quality of working paper
40. Which of the following is an incorrect documentation, reports, and
statement concerning the relationship recommendations.
of the internal auditor and the scope of b. Organizational level to which the
the external audit of an entity’s internal auditor reports
financial statements? c. Influence of management on the
a. The external auditor is not required internal auditor’s duties
to give consideration to the internal d. Entity’s commitment to integrity
audit function beyond obtaining a and ethical values
sufficient understanding to identify
and assess the risks of material
misstatement of the financial 43. The coordination of activities between
statements and to design and internal and external auditors
perform further audit procedures. a. Eliminates duplication of audit
b. The internal auditors may efforts
determine the extent to which audit b. Includes the exchange of audit
procedures should be employed by reports and management letters
the external auditor c. Prevents external auditors from
c. Under certain circumstances, the having access to the programs used
internal auditors may assist the by internal auditors
external auditor in performing d. Prohibits the internal auditor from
substantive tests and tests of using the same audit techniques as
controls external auditors and vice versa
d. The nature, timing, and extent of
the external auditor’s substantive
tests may be affected by the work of 44. Which of the following are included in
internal auditors. the activities of the internal audit
function?
I. Monitoring of internal control
41. In determining whether the work of II. Examination of financial and
the internal auditors is likely to be 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
45. _______ is an individual or b. The auditor should obtain an
organization possessing expertise in a understanding of the methods and
field other than accounting or auditing, assumptions used by the expert
whose work in that field is used by the c. The entity need not have an
auditor to assist the auditor in understanding of the nature of the
obtaining sufficient appropriate audit work to be performed by the expert
evidence. d. The expert need not have an
a. Auditor’s expert understanding of the auditor’s
b. Management’s expert corroborative use of the expert’s
c. Expert findings.
d. Specialist

49. In using the work of an expert, an

46. _______ is an individual or understanding should exist among the
organization possessing expertise in a auditor, the entity, and the expert as to
field other than accounting or auditing, the nature, scope, and objective of the
whose work in that field is used by the expert’s work. The documentation of
entity to assist the entity in preparing this understanding should cover
the financial statements a. The conditions under which a division of
a. Auditor’s expert responsibility may be necessary
b. Management’s expert b. A statement that the expert assumes no
c. Expert responsibility to update the expert’s
d. Specialist report for future events or
circumstances
c. The intended use by the auditor of the
47. When planning to use the work of an expert’s work, including the possible
expert, the auditor should evaluate the communication to third parties of the
I. Professional competence of the expert’s identity and extent of
expert involvement.
II. Objectivity of the expert d. The auditor’s disclaimer as to whether
a. I only the expert’s findings corroborate the
b. II only representations in the financial
c. Both I and II statements.
d. Neither I nor II

50. Which of the following is not an expert

48. Which of the following statements is upon whose work an auditor may rely?
correct concerning the auditor’s use of a. An actuary
the work of an expert? b. An individual with expertise in
a. The auditor is required to perform complex modeling for the purpose
substantive test procedures to of valuing financial instruments.
verify the expert’s assumptions and c. An expert in taxation law
findings
 d. An individual with expertise in c. Auditor, as a result of the expert’s
applying methods of accounting for work, issues a modified auditor’s
deferred income tax report
d. Auditor, as a result of the expert’s
work, adds an emphasis-of-matter
51. If the results of the expert’s work do paragraph in his/her unmodified
not provide sufficient appropriate audit auditor’s report
evidence or are not consistent with
other audit evidence, the auditor
should 54. As used in PSA 600, Special
a. Report the matter to the appropriate Considerations – Audits of Group
regulatory agency of the government Financial Statements (Including the
b. Resolve the matter Work of Component Auditors),
c. Withdraw from the engagement _______ is an entity or business
d. Express an unqualified opinion with activity for which group or component
reference to the work of the expert management prepares financial
information that should be included in
the group financial statements.
52. When issuing an unmodified auditor’s a. Component
report, the auditor b. Group
a. May refer to the work of an expert c. Significant component
b. Should refer to the work of an d. Group management
expert to indicate a division of
responsibility
c. Should include in the auditor’s 55. As used in PSA 600, financial
report the identity of the expert and statements that include the financial
the extent of the expert’s information of more than one
involvement component are called
d. Should not refer to the expert’s a. Component financial statements
work b. Group financial statements
c. Consolidated financial statements
d. Common financial statements
53. In using the work of an expert, an
auditor referred to the expert’s
findings in the auditor’s report. This is 56. The __________ is the partner or other
an appropriate reporting practice if the person in the firm who is responsible
a. Auditor, as a result of the expert’s for the group audit engagement and its
work, decides to indicate a division performance, and for the auditor’s
of responsibility with the expert report on the group financial
b. Expert is aware that his/her work statements that is issued on behalf of
will be used to evaluate the the firm.
assertions in the financial a. Engagement partner
statements b. Component engagement partner
c. Principal auditor
 d. Group engagement partner overall group audit strategy and
audit plan
b. The group engagement team shall
57. The group engagement team shall determine the materiality for the
obtain an understanding that is group financial statements as a
sufficient to whole when establishing the overall
I. Confirm or revise its initial group audit strategy
identification of components c. The component engagement
that are likely to be significant partner shall review the overall
II. Assess the risks of material group audit strategy and group
misstatement of the group audit plan
financial statements, whether d. The group engagement partner
due to fraud or error shall agree on the terms of the
a. I only group audit engagement in
b. II only accordance with PSA 210
c. Both I and II
d. Neither I nor II
60. An auditor who, at the request of the
group engagement team, performs
58. If the group engagement team plans to work on financial information related
request a component auditor to to a component for the group audit is a
perform work on the financial a. Group auditor
information of a component, the group b. Component auditor
engagement team shall obtain an c. Component engagement team
understanding of d. Group engagement team
I. Whether the component
auditor understands and will
comply with the ethical
requirements that are relevant
to the group audit and, in
particular, is independent
II. The component auditor’s
professional competence
a. I only
b. II only
c. Both I and II
d. Neither I nor II

59. Which of the following statements

concerning group audits is incorrect?
a. The group engagement team has
the responsibility to establish an