206

CHAPTER