AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
1. Which of the following is the correct order of steps in the audit process?
A. Obtain understanding of the client’s internal control
B. Perform tests of control
C. Obtain understanding of the client’s business and its environment
D. Draft an audit report
E. Prepare a management letter
F. Prepare engagement letter
G. Perform substantive tests
a. F, C, A, B, G, E, D
b. F,A,C,B,G,E,D
c. F, E, A, C, B, G, D
d. F, C, A, B, G, D, E
2. In making a decision to accept or continue with a client, the auditor should consider:
a b c d
Its competence YES YES YES YES
Its own independence YES NO YES NO
Its ability to service the client properly YES YES YES NO
The integrity of the client’s management YES YES NO YES
3. Which of the following is not one of the reasons why auditor should perform preliminary
engagement activities?
a. To ensure that the auditor maintains the necessary independence and ability to perform the
engagement.
b. To help ensure that there are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement.
c. To ensure that there is no misunderstanding with the client as to the terms of the engagement.
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion
on the financial statements.
4. An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should
a. Engage financial experts familiar with nature of the business entity
b. Obtain knowledge of matters that relate to the nature of the entity’s business
c. Refer a substantial portion of the audit to another CPA who will act as the principal auditor
d. Inform the client that an unqualified opinion cannot be expressed.
5. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement.
b. Determine the integrity of management.
c. Determine whether the firm is independent of the client.
d. Gather evidence about the fairness of the financial statements.
6. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
a. An inadequate understanding of the entity’s interval control structure
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing control risk
7. Which of the following factors most likely would influence an auditor’s determination of the
auditability of the entity’s financial statements?
a. The complexity of the accounting system
b. The existence of related party transactions
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures
8. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Obtaining management representation letter
9. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client.
b. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
c. Minimize the likelihood of association with clients whose management lacks integrity.
d. Anticipate before performing any field work whether an unqualified opinion can be expressed.
10. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion.
c. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information
regarding the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests.
11. What is the most likely course of action that will be taken by an auditor in assessing management
integrity?
a. Tour the plant
b. Review the minutes of the board of directors
c. Research the background and histories of officers
d. Review bank reconciliation
12. What will an auditor who has been proposed for an audit engagement usually do prior to accepting a
new client?
a. Draft the financial statements of the client.
b. With the permission from the prospective client, contact the predecessor auditor to determine if
there are any disagreements between the client and the audit firms.
c. Obtain the potential client’s permission to talk to the former auditor and review work papers.
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
d. Prepare an audit engagement letter.
13. Where client is changing auditors, PSA requires communication between predecessor and successor
auditors. The burden of initiating the communication rest with the
a. Predecessor auditor c. incoming auditor
b. client d. SEC
14. Prior to the acceptance of an audit engagement with a client who has terminated the services of the
predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete
report of the circumstance leading to the termination with the understanding that all information
disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor
to violate the confidential relationship between the auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for
the contact.
15. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of
the predecessor auditor. This is a necessary procedure because the predecessor may be able to
provide the successor with information that will assist the successor in determining.
a. Whether he predecessor’s work should be utilized
b. Whether the company follows the policy of rotating its auditors
c. Whether in the predecessor’s opinion internal control of the company has been satisfactory.
d. Whether the engagement should be accepted
16. When one auditor succeeds another, the successor auditor should request the
a. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior
year’s litigation, claims, and assessments.
b. Predecessor auditor to submit a list of internal accounting control weaknesses that have not been
corrected.
c. Client to authorize the predecessor auditor to allow a review of the predecessor auditor’s working
papers.
d. Predecessor auditor to update the prior year’s report to the date of the change of auditors.
17. Which of the following will an auditor least likely discuss with the former auditors of a potential client
prior to acceptance?
a. Integrity of management
b. Fees charged for services
c. Disagreement with management regarding accounting principles
d. Reasons for changing audit firms
18. In an audit, communication between the predecessor and successor auditor should be
a. authorized in an engagement letter
b. acknowledged in a representation letter
c. either written or oral
d. written and included in the working papers
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
19. A successor auditor plans to communicate with the predecessor in connection with an audit of
prospective client’s financial statements. Such communication is acceptable if
a. the client consents
b. the predecessor auditor consents
c. the client and predecessor auditor consent
d. the client and successor auditor consent
20. Upon discovering material misstatements in a client’s financial statements that the client would not
revise, the auditor withdrew from the engagement. If asked by the successor auditor about the
termination the engagement, the predecessor auditor should
a. State that he found material misstatements that the client would not revise
b. Suggest that the successor ask the client
c. Suggest that the successor obtain the client’s permission to discuss the reasons
d. Indicate that a misunderstanding occurred
21. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of GAAP between periods
d. Evaluation of all matters of continuing accounting significance
22. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client's industry
b. The competency of the client's internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.
23. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an
audit engagement?
a. Analysis of balance sheet accounts
b. Analysis of income statement accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management
24. What information should a successor auditor obtain during the inquiry of the predecessor auditor
prior to acceptance of the audit?
I. Facts that bear on the integrity of management
II. Understanding of the client as to the reasons for change of auditors.
III. Disagreement with management concerning auditing procedures
IV. The amount of misstatement which the auditor considers to be material to the financial
statements.
a. I and II b. I and III c. I and IV d. III and IV
25. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed
terms would need to be recorded in an
a. memorandum to be placed in the permanent section of the auditing working papers
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
b. engagement letter
c. client representation letter
d. client representation letter
26. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client.
a. before the audit report is issued
b. after the audit report is issued
c. at the end of fieldwork
d. before the commencement of the engagement
27. An engagement letter should ordinarily include information on the objectives of the engagement
and
CPA’s responsibilities Client’s responsibilities Limitation of engagement
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No No No
28. The primary reason an engagement letter is obtained by audit firms prior to starting the work is
that
a. it clarifies the responsibilities of management and those of the auditor.
b. it defines the firm’s policies and procedures regarding new clients.
c. it assures that all misstatements will be detected by the auditor.
d. it communicates the type of opinion that will be rendered on the engagement.
29. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps avoid and
resolve misunderstandings between CPA and client regarding the precise nature of the work
to be performed and the type of report to be issued.
c. The engagement letter informs the management of the detailed steps to be applied in the
audit process.
d. The engagement letter outlines the deficiencies in the client’s business noted by the auditor
during the audit engagement.
30. Which of the following would be least likely to be included in the auditor’s engagement letter
a. Forms of the report
b. Extent of his responsibilities to his client
c. Objectives and scope of the audit
d. Type of opinion to be issued
31. An engagement letter would not normally include
a. billing arrangement
b. arrangement concerning client’s assistance
c. details of the procedure that will be performed
d. expectation of receiving a representation letter from management
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
32. Arrangements concerning which of the following are least likely to be included in engagement
letter?
a. auditor’s responsibilities
b. Fees and billing
c. CPA investment in client securities
d. Other forms of reports to be issued in addition to the audit report
33. The audit engagement letter should generally include a reference to each of the following except
a. The expectation of receiving a written management representation letter
b. A request for the client to confirm the terms of the engagement
c. A description of the auditor’s method of sample selection
d. The risk that material misstatements may remain undiscovered.
34. After preliminary audit, arrangements have been made, an engagement confirmation letter should
be sent to the client. The letter usually would not include
a. A reference to the auditor’s responsibility for the detection of errors or irregularities
b. An estimate of the time to be spent on the audit work by audit staff and management
c. A statement that management advisory services would be made available upon request
d. A statement that a management letter will be issued outlining comments and suggestions as
to any procedures requiring the client’s attention
35. The use of an engagement letter is the best method of documenting
I. The required communication of significant deficiencies in internal control structure
II. Significantly lower materiality levels than those used in the prior audit
III. The description of any letters or reports that the auditor expects to issue
IV. Notification of any changes in the original arrangements of the audit
a. I and II b. I and IV c. II and III d. III and IV
36. Which of the following activities does not constitute audit supervision?
a. preparing an preliminary audit program
b. providing appropriate instructions to the auditors
c. reviewing audit working papers
d. seeing that audit objectives are achieved
37. Which of the following best describes audit supervision?
a. The manager of each audit has the ultimate responsibility for supervision
b. Supervision is primarily exercised at the final review stage of an audit to
ensure the accuracy of the audit report
c. Supervision is most important in the planning phase of the audit to ensure
appropriate audit coverage
d. Supervision is a continuing process beginning with planning and ending with
the conclusion of the auditing assignment
38. When audits are performed for the external auditor by the internal auditors of the entity, the
external auditor is responsible for...
a. making sure that the audit reports are objective, clear, concise, constructive
and timely
b. reviewing the audit programs for approval
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
c. providing appropriate audit supervision from the beginning to the conclusion
of the audit engagement
d. none of the audit work performed by the internal auditors
39. The independent auditor should acquire an understanding of the internal audit function as it
relates to the independent auditor's study and evaluation of internal control because
a. The audit programs, working papers, and reports of internal auditors can often
be used as a substitute for the work of the independent auditor's staff.
b. The procedures performed by the internal audit staff may eliminate the
independent auditor's need for an extensive study and evaluation of internal
control.
c. The work performed by internal auditors may be a factor in determining the
nature, timing, and extent of the independent auditor's procedures.
d. The understanding of the internal audit function is an important substantive test
to be performed by the independent auditor.
