Burauen Community College

Poblacion District 9, Burauen, Leyte

AUDITING AND ASSURANCE PRINCIPLES

Mock Midterm Examination

1. Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?
a. Integrity
b. Independence
c. Non-compliance with PFRS
d. Confidentiality
2. Which of the following is not a broad category of threat to auditor independence?
a. Familiarity
b. Positive work relationship
c. Financial self interest
d. Undue influence
3. A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA
firm’s revenues come from this client. Which statement is most likely to be true?
a. Appearance of independence may be lacking
b. The small CPA firm does not have the proficiency to perform a larger audit.
c. The situation is satisfactory if the auditor exercises due care in the audit
d. The auditor should provide an “emphasis of a matter paragraph” to his/her audit report
adequately disclosing this information and then it may issue an unqualified opinion.
4. Contingency fee-based pricing of accounting services is:
a. Always strictly prohibited in public accounting practice
b. Never restricted in public accounting practice
c. Prohibited for clients for whom attestation services are provided.
d. Considered an act discreditable to the profession
5. Which of the following family relationships is most likely to impair a CPA’s independence with respect
to a particular audit client on which the CPA works?
a. A close relative has a material investment in that client of which the CPA is not aware.
b. A cousin has an immaterial investment in the client of which the CPA is aware.
c. The CPA’s sister is controller of the audit client.
d. The CPA’s spouse participates in a savings plan sponsored by the client.
6. Independence requirements suggest that a CPA should evaluate whether a particular threat to
independence would lead to a reasonable person, aware of all the relevant facts, to conclude that:
a. A questioning mind reveals doubt as to independence.
b. An unacceptable risk of non-independence exists.
c. The accountant is definitely not independent.
d. There is substantial cause for a legal finding of non-independence.
7. Which of the following is not a broad category of safeguards that mitigate or eliminate threats to
independence?
a. Safeguards created by the profession, legislation, or regulation.
b. Safeguards created to assure proper training within both the client and attest environment.
c. Safeguards implemented by the attest client.
d. Safeguards implemented by the firm, including policies and procedures to implement
professional and regulatory requirements.
8. Which of the following statements is correct?
a. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the
CPA are received.
b. CPA working papers are the joint property of the CPA and the client.

1
 Burauen Community College
Poblacion District 9, Burauen, Leyte

c. Working papers prepared by the auditor solely for the engagement need not be returned to the
client.
d. CPA working papers that include copies of client’s records are not available to third parties under
any circumstances.
9. When a threat to independence arises, an auditor should consider:
a. Alternative threats to a lack of independence
b. Available safeguards to independence
c. Global independence rules
d. Required lack of independence approaches
10. Which of the following types of employees must be independent of an audit client?
a. A partner in the office that performs the engagement.
b. Senior auditors assigned to the office that performs the audit.
c. Managers assigned to an office that does not participate in the engagement.
d. All firm professionals, regardless of their position.
11. Cruz & Santos CPAs has one office. Which of the following is least likely to impair independence with
respect to an audit client?
a. The client owes the firm for two prior years’ audit fees.
b. A partner in the CPA firm is the son of the president of the client.
c. The husband of a partner in the firm has a small direct financial interest in the client.
d. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.
12. Which of the following forms of advertising would most likely be considered a violation of the Code of
Ethics?
a. Advertising including the types of services offered and the standard fees for the services.
b. Advertising including the experience of the firm’s professional staff.
c. Advertising including an indication that the firm has a close relationship with several tax court
judges.
d. Advertising including the percentage of the firm’s staff that have CPA certificates.
13. A CPA should maintain objectivity and be free of conflicts of interest when performing:
a. Audits, but not any other professional services.
b. All attestation services, but not other professional services.
c. All attestation and tax services, but not other professional services.
d. All professional services.
14. In determining the scope and nature of services to be performed in public practice, a CPA firm should:
a. Require independence for all services performed.
b. Determine that the performance of all services is consistent with the firm’s members’ role as
professionals.
c. Have in place internal control procedures.
d. Only perform accounting related services.
15. A CPA’s retention of client records as a means of enforcing payment of an overdue audit fee is an action
that is:
a. Considered acceptable by the Code of Ethics
b. Ill advised since it would impair the CPA’s independence with respect to the client.
c. Considered discreditable to the profession.
d. A violation of generally accepted auditing standards.
16. An audit independence issue might be raised by the auditor’s participation in consulting services
engagements. Which of the following statements is most consistent with the profession’s attitude toward
this issue?
a. Information obtained as a result of a consulting services engagement is confidential to that
specific engagement and should not influence performance of the attest function.

