NEU CPA REVIEW -RESA- THE REVIEW SCHOOL OF ACCOUNTANCY-AUDITING THEORY-SY 22-

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AT-05: FS AUDIT PROCESS – PRE-ENGAGEMENT

REQUIRED READINGS
• Chapter 5, Auditing and Assurance Principles, 2017 Edition
• PSA 200 (Revised and Redrafted) – Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Philippine Standards on Auditing
• PSA 210 (Revised and Redrafted): Terms of Engagement
• PSA Glossary of Terms

1. Which of the following presents the audit phases in proper order?

a. Pre-engagement, evaluation of controls, planning, evidence gathering, reporting & completion
b. Pre-engagement, evaluation of controls, evidence gathering, planning, reporting & completion
c. Pre-engagement, planning, evaluation of controls, evidence gathering, reporting & completion
d. Planning, pre-engagement, evaluations of controls, evidence gathering, reporting & completion

2. Which of the following is/are not considered in deciding whether to accept a new client or not?
I. Firm’s competency to perform the engagement and ability to comply with relevant ethical
requirements
II. Client’s integrity including its standing in the business community and financial ability
III. Integrity of predecessor auditor
IV. Probability of achieving an unqualified opinion

A. I only C. III only

B. I and II only D. III and IV only

3. Determine whether the following statements are true or false:

I. A successor auditor should make specific inquiries of the predecessor auditor regarding
disagreements which the predecessor had with the client concerning auditing procedures
and accounting principles
II. If a client refuses to permit the predecessor to respond to the successor’s inquiry, then the
successor auditor should inquire as to the reasons for such refusal and consider the
implications of this in deciding whether to accept the engagement or not.

A. Both I and II are true. C. I is true while II is false.

B. Both I and II are false. D. I is false while II is true.

4. Determine whether the statements are true or false:

I. In deciding whether to accept a new client or not, the predecessor auditor should initiate
communication to the successor.
II. Relevant ethical and professional requirements guide the current auditor’s communications
with the predecessor auditor.
A. Both I and II are true. C. I is true while II is false.
B. Both I and II are false. D. I is false while II is true

5. Which of the mechanisms below will enhance the auditor’s independence?

I. Appointing a partner of the CPA firm conducting the audit to the corporation’s audit
committee.
II. Have the external financial statements auditor report to the audit committee

A. I only C. Both I and II

B. II only D. Neither I nor II

6. S1 Independence must be considered in deciding whether to accept a company as an audit

client.
S2 Only partners and managers are required by the Code of Ethics to be independent from their
assurance clients.
A. True, false B. False, true C. True, true D. False, false

7. After client acceptance, the terms of the engagement are agreed by the auditor with the client.
The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are
best documented in:
A. Independent auditor’s report C. Client’s representation letter.
B. Audit engagement letter. D. Audit program.

8. The engagement letter will do one, some, or all of the following:

A B C D
1. State whether the CPA will perform audit, review or
compilation services. Yes Yes Yes Yes

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Auditing Theory: FS Audit Process – Pre-engagement

2. State whether the CPA will perform tax or

management advisory or other services. Yes Yes No Yes
3. State any restriction to be imposed on the CPA’s No Yes Yes Yes
work.
4. Identify deadlines for completing the work. Yes Yes No Yes
5. State the amount and type of work to be done by
client’s personnel in generating auditor’s workpapers. No No Yes Yes
6. State the CPA’s fees for the engagement. Yes Yes No Yes
7. Inform the client that the CPA does not have
responsibility for detecting fraud. No No Yes Yes

9. The primary purpose of the engagement letter is to:

A. Remind management that the primary responsibility for the FS rests with management.
B. Provide a written record of the agreement with the client as to the services to be provided.
C. Provide a starting point for the auditor’s preparation of the preliminary audit program.
D. Satisfy the requirements of the CPA’s liability insurance policy.

10. Which of the following is least likely to be included in an audit engagement letter?
A. Identification of specific audit procedures that the auditor needs to undertake.
B. Description of any letters or reports that the auditor expects to submit to the client.
C. A reference to the inherent limitations of an audit that there is an unavoidable risk that
some material misstatements may remain undiscovered.
D. Basis on which fees are computed and any billing arrangements.

11. Which of the following factors need to be considered in deciding whether to send a separate
engagement letter to a component (in the case of group audits)?
A. Who appoints the auditor of the component.
B. Legal requirements.
C. Whether a separate audit report is to be issued on the component.
D. All of the above are considered.

12. In which of the following situations will there be a need to send a new letter for recurring
engagements?
A. Revisions or special terms of the engagement.
B. Significant change in nature or size of the client’s business.
C. Indications of misunderstanding of the objective and scope of the audit.
D. Recent change of middle management and rank and file organizational structure

13. The following may lead the client to request for a change in engagement:
A. Restrictions on the scope of the engagement.
B. Misunderstanding as to the nature of an audit or related service originally requested.
C. Change in circumstances affecting the need for the service.
D. All of the answers.

14. If a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement:
A. Should qualify the opinion due to a scope limitation.
B. Omits reference to the original engagement.
C. Should always refer to any procedures that may have been performed in the original
engagement.
D. Should refer to the original engagement in a separate paragraph preceding the opinion
paragraph.

15. If a change in the type of engagement from higher to lower level of assurance is not justified, the
auditor should:
A. Qualify the report on the original engagement.
B. Continue with the revised engagement but make explicit reference about the original
engagement.
C. Refuse to agree to management’s request on the change of engagement and continue with
the original engagement.
D. Withdraw from the engagement.

16. Which of the following actions may be appropriate if the auditor is unable to agree to a change of
the engagement and is not permitted to continue the original engagement
I. Issue a qualified opinion due to a significant scope limitation.
II. Auditor should withdraw from the engagement.

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III. Consider whether there is any obligation to report to the board of directors or shareholders the
circumstances necessitating withdrawal

a. I only b. II and III c. I and II d. I, II and III

17. When the auditor believes a misstatement is or may be the result of fraud but that the effect of
the misstatement is not material to the financial statements, which of the following steps is
required?
A. Consider the implications for other aspects of the audit.
B. Resign from the audit.
C. Commence a fraud examination.
D. Contact regulatory authorities.

18. Which of the following statements is correct relating to the auditor’s consideration of fraud?
A. The auditor’s interest in fraud consideration relates to fraudulent acts that cause a material
misstatement of financial statements.
B. A primary factor that distinguishes fraud from error is that fraud is always intentional, while
errors are generally, but not always, intentional.
C. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of
assets.
D. While an auditor should be aware of the possibility of fraud, management, and not the
auditor, is responsible for detecting fraud.

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

20. Which of the following documentation is not required for an audit in accordance with generally
accepted auditing standards?
A. A written audit plan setting forth the procedures necessary to accomplish the audit’s
objectives.
B. An indication that the accounting records agree or reconcile with the financial statements.
C. A client engagement letter that summarizes the timing and details of the auditor’s planned
fieldwork.
D. The assessment of the risks of material misstatement.

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