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AT-96-PW - Auditing theory
Auditing theory
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Accounting (ACC 156)
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University of Iloilo - PHINMA
Academic year: 2024/2025
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CPA REVIEW SCHOOL OF THE PHILIPPINES AT 96 PW
M a n i l a
AUDITING THEORY CPA Review
MULTIPLE CHOICE QUESTIONS
1. A CPA performed the following engagements in March 20 24. Which is considered an
attestation engagement?
I. Audit of 202 3 financial statements
II. Examination of 202 5 proposed financial statements
A. I only
B. II only
C. Both I and II
D. Neither I nor II
2. A CPA should decide NOT to accept a new client for an audit engagement if
A. the CPA lacks an understanding of the client’s industry and accounting principles prior to
acceptance.
B. The client’s management has unusually high turnover.
C. Both and A and B.
D. Neither A nor B.
3. All of the following are correct regarding an auditor’s understanding with a potential client
prior to beginning an audit EXCEPT:
A. the understanding should list the audit fees and frequency of billing.
B. the understanding should cover the responsibilities of the independent auditor.
C. the understanding should cover the limitations of the engagement.
D. the understanding should be in the form of an engagement letter in order to be in
conformity with auditing standards.
4. Which of the following procedures would an auditor perform in planning a financial statement
audit?
I. Selecting a sample of vendors’ invoices for comparison to receiving reports.
II. Coordinating the assistance of entity personnel in data preparation.
III. Reading the current year’s interim financial statements.
A. II only
B. II and III only
C. I, II, and III
D. III only
5. Some accounting estimates may involve relatively low estimation uncertainty and may give
rise to lower risks of material misstatements, such as those ______________.
A. with fair value estimates for which a highly specialized entity-devloped model is used
B. relating to the outcome of litigation
C. with fair value estimates for derivative financial instruments not publicly traded
D. that are frequently made and updated because they relate to routine transactions.
6. Which of the following meets the definition of an assurance engagement but does NOT need
to be performed in accordance to the Framework for Assurance Engagement?
A. Consulting (or advisory) engagements, such as management and tax consulting.
B. The preparation of tax returns where no conclusion conveying assurance is expressed.
C. Agreed-upon procedures engagements and compilations of financial or other information.
D. Engagements to testify in legal proceedings regarding accounting, auditing, taxation or
other matters.
7. The _______________ sets the scope, timing and direction of the audit, and guides the
development of the more detailed ______________.
A. overall audit strategy; audit plan
B. audit plan; overall audit strategy
C. audit risk plan; substantive tests
D. audit plan; risk assessment procedures
8. Which of the following procedures is a practitioner least likely to perform during a review
engagement?
A. Comparing the financial statements with anticipated results in budgets and forecasts.
B. Studying the relationships of financial statement elements expected to conform to
predictable patterns.
C. Inquiring of management about actions taken at the board of directors’ meetings.
D. Observing the safeguards over access to and use of assets and records.
9. The _________________ element of internal control includes the governance and
management functions and the attitudes, awareness, and actions of those charged with
governance and management concerning the entity’s internal control and its importance in
the entity.
A. control activities
B. control environment
C. monitoring
D. risk assessment process
10. Under the Code of Ethics, the following are examples of situations that might create a conflict
of interest, EXCEPT
A. Providing services to a seller and a buyer in relation to different transactions.
B. Preparing valuations of assets for two parties who are in an adversarial position with
respect to the assets.
C. Representing two clients in the same matter who are in a legal dispute with each other.
D. In relation to a license agreement, providing an assurance report for a licensor on the
royalties due while advising the licensee on the amounts payable.
11. The auditor shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s financial statements
by:
A. Evaluating whether audit procedures performed in the current period provide evidence
relevant to the closing balances.
B. Determining whether the prior period’s closing balances have been correctly brought
forward to the current period.
C. Performing specific audit procedures to obtain evidence regarding the closing balances.
D. Determining whether the closing balances reflect the application of appropriate accounting
policies.
12. Which of the following is correct about forensic audits?
A. Forensic are usually performed in situations in which fraud has been found or suspected.
B. Forensic audits are equivalent to compliance audits.
C. Forensic audits are performed by law firms; they are not performed by CPA firms.
D. All audits are forensic audits.
13. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk, and therefore the risk of material misstatement, from that
originally planned. To achieve an overall audit risk level that is substantially the same as the
planned audit risk level, the auditor would ________________.