2
 Burauen Community College
Poblacion District 9, Burauen, Leyte

b. The decision as to loss of independence must be made by the client based on the facts of the
particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions, is also competent to make these
decisions and can do so without loss of independence.
17. A primary purpose for establishing a code of conduct within a professional organization is to:
a. Reduce the likelihood that members of the profession will be sued for substandard work.
b. Ensure that all members of the profession perform at approximately the same level of
competence.
c. Demonstrate acceptance of responsibility to the interests of those served by the profession.
d. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of
their organization.
18. Which of the following is a possible safeguard implemented by the client that might mitigate an audit
independence threat?
a. CPA firm leaderships stresses the importance of complying with professional standards.
b. Management has suitable skills to make managerial decisions.
c. Management maintains substantial common stock investment in the company.
d. Top management selects the auditing firm.
19. Which of the following is prohibited by the Code of Ethics?
a. Advertising in a general newspaper to attract clients.
b. Auditing a competitor of the current audit client.
c. Charging and accepting a contingent fee for a financial statement review engagement.
d. Purchasing a product and reselling that product at a higher price.
20. An accounting association established a code of ethics for all members. The most likely primary purpose
for establishing the code of ethics was to:
a. Outline criteria for professional behavior to maintain standards of competence, morality, honesty,
and dignity within the association.
b. Establish standards to follow for effective accounting practice.
c. Provide a framework within which accounting policies could be effectively developed and
executed.
d. Outline criteria that can be utilized in conducting interviews of potential new accountants.
21. A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational
fund for the CPA's minor child. The trust securities were not material to the CPA but were material to
the child's personal net worth. Would the independence of the CPA be considered to be impaired with
respect to the client?
a. Yes, because the stock would be considered a direct financial interest and, consequently,
materiality is not a factor.
b. Yes, because the stock would be considered an indirect financial interest that is material to the
CPA's child.
c. No, because the CPA would not be considered to have a direct financial interest in the client.
d. No, because the CPA would not be considered to have a material indirect financial interest in the
client.
22. In connection with the element of professional development, a CPA firm’s system of quality control
should ordinarily provide that all personnel
a. Have the knowledge required to enable them to fulfill responsibilities assigned
b. Possess judgment, motivation, and adequate experience
c. Seek assistance whom persons having appropriate levels of knowledge, judgment, and authority.
d. Demonstrate compliance with peer review directives

3
 Burauen Community College
Poblacion District 9, Burauen, Leyte

23. The least important element in the evaluation of a CPA firm’s system of quality controls would concern
its policies and procedures with respect to
a. Employment (hiring)
b. Confidentiality of audit engagements
c. Assigning personnel to audit engagements
d. Determination of audit fees
24. 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
25. The primary reason why a CPA firm establishes quality control policies and procedures for human
resource is to
a. Comply with the continuing educational requirements imposed for all staff accountants in CPA
firms.
b. Establish in fact as well as in appearance that staff accountants are increasing their knowledge of
accounting and auditing matters
c. Provide a forum for staff accountants to exchange their experiences and views concerning firm
policies and procedures
d. Provide reasonable assurance that staff personnel will have the capability, competence and
commitment to ethical principles required to enable them to fulfill their responsibilities in
accordance with professional standards and regulatory and legal requirements.
26. In pursuing its quality control objectives with respect to assigning personnel to engagements, a CPA firm
may use policies and procedures such as the following
a. Rotating employees from assignment to assignment on a random basis to aid in the staff training
effort
b. Requiring timely identification of the staff 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.
27. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely
to
a. Make inquiries of the proposed client’s legal counsel
b. Review financial statements of the proposed client
c. Make inquiries of previous auditors
d. Review the personnel practices of the proposed client
28. In pursuing its quality control objectives with respect to independence, a CPA firm may use policies and
procedures such as the following except
a. Emphasizing independence in mental attitude in firm training programs and in supervision and
review of work
b. Prohibiting employees from owning shares of the stock of publicly traded companies
c. Suggesting that employees conduct their banking transactions with banks that do not maintain
accounts with client firms
d. Assigning employees who may lack independence to research positions that do not require
participation in field audit work.