40. If the independent auditor decides that the work performed by internal auditors may have a
bearing on the independent auditor's own procedures, the independent auditor should consider the
objectivity of the internal auditors. One method of judging objectivity is to
a. Review the recommendations made in the reports of the internal auditor.
b. Examine, on a test basis, documentary evidence of the work performed by
internal auditors.
c. Inquire of management about the qualifications of the internal audit staff.
d. Consider the client's practices for hiring, training, and supervising the internal
audit staff.
41. Which of the following statements best describes the auditor's responsibility regarding the
detection of material fraud?
a. Because of the inherent limitations of an audit, the auditor is not responsible
for the failure to detect material fraud.
b. The auditor is responsible for the failure to detect material fraud when such
failure results from nonperformance of audit procedures specifically described
in the engagement letter.
c. The auditor should design audit programs that will provide reasonable
assurance that material errors and fraud will be detected in the ordinary course
of the examination.
d. The auditor is responsible for the failure to detect material fraud when the
auditor's evaluation of internal control procedures indicates that they are
ineffective.
42. Which of the following conditions suggest a lowering of the aggregate materiality threshold?
a. Internal controls in the area of payroll processing are found to be much
stronger than the auditor's initial assessment.
b. The application of analytical procedures reveals a favorable sales budget
variance that is material and that remains unexplained.
c. Study of the business and industry reveals a material decline in both industry
and client revenue during the current year.
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
d. Tests of internal controls in nearly all transaction cycle subsets have produced
numerous and widespread errors.
43. Under which of the following conditions would you consider lowering individual item materiality
thresholds.
a. Study of the business and industry, together with the application of analytical
procedures, reveals that the client has enjoyed a surge in sales and gross profit
during an industry downturn.
b. Application of analytical procedures shows that the client's gross profit rate is
significantly below last year and also is materially lower than the industry average.
c. Study of internal controls within the revenue cycle reveals material weaknesses.
d. Study of internal controls within the payroll cycle confirms the auditor's belief that
few errors have occurred.
44.i. Which of the following may be considered as a danger signal that the client may resort to deliberate
misstatement of its financial statements?
a. The company is financially distressed.
b. The company is the subsidiary of a multinational corporation.
c. The company has its branches all over the Philippines.
d. The company is engaged in mining.
45.ii LS Transit Corp. maintains a staff of three full-time internal auditors who report directly to the
controller. In planning to use the internal auditors to provide assistance in performing the audit, the
independent auditor most likely will
a. Increase the extent of the procedures needed to reduce control risk to an acceptable level.
b. Decrease the extent of the tests of controls needed to support the assessed level of detection risk.
c. Place limited reliance on the work performed by the internal auditors.
d. Avoid using the work performed by the internal auditors.
46.iii. Which of the following ultimately determines the specific audit procedures necessary to provide an
independent auditor with a reasonable basis for the expression of an opinion?
a. The auditor's judgment
b. The audit program
c. Generally accepted auditing standards
d. None of the above
47.iv.In developing a preliminary audit plan, the auditor should consider…
a. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
b. Findings from substantive tests performed at interim dates.
c. Whether the inquiry of the client's legal counsel identifies any litigation, claims, or assessments not
disclosed in the financial statements.
d. The assessed level of control risk
48.v. In planning an audit of certain accounts, an auditor may conclude that specific procedures used to
obtain an understanding of an entity's internal control structure need not be included because of the
auditor's judgments about materiality and assessments of…
a. Sampling risk.
b. Detection risk.
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
c. Control risk.
d. Audit risk.
49. vi. The risk that an auditor will conclude, based on substantive tests, that a material error does not
exist in an account balance when, in fact, such error does exist is referred to as
a. Non-sampling risk
b. Sampling risk.
c. Detection risk.
d. None of the above.