A. decrease detection risk.
B. decrease substantive testing.
C. increase inherent risk.
D. increase materiality level.
14. Which is least likely beneficial in adequately planning an audit of financial statements?
A. Assist in coordination of work done by auditors of components and experts.
B. Assist in the selection of engagement team members with appropriate levels of capabilities
and competence.
21. Which of the following is not one of the principal duties of the COA?
A. Keep the general accounts of the government and preserve the vouchers and supporting
papers pertaining thereto.
B. Maintain price stability conducive to a balanced and sustainable economic growth.
C. Promulgate accounting and auditing rules and regulations including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant or
unconscionable expenditures, or uses of government funds and properties.
D. Submit to the president of the Philippines and congress, within the time fixed by law, an
annual report covering the financial condition and operation of the government.
22. The following statements relate to assurance engagements. Choose the incorrect statements.
1. The objective of an assurance engagement is for a professional accountant to evaluate or
measure a subject matter that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a level
of assurance about the subject matter.
2. Assurance engagements performed by professional accountants are intended to enhance
the credibility of information about a subject matter.
3. Assurance engagements involve two parties: a professional accountant and an intended
user.
4. The subject matter of an assurance engagement is limited to historical or prospective
financial information.
5. The intended user in an assurance engagement is the person or class of persons for whom
the professional accountant prepares the report for a specific use or purpose.
A. 2, 3, 4, and 5. C. 3 and 4.
B. 2, 4, and 5. D. 1, 2, 3, and 4.
23. Assistants to whom work is delegated need appropriate direction. Direction involves
A. Informing assistants of their responsibilities and the objectives of the procedures they are
to perform.
B. Informing assistants of matters, such as the nature of the entity’s business and possible
accounting or auditing problems that may affect the nature, timing, and extent of audit
procedures with which they are involved.
C. Both A and B.
D. Neither A nor B.
24. Narratives, flowcharts, and internal control questionnaires are three common methods of
A. documenting the auditor’s understanding of internal controls.
B. designing the audit manual and procedures.
C. documenting the auditor’s understanding of a client’s organizational structure.
D. testing the internal controls.
25. The following audited balances pertain to OWEL Company.
Accounts payable:
January 1, 202 4 P286,
December 31, 202 4 737,
Inventory balance:
January 1, 202 4 815,
December 31, 202 4 488,
Cost of goods sold – 2024 1,859,
How much was paid by OWEL Company to its suppliers in 202 4?
A. P2,636,
B. P1,081,
C. P1,734,
D. P1,983,
Computation:
Cost of goods sold – 2024
Inventory, Dec. 31, 202 4
Goods available for sale
Inventory, Jan. 1, 202 4
Purchases
Accounts payable, Jan. 1, 202 4
Total
Accounts payable, Dec. 31, 202 4
Amount paid to suppliers in 202 4
26. Fraud refers to an intentional act by one or more individuals among management, employees
or third parties, which results in a misrepresentation of financial statements while error refers
to unintentional mistakes in financial statements. Fraud may involve
1. Manipulation, falsification or alteration of records or documents.
2. Misappropriation of assets.
3. Mathematical or clerical mistakes in the underlying records and accounting data.
4. Suppression or omission of the effects of transactions from records or documents.
5. Oversight or misinterpretation of facts
6. Recording of transactions without substance.
7. Misapplication of accounting policies.
A. 1, 2, 4, 6, and 7.
B. 1, 2, 3, 4, 6, and 7.
C. 1, 2, 3, and 6
D. 1, 2, 4, 5, and 6.
27. As defined in PSA 500, __________ is an individual or organization possessing the expertise
in a field other than accounting or auditing, whose work in that field is used by the entity to
assist the entity in preparing the financial statements.
A. auditor’s expert C. auditor’s internal expert
B. management’s expert D. auditor’s external expert
28. The date of the end of the latest period covered by the financial statements, which is normally
the date of the most recent balance sheet in the financial statements subject to audit is the
A. Date the financial statements are issued.
B. Date of the auditor’s report.
C. Date of the financial statements.
D. Date of approval of the financial statements.
29. Which one of the following statements concerning sampling risk and nonsampling risk is
correct?