4
 Burauen Community College
Poblacion District 9, Burauen, Leyte

29. In pursuing its quality control objectives, a CPA firm may maintain records indicating which of its
partners or employees were previously employed by its clients. Which quality control element would
this be most likely to satisfy?
a. Leadership responsibilities for quality within the firm
b. Human resources
c. Ethical requirements
d. Engagement performance
30. A process comprising an ongoing consideration and evaluation of the firm’s system of quality control
including a periodic inspection of a selection of completed engagements designed to provide the firm
with reasonable assurance that its system of quality control is operating effectively.
a. Quality assurance review
b. Monitoring
c. Documenting
d. Auditing
31. A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed
with the preparer is an example of a quality control procedure in the area of:
a. Acceptance and continuance of client relationships and specific engagements
b. Engagement performance
c. Human resources
d. Relevant ethical requirements
32. Inherent risk would be considered to be high when
a. The company’s profit for the year is the same as last year
b. The chief accountant has been with the company for 15 years
c. The newly appointed finance director was previously the marketing manager
d. The company has decided to set-up an internal audit department.
33. Which of the following statements best describes the audit approach to materiality?
a. Materiality is a matter of professional judgment
b. Materiality is only relevant when planning the audit
c. Materiality relates to the relative size of items within the financial statements
d. Materiality is determined by reference to professional standards
34. The best description of the auditor’s responsibility with respect to audited financial statement is:
a. The auditor's responsibility on fair presentation of financial statements is limited only up to the
date of the audit report.
b. The auditor is responsible for detecting misstatements on the financial statements.
c. The responsibility over the financial statements rests with the management.
d. The auditor's responsibility is limited to the expression of opinion on the financial statements.
35. The responsibility for adopting sound accounting policies, maintaining adequate internal control, and
making fair representations in the financial statements rests
a. With management
b. With the independent auditor
c. Equally with management and the auditor
d. With the internal audit department.
36. A measure of the auditor's assessment of the likelihood that there are material misstatements in a
segment before considering the effectiveness of the internal control structure is
a. Inherent risk.
b. Acceptable audit risk.
c. Statistical risk.
d. Control risk.
37. Which of the following concepts of materiality is incorrect?

5
 Burauen Community College
Poblacion District 9, Burauen, Leyte

a. Materiality is based on quantitative and non-quantitative factors.

b. Materiality is a matter of professional audit judgment.
c. Materiality does not apply if internal control is highly effective.
d. Materiality is more closely related to the fieldwork and reporting standards than to general
standards.
38. Auditors focus on
a. Areas where the risk of material errors and irregularities is least.
b. Areas where the risk of material errors and irregularities is greatest.
c. All areas equally.
d. A random selection of all areas.
39. The risk associated with a company's survival and profitability is referred to as:
a. Information risk
b. Business risk
c. Control risk
d. Detection risk
40. In determining the primary responsibility of the external auditor for an audit of a company's financial
statements, the auditor owes primary allegiance to:
a. The management of the audit client because the auditor is hired and paid by management.
b. The audit committee of the audit client because that committee is responsible for coordinating
and reviewing all audit activities within the company.
c. Stockholders, creditors, and the investing public.
d. The Auditing and Assurance Standards Council, because it determines auditing standards and
auditor's responsibility.
41. In financial statement audits, the audit process should be conducted in accordance with
a. Philippine Financial Reporting Standards
b. International Accounting Standards
c. Philippine Standards on Auditing
d. Philippine Accounting Standards
42. Management’s assertions in the financial statements are relevant to the audit process because:
a. They provide evidence that auditors have prepared financial statements in accordance with
GAAP
b. They embody the audit procedures that will be performed by the audit engagement team.
c. They include representations of financial statements in accordance with the applicable reporting
criteria
d. They relate to regulator’s expectations about audit results.
43. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the
audit.
a. Scope of an audit c. Objective of an audit
b. Audit program d. Reasonable assurance
44. It is essential that users regard CPA firms as
a. Competent.
b. Unbiased.
c. Technically proficient.
d. All of the above

45. Which of the following least likely create "self-interest threat"?

a. Pressure to reduce inappropriately the extent of work performed in order to reduce fees.
b. Undue dependence on total fees from an assurance client.
c. Concern about the possibility of losing the engagement.
d. Having a close business relationship with an assurance client.