50.vii. In developing a preliminary audit plan, the auditor should consider…
a. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
b. Findings from substantive tests performed at interim dates.
c. Whether the inquiry of the client's legal counsel identifies any litigation, claims, or assessments not
disclosed in the financial statements.
d. The assessed level of control risk
51. viii. In planning an audit engagement, which of the following is a factor that affects the independent
auditor's judgment as to the quantity, type, and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluations based upon initial substantive testing.
c. The content of the client's representation letter.
d. The anticipated nature of the auditor's report.
52. ix. Which of the following situations would most likely require special audit planning by the auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client's tax return differ from those used on the books.
c. Assets costing less than $500 are expensed even though the expected life exceeds one year.
d. Inventory is comprised of precious stones.
53.x. The auditor may refer to and identify a specialist in the auditor's report if the auditor
a. Expresses an unqualified opinion.
b. Believes it will facilitate an understanding of the reason for modification of the report.
c. Wishes to indicate a division of responsibility.
d. Wishes to emphasize the thoroughness of the audit.
54. xi. Which of the following is not a specialist upon whose work an auditor may rely?
a. Actuary.
b. Appraiser.
c. Internal auditor.
d. Engineer.
55. xii. When an outside specialist has assumed full responsibility for taking the client's physical inventory,
reliance on the specialist's report is acceptable if
a. The auditor is satisfied through application of appropriate procedures as to the repu tation and
competence of the specialist.
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
b. Circumstances made it impracticable or impossible for the auditor either to do the work personally
or observe the work done by the inventory firm.
c. The auditor conducted the same audit tests and procedures as would have been applicable if the
client employees took the physical inventory.
d. The auditor's report contains a reference to the assumption of full responsibility.
56. xiii. In which of the following instances would it be appropriate for the auditor to refer to the work
of an appraiser in the auditor's report?
a. An unqualified opinion is expressed and the auditor wishes to place emphasis on the use of a
specialist.
b. A qualified opinion is expressed because of a major uncertainty unrelated to the work of the
appraiser.
c. An adverse opinion is expressed based on a difference of opinion between the client and the outside
appraiser as to the value of certain assets.
d. A disclaimer of opinion is expressed due to a scope limitation imposed on the auditor by the
appraiser.
57.xiv. In using the work of a specialist, an understanding should exist among the auditor, the
client, and the specialist as to the nature of the work to be performed by the specialist.
Preferably, the understanding should be documented and would include all of the following,
except
a. The objectives and scope of the specialist's work.
b. The specialist's representations as to his relationship, if any, to the client.
c. The specialist’s understanding of the auditor's corroborative use of the specialist's findings in relation
to the representations in the financial statements.
d. A statement that the methods or assumptions to be used are not inconsistent with those used by the
client.
58.xv. If a small client is using a service bureau, the auditor
a. Should refuse to accept the engagement.
b. May accept the outside service bureau's control procedures.
c. Must evaluate the service bureau's control procedures.
d. None of the above
59.xvi. Which of the following ultimately determines the specific audit procedures necessary to provide
an independent auditor with a reasonable basis for the expression of an opinion?
a. The auditor's judgment
b. The audit program
c. Generally accepted auditing standards
d. None of the above
60. xvii. The primary inherent risk associated with accounts receivable is that
a. The receivables are incorrectly classified.
b. The receivables are pledged as collateral
c. The income from receivables is not collectible.
d. The entity has 100% claim over the receivables
AUD TH HO MODULE 3 PRE-ENGAGEMENT AND AUDIT PLANNING
61. xviii. It refers to a system whereby shareholders, creditors and other stakeholders of a corporation
ensure that management enhances the value of the corporation as it competes in an increasingly global
market place.
a. quality control standards
b. corporate governance
c. international financial reporting standards
d. corporate ethics
62. xix. A CPA is conducting the first examination of a company's financial statements. The CPA hopes to
reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's
working papers. This practice is
a. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work.
b. Acceptable if the client and the predecessor auditor agree to it.
c. Required if the CPA is to render an unqualified opinion.
d. Unacceptable because the CPA should bring an independent viewpoint to a new engagement.
i A
ii C
iii
A
iv
D
v
D
vi
C
vii
D
viii
D
ix
D
x
B
xi
C
xii
C
xiii
C
xiv
D
xv
C
xvi
A
xvii
C
B
xviii
Corporate Governance – refers to a system whereby shareholders, creditors and other stakeholders of a corporation
ensure that management enhances the value of the corporation as it competes in an increasingly global market
place.
xix B