A. Neither sampling risk nor nonsampling risk can be reduced by the auditor.
B. Sampling risk, but not nonsampling risk, can be reduced by the auditor.
C. Nonsampling risk, but not sampling risk, can be reduced by the auditor.
D. Both sampling risk and nonsampling risk can be reduced by the auditor.
30. Users of financial statements demand independent audits because ____________
A. management relies on the auditor to improve the entity’s internal control.
B. management may not be objective in reporting.
C. users expect auditors to correct errors of management.
D. users want assurance that fraud does not exist.
31. Audit working papers are indexed by means of reference numbers. The primary purpose of
indexing is to
A. Permit cross-referencing and simplify supervisory review.
B. Support the audit report.
C. Eliminate the need for follow-up reviews.
D. Determine that working papers adequately support findings, conclusions, and reports.
32. Which of the following statements concerning the auditor’s responsibility regarding
subsequent events is INCORRECT?
B. Assess the presentation of management’s financial statements in accordance with PFRS.
C. Determine whether management has complied with applicable laws and regulations.
D. Determine whether the audit committee of the board of directors is effectively discharging
its responsibility to oversee management’s operations.
38. In a financial statement audit, audit risk represents the probability that
A. Internal control fails and the failure is not detected by the auditor’s procedures.
B. The auditor unknowingly fails to modify an opinion on materially misstated financial
statements.
C. Inherent and control risk cause errors that could be material to the financial statements.
D. The auditor is not retained to conduct a financial statement audit in the succeeding year.
39. The auditor is examining copies of sales invoices only for the initials of the person responsible
for checking the extensions. This is an example of a ______________
A. test of controls.
B. substantive test.
C. dual-purpose test
D. test of balances.
40. The risk that the audit will fail to uncover a material misstatement is eliminated ________.
A. if client has good internal control
B. if client follows Financial Reporting Standards
C. when the auditor has complied with Standards on Auditing
D. under no circumstances
41. Internal control is the process designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives with regard to __________.
A. reliability of financial reporting
B. effectiveness and efficiency of operations
C. compliance with applicable laws and regulations
D. All of the above
42. Which of the following is the best example of a substantive test?
A. Examining a sample of cash disbursements to test whether expenses have been properly
approved.
B. Confirmation of balances of accounts receivable.
C. Comparison of signatures on checks to a list of authorized signers.
D. Flowcharting of the client’s cash receipts system.
43. Analytical procedures performed in the overall review stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely indicate
that _____________.
A. irregularities exist among the relevant account balances
B. internal control procedures are not operating effectively
C. additional tests of details are required
D. the communication with the audit committee should be revised
44. A document that details what the auditor will do to gather sufficient, appropriate evidence is
the __________.
A. audit strategy
B. audit program
C. audit procedure
D. audit risk model
45. In the context of an audit of financial statements, substantive tests are audit procedures that
__________.
A. may be eliminated under certain conditions
B. are designed to discover significant subsequent events
C. may be either tests of transactions, direct tests of financial balances, or analytical tests
D. will increase proportionately with the auditor’s assessment of control risk
46. As the acceptable level of detection risk decreases, an auditor may change the
A. timing of substantive tests by performing them at an interim date rather than at year-end.
B. nature of substantive tests from a less effective to a more effective procedure.
C. timing of tests of controls by performing them at several dates rather than at one time.
D. assessed level of inherent risk to a higher amount.
47. Which of the following least likely requires the services of an expert?
A. Valuations of certain types of assets like land and buildings.
B. Legal opinions concerning interpretations of statutes and regulations.
C. Determination of amounts using specialized techniques.
D. Application of accounting methods in computing inventory balances.
48. While ________________ engagement involves the application of audit skills and techniques
and the gathering of evidence, it does not ordinarily involve an assessment of accounting and
internal control systems, tests of records, and of responses to inquiries by obtaining
corroborating evidence through inspection, observation, confirmation, and computation.
A. compilation
B. review
C. agreed-upon procedures
D. consultancy
49. After considering internal control, an auditor might decide to ___________.
A. increase the extent of tests of controls and substantive tests in areas where internal
control is strong
B. reduce the extent of tests of controls in areas where internal control is strong
C. reduce the extent of both substantive tests and tests of controls in areas where internal
control is strong
D. increase the extent of substantive tests in areas where internal control is weak
50. Which of the following procedures can be performed only in the subsequent period?
A. Examination of data to determine that a proper cutoff has been made.
B. Tests of the details of balances.
C. Tests of the details of transactions.
D. Reading of the minutes of the board of directors’ meetings.
51. The establishment of an overall audit strategy or plan involves
I. Determining the characteristics of the engagement that define its scope.
II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required.