6
 Burauen Community College
Poblacion District 9, Burauen, Leyte

46. If a member of the assurance team, or their immediate family member receives, by way of, for example,
an inheritance, gift or, as a result of a merger, a direct financial interest or a material indirect financial
interest in the assurance client, a self-interest threat would be created. The following safeguards should
be applied to eliminate the threat or reduce it to an acceptable level:
a. Disposing of the financial interest at the earliest practical date.
b. Removing the member of the assurance team from the assurance engagement.
c. Either a or b
d. Neither a nor b
47. Which of the following is an indication of lack of objectivity of an auditor?
a. In preparing client's tax return, the CPA encourages client to take a deduction which the CPA
believes is valid, but for which there is some but not complete support.
b. The auditor believes that accounts receivable may not be collectible, but accepts management's
opinion without an independent evaluation.
c. Both a and b above would be a violation
d. Neither would be a violation
48. A CPA in public practice shall not disclose any confidential client information without the specific
consent of the client. The confidentiality rule is violated if CPA disclosed information without client's
consent as a result of a
a. Subpoena or summons.
b. Request by client's largest stockholder.
c. Peer review.
d. Complaint filed with the trial board of the board of accountancy.

49.Which of the following best describes the objective of an audit of financial statements?
a. To express an opinion whether the financial statements are prepared in accordance
with prescribed criteria.
b. To express an assurance as to the future viability of the entity whose financial
statements are being audited.
c. To express an assurance about the management’s efficiency or effectiveness in
conducting the operations of entity.
d. To express an opinion whether the financial statements are prepared, in all material
respect, in accordance with an identified financial reporting framework.
50.Which best describes the representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to consider the different
types of potential misstatements that may occur.
a. Financial statement assertions C. Audit evidence
b. Notes to the financial statements D. Disclosure requirements
51. Which of the following procedures would an auditor most likely include in the planning phase of a
financial statement audit?
a. Obtain an understanding of the entity’s risk assessment process.
b. Identify specific internal control activities designed to prevent fraud.
c. Evaluate the reasonableness of the entity’s accounting estimates.
d. Perform cutoff tests of the entity’s sales and purchases.

52. An auditor obtains knowledge about a new client’s business and its industry 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. Understand the events and transactions that may have an effect on the client’s financial
statements.

7
 Burauen Community College
Poblacion District 9, Burauen, Leyte

53. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
a. Coordinating the assistance of entity personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for nonaudit
services to the entity.
c. Selecting a sample of vendors’ invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.
54. 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 to 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.
55. Analytical procedures used in planning an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidential matter.
56. With respect to planning an audit, which of the following statements is always true?
a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.
b. An engagement should not be accepted after the client’s year-end.
c. An inventory count must be observed at year-end.
d. Final staffing decisions must be made prior to completion of the planning stage.
57. Which of the following statements is correct concerning an auditor’s responsibilities regarding financial
statements?
a. Making suggestions that are adopted about the form and content of an entity’s financial
statements impairs an auditor’s independence.
b. An auditor may draft an entity’s financial statements based on information from management’s
accounting system.
c. The fair presentation of audited financial statements in conformity with GAAP is an implicit part
of the auditor’s responsibilities.
d. An auditor’s responsibilities for audited financial statements are not confined to the expression
of the auditor’s opinion.
58. In the case of recurring audits, the auditor should consider whether circumstances require the terms of
engagement to be revised and whether there is a need to remind the client of the existing terms of the
engagement. The auditor may decide not to send a new engagement letter each period. However, the
following factors may make it appropriate to send a new letter, except
a. There is indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change of rank and file employees.
d. Legal requirements and other government agencies’ pronouncements.
59. The auditor should be alert for particular trends and relationships that may indicate a risk of material
misstatement due to fraud, such as the following, except:
a. Uncharacteristically large amounts of income being reported in the last few weeks of the
reporting period.
b. Unusual transactions
c. Application of conservatism or prudence in making accounting estimates
d. Income that is inconsistent with trends in cash flow from operations.
60. An initial audit requires more audit time to complete than a recurring audit. One of the reasons for this
is that:
a. The new auditors are usually assigned to an initial audit.
b. The predecessor auditors need to be consulted.
c. The client’s business, industry, and internal control are unfamiliar to the auditor and he needs to
carefully study them.