III. Considering the important factors that will determine the focus of the engagement
team’s efforts.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.
52. In obtaining an understanding of internal control relevant to the audit, the auditor may trace
several transactions through the system, including how the transactions interface with any
service organizations whose services are part of the entity’s information system. The primary
objective of this procedure is to
A. Evaluate the design of internal control and determine whether it has been implemented.
B. Determine the effectiveness of internal control.
C. Detect fraud.
D. Replace substantive tests.
53. Which of the following questions would an auditor most likely include in the production cycle
internal control questionnaire?
makes __________ regarding the recognition, measurement, presentation, and disclosure of
the various elements of financial statements and related disclosures.
A. assertions
B. allegations
C. conclusions
D. assurances
60. Which of the following procedures is most likely to give the greatest assurance that securities
held as investments are safeguarded?
A. There is no access to securities between year-end and the date of the auditor’s security
count.
B. Proceeds from the sale of investments are received by an employee who does not have
access to securities.
C. Investment acquisitions are authorized by a member of the board of directors before
execution.
D. Access to securities requires the signatures and presence of two designated officials.
61. The diamond-shaped symbol is commonly used in flowcharting to show or represent a
A. Process or a single step in a procedure or program.
B. Terminal output display.
C. Decision point, conditional testing, or branching.
D. Predefined process.
62. Sequential access means
A. Data are stored on magnetic tape.
B. The address of the location of data is found through the use of either an algorithm or an
index.
C. Each record can be accessed in the same amount of time.
D. To read record 500, records 1 through 499 must be read first.
63. An auditor is concerned with completing various phases of the audit after the balance sheet
date. This subsequent period extends to the date of the
A. Delivery of the auditor’s report to the client.
B. Auditor’s report.
C. Final review of the audit working papers.
D. Public issuance of the financial statements.
64. The ____________ is responsible for the direction, supervision and performance of the group
audit engagement in compliance with professional standards and regulatory and legal
requirements, and whether the auditor’s report that is issued is appropriate in the
circumstances.
A. group engagement partner
B. component auditor
C. team leader
D. principal partner
65. After testing a client's internal control activities, an auditor discovers a number of significant
deficiencies in the operation of a client's internal controls. Under these circumstances the
auditor most likely would _____________.
A. issue a disclaimer of opinion about the internal controls as part of the auditor's report.
B. increase the assessment of control risk and increase the extent of substantive tests.
C. issue a qualified opinion of this finding as part of the auditor's report.
D. withdraw from the audit because the internal controls are ineffective.
66. A substantive strategy is typically used to audit stockholders' equity because __________.
A. controls over stockholders' equity transactions typically are weak
B. a reliance strategy is most efficient
C. the number of transactions is small
D. a substantive strategy likely was used in prior years
67. Auditors may use positive and/or negative forms of confirmation requests. An auditor most
likely will use
A. The negative form for small balances.
B. The positive form, when the combined assessed level of inherent and control risk for
related assertions is acceptably low, and the negative form when it is unacceptably high.
C. The positive form to confirm all balances regardless of size.
D. A combination of the two forms, with the positive form used for trade balances and the
negative form for other balances.
68. As used in PSA 230, _______________ refers to the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached.
A. audit documentation
B. audit file
C. audit planning memorandum
D. management letter
69. Safeguards created by the profession, legislation or regulation include the following, except
A. Continuing professional development requirements.
B. Professional standards.
C. Firm-wide and engagement specific safeguards.
D. Educational, training and experience requirements for entry into the profession.
70. The date of the review report should
A. Not be earlier than the date on which the financial statements were approved by
management.
B. Be earlier than the date on which the financial statements were approved by management.
C. Coincide with the balance sheet date.
D. Not be later than the balance sheet date.
71. Which of the following circumstances may create self-interest threats for a professional
accountant in public practice?
A. A financial interest in a client or jointly holding a financial interest with a client.
B. Performing a service for a client that directly affects the subject matter of the assurance
engagement.
C. Being threatened with litigation.
D. Acting as an advocate on behalf of an assurance client in litigation or disputes with third
parties.
72. An accountant may perform an agreed-upon procedures engagement regarding prospective
financial statements provided that
A. Use of the report is to be restricted to the specified users.
B. The prospective financial statements are also examined.
C. Responsibility for the sufficiency of the procedures performed is taken by the accountant.
D. Negative assurance is expressed on the prospective financial statements taken as a whole.
73. The objective of performing analytical procedures in planning an audit is to identify the
existence of ___________.
A. unusual transactions and events
B. noncompliance with laws that went undetected because of internal control weaknesses
C. related party transactions
D. recorded transactions that were not properly authorized
74. Observation
A. Consists of looking at a process or procedure being performed by others.
B. Consists of seeking information of knowledgeable persons, both financial and nonfinancial,
throughout the entity or outside the entity.
C. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
D. Is the process of obtaining a representation of information or of an existing condition
directly from a third party.
82. Under the Code of Ethics, threats may be created by a broad range of relationships and
circumstances. The threat that a professional accountant will promote a client’s or employer’s
position to the point that the professional accountant’s objectivity is compromised is
A. self-review threat.
B. intimidation threat.
C. familiarity threat.
D. advocacy threat.
83. With respect to the management representation letter, materiality would apply to
management having made available to the auditor access to which of the following?
A. Minutes of board meetings
B. Records relating to revenue and expenses
C. Both A and B.
D. Neither A nor B.
84. Comfort letters ordinarily are signed by the entity’s _______________.
A. independent auditor
B. underwriter of securities
C. audit committee
D. senior management
85. The financial statements to be filed with the SEC shall be accompanied by a Statement of
Management’s Responsibility which bears the signature of the
A. chairman of the board of directors
B. Chief Executive Officer (CEO)
C. Chief Financial Officer (CFO)
D. All of the above
86. Which of the following procedures should a USER auditor include in the audit plan to create
the most efficient audit when an audit client uses a service organization for several processes?
A. Audit the service organization’s controls to test the work of the service auditor.
B. Audit the service organiation’s controls, assess risk, and prepare the audit plan.
C. Review the service auditor’s report and outline the accounting system in a memo to the
working papers.
D. Review the service auditor’s report on controls placed in operation.
87. Which of the following items should be included in an auditor’s report for financial statements
prepared using a special-purpose framework?
A. A section stating that the audit was conducted in accordance with the special-purpose
framework.
B. A sentence stating that the auditor is responsible for the financial statements.
C. The signature of the company controller.
D. A title that includes the word “independent.”
88. Which of the following would a successor auditor ask the predecessor auditor to provide after
accepting an audit engagement?
A. Disagreements between the predecessor auditor and management as to significant
accounting policies and principles.
B. Facts known to the predecessor auditor that might bear on the integrity of management.
C. The predecessor auditor’s understanding of the reasons for the change of auditors.
D. Matters that may facilitate the evaluation of financial reporting consistency between the
current and prior years.
89. Which of the following passwords would be most difficult to crack?
A. cute
B. oroplatamata
C. Myfutureself
D. GnG!!SaKaKaEMEmo
90. Which of the following is a general control that would most likely assist an entity whose
systems analyst left the entity in the middle of a major project?
A. Grandfather-father-son record retention
B. Input and output validation routines
C. Systems documentation
D. Check digit verification
91. Which of the following is a sampling risk that is associated with the efficiency of an audit?
A. Risk of assessing control risk too high
B. Risk of incorrect acceptance
C. Inherent risk
D. Detection risk
92. An auditor traced a sample of purchase orders and the related receiving reports to the
purchases journal and the cash disbursements journal. The purpose of this substantive audit
procedure most likely was to
A. Test whether payments were for goods actually ordered.
B. Verify that cash disbursements were for goods actually received.
C. Determine that purchases were properly recorded
D. Identify unusually large purchases that should be investigated further.
93. Which of the following procedures would an auditor most likely complete to test the existence
assertion of property, plant and equipment?
A. Obtaining a listing of all current-year additions, vouching significant additions to original
invoices, and determining that they have been placed in service.
B. Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied
consistently.
C. Obtaining a listing of current-year additions and verifying tha items are recorded in the
proper period.
D. Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized.
94. A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the
invoice was approved and to ascertain the amount and other items of the invoice. Which of
the following lists two sets that the auditor performed?