8
 Burauen Community College
Poblacion District 9, Burauen, Leyte

d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.

61. According to PSA 315, an example of the matters that the auditor may consider to obtain an
understanding of the nature of the entity is conduct of operations. Conduct of operations include the
following, except:
a. Stages and methods of production
b. Business segments
c. Alliances, joint ventures, and outsourcing activities
d. Details of declining or expanding operations
62. During audit planning, the entire audit team is considering the risk of non-compliance. The audit
associate asked the audit partner: “If an illegal act is discovered during the audit of a publicly held
company, what should the auditor do?” Select the most appropriate reply of the partner:
a. “The auditor should notify the regulatory authorities.”
b. “We must determine who was responsible for the illegal act.”
c. “The auditor should report the act to high level personnel within the client’s organization and to
the audit committee.”
d. “The audit team will intensify the examination, because we must identify all illegal acts.”
63. When an auditor is assessing the auditability of a small business client, the auditor should focus upon:
a. the integrity of management and the adequacy of the client’s internal control systems.
b. whether the auditor has adequate resources to accomplish the audit.
c. the amount of risk the audit represents and the audit fee which can be collected.
d. whether the client’s accounting personnel are well trained and professionally qualified.
64. Which of the following topics is not normally included in an engagement letter?
a. The auditor’s estimate of the professional fee for the engagement.
b. Limitations on the scope of the engagement.
c. A description of responsibility for the detection of fraud.
d. The auditor’s preliminary assessment of internal control.
65. The auditor shall perform risk assessment procedures to provide a basis for the identification and
assessment of risks of material misstatement at the
a. Financial statement level c. FS and assertion level
b. Assertion level d. Account balance level
66. As the audit progresses and additional information about the client is obtained, the acceptable level of
audit risk
a. May be modified
b. May not be modified because it would become statistically invalid, but it may be increased
c. May not be increased because it would become statistically invalid, but it may be reduced
d. May not be modified
67. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit
function. An effective auditor will
a. Take any means available to reduce the risk to the lowest possible level
b. Set the risk level between 5% and 10%.
c. Perform the audit procedures first and quantitatively set the risk level before forming an opinion
and writing the report.
d. Recognize that risk exists and deal with it in an appropriate manner
68. Least likely relevant to an auditor in performing risk assessment procedures
a. Discussion with people within the entity c. Tour of the entity’s facilities
b. Industry-related publications d. Walk-through procedures
69. Choose the correct statement
a. Compared to the management, the auditor is required to have more knowledge of the entity’s
business
b. Initial knowledge about the entity’s industry must be acquired after the engagement acceptance
to determine whether the auditor has the knowledge to perform the audit
c. Knowledge about the client’s business must be acquired at the start of the engagement
following acceptance
d. The auditor need not perform risk assessment procedures for continuing engagements