A. Substantive procedures and analytical procedures
B. Substantive analytical procedures and tests of controls
C. Tests of details and substantive procedures
D. Tests of controls and tests of details
95. During a recent audit of the revenue cycle, a CPA found the client had P1 million in accounts
receivable recorded for fictitious customers. Which of the following tests most likely facilitated
identification of the fraud?
A. Sending positive confirmations to all of the client’s customers with balances on December
31.
B. Examining the reconciliation between the subsidiary ledger and the general ledger control
account.
C. Reviewing the segregation of duties for staff who had responsibility for sales, shipping,
and invoicing.
D. Reviewing the support for open sales orders not yet shipped at December 31.
96. Which of the following audit procedures would be most likely to assist an auditor in identifying
related-party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance
sheet date.
C. Performing analytical procedures to seek indications of possible financial difficulties.
D. Reviewing confirmations of loans receivable and payable for indications of guarantees.
97. Which of the following statements would an auditor most likely require management to
indicate in a written representation letter obtained for an audit?
A. The client engages an outside computer expert service organization to prepare its payroll.
B. A tax expert employed by the auditor’s CPA firm reviews the client’s tax accruals.
C. The auditor makes inquiries of the client’s lawyer regarding pending litigation.
D. The auditor engages a lawyer to interpret the provisions of a complex contract.
105. An auditor finds several errors in the financial statements that the client prefers not to
correct. The auditor determines that the errors are not material in the aggregate. Which of
the following actions by the auditor is most appropriate?
A. Document the conclusion that the errors do not cause the financial statements to be
misstated, but do not summarize uncorrected errors in the audit documentation.
B. Summarize the uncorrected errors in the audit documentation, but do not document
whether the errors cause the financial statements to be misstated.
C. Do not summarize the uncorrected errors in the audit documentation, and do not
document a conclusion about whether the uncorrected errors cause the financial
statements to be misstated.
D. Document the errors in the summary of uncorrected errors, and document the conclusion
that the errors do not cause the financial statements to be misstated.
---END---
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AT-96-PW - Auditing theory
Course: Accounting (ACC 156)
180 Documents
Students shared 180 documents in this course
University: University of Iloilo - PHINMA
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CPA REVIEW SCHOOL OF THE PHILIPPINES AT 96 PW
M a n i l a
AUDITING THEORY CPA Review
MULTIPLE CHOICE QUESTIONS
1. A CPA performed the following engagements in March 2024. Which is considered an
attestation engagement?
I. Audit of 2023 financial statements
II. Examination of 2025 proposed financial statements
A. I only
B. II only
C. Both I and II
D. Neither I nor II
2. A CPA should decide NOT to accept a new client for an audit engagement if
A. the CPA lacks an understanding of the client’s industry and accounting principles prior to
acceptance.
B. The client’s management has unusually high turnover.
C. Both and A and B.
D. Neither A nor B.
3. All of the following are correct regarding an auditor’s understanding with a potential client
prior to beginning an audit EXCEPT:
A. the understanding should list the audit fees and frequency of billing.
B. the understanding should cover the responsibilities of the independent auditor.
C. the understanding should cover the limitations of the engagement.
D. the understanding should be in the form of an engagement letter in order to be in
conformity with auditing standards.
4. Which of the following procedures would an auditor perform in planning a financial statement
audit?
I. Selecting a sample of vendors’ invoices for comparison to receiving reports.
II. Coordinating the assistance of entity personnel in data preparation.
III. Reading the current year’s interim financial statements.
A. II only
B. II and III only
C. I, II, and III
D. III only
5. Some accounting estimates may involve relatively low estimation uncertainty and may give
rise to lower risks of material misstatements, such as those ______________.
A. with fair value estimates for which a highly specialized entity-devloped model is used
B. relating to the outcome of litigation
C. with fair value estimates for derivative financial instruments not publicly traded
D. that are frequently made and updated because they relate to routine transactions.
6. Which of the following meets the definition of an assurance engagement but does NOT need
to be performed in accordance to the Framework for Assurance Engagement?
A. Consulting (or advisory) engagements, such as management and tax consulting.
B. The preparation of tax returns where no conclusion conveying assurance is expressed.
C. Agreed-upon procedures engagements and compilations of financial or other information.
D. Engagements to testify in legal proceedings regarding accounting, auditing, taxation or
other matters.
7. The _______________ sets the scope, timing and direction of the audit, and guides the
development of the more detailed ______________.
A. overall audit strategy; audit plan
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