9
 Burauen Community College
Poblacion District 9, Burauen, Leyte

70. 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
71. The risk that the audit will fail to uncover a material misstatement is eliminated
a. If a client has strong internal controls
b. If a client follows generally accepted accounting principles (GAAP)
c. When the auditor has complied with generally accepted auditing standards (GAAS)
d. Under no circumstances
72. Which of the following is least likely to be included in an auditor’s inquiry of management while
obtaining information to identify the risks of material misstatement due to fraud?
a. Are financial reporting operations controlled by and limited to one location?
b. Does it have knowledge of fraud or suspected fraud?
c. Does it have programs to mitigate fraud risk?
d. Has it reported to the audit committee the nature of the company’s internal control?
73. Which type of risk does the management of a company have the most control over in the short term?
a. Inherent risk c. Detection risk
b. Control risk d. Sufficiency risk
74. Which of the following best describes why an independent auditor reports on financial statements?
a. Independent auditors are likely to detect fraud
b. Competing interests may exist between management and the users of the statements
c. Misstated account balances are generally corrected by an independent audit.
d. Ineffective internal controls may exist.
75. Which of the following is incorrect regarding the general principles of an audit?
a. The auditor should comply with the “Code of Ethics for Professional Ethics for Certified Public
Accountants” promulgated by the Philippine Professional Regulation Commission.
b. The auditor should conduct an audit in accordance with PSAs.
c. The auditor should plan and perform an audit with an attitude of professional skepticism
recognizing that circumstances may exist that cause the financial statements to be materially
misstated.
d. The auditor would ordinarily expect to find evidence to support management representations
and assume they are necessarily correct.
76. PSA 315 requires
a. The auditor to obtain an understanding of the entity and its environment, including its internal
control.
b. Discussion among the engagement team about the susceptibility of the entity’s financial
statements to material misstatement.
c. The auditor to identify and assess the risks of material misstatement at the financial statement
and assertion levels.
d. All of the above.
77. Which statement is correct regarding business risks?
a. The risk of material misstatement of the financial statements is broader than business risk,
though it includes the latter.
b. The auditor should identify or assess all business risks.
c. All business risks give rise to risks of material misstatement.
d. A business risk may have an immediate consequence for the risk of misstatement for classes of
transactions, account balances, and disclosures at the assertion level or the financial statements
as a whole.
78. The assessment of the risks of material misstatement at the financial statement level is affected by the
auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily
will lead the auditor to

10
 Burauen Community College
Poblacion District 9, Burauen, Leyte

a. Have more confidence in internal control and the reliability of audit evidence generated internally
within the entity.
b. Conduct some audit procedures at an interim date rather than at period end.
c. Modify the nature of audit procedures to obtain more persuasive audit evidence.
d. Decrease the number of locations to be included in the audit scope.
79. Which of the following is the ultimate concern of the knowledge about the business?
a. Consideration of how it affects the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.
80. The auditor is not expected to have
a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. Knowledge of business which is used in assessing inherent and control risk.
81. Gaining an understanding of the client and its environment includes all of the following areas except:
a. Regulatory issues unique to the industry.
b. The entity's application of accounting policies.
c. The audit fee and timeline for completion of the work.
d. The entity's business risks.
82. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor's experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.
83. Which of the following is least likely considered by the auditor in developing the overall audit plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major component of financial statements
d. The general level of competence of audit assistants.
84. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are expected under
the engagement.
85. Analytical procedures used in planning an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor's understanding of the client's business.
d. Assessing the adequacy of the available evidential matter.
86. Which of the following least likely requires the auditor to send a new engagement letter?
a. An indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change in the audit firm's management.
d. Legal requirements and other government agencies' pronouncements.
87. Which of the following conditions and events may most likely indicate the existence of risks of material
misstatement?
a. Having personnel with appropriate accounting and financial reporting skills.
b. Accounting measurements that involve simple processes.
c. Significant amount of routine or systematic transactions.
d. Constraints on the availability of capital and credit.
88. The auditor's understanding of the entity and its environment consists of an understanding of the
following aspects:

11
 Burauen Community College
Poblacion District 9, Burauen, Leyte

I. Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
II. Nature of the entity, excluding the entity's selection and application of accounting policies.
III. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
IV. Measurement and review of the entity's financial performance.
V. Internal control.

a. All of the above statements C. I, III, IV and V

b. I, II, III and IV D. I, II, III and V
89. Inquiries directed towards those charged with governance may most likely
a. Relate to their activities concerning the design and effectiveness of the entity's internal control
and whether management has satisfactorily responded to any findings from these activities.
b. Help the auditor understand the environment in which the financial statements are prepared.
c. Relate to changes in the entity's marketing strategies, sales trends, or contractual arrangements
with its customers.
d. Help the auditor in evaluating the appropriateness of the selection and application of certain
accounting policies.
90. The auditor of a parent entity is also the auditor of its component. Which of the following factors may
influence the auditor's decision whether to send a separate engagement letter to the entity's
component?
a. The preconditions for an audit of the component's financial statements are not present.
b. The financial reporting framework used by the component is unacceptable.
c. The component's management does not accept its responsibilities that are fundamental to the
conduct of an audit.
d. Whether a separate auditor's report is to be issued on the component.

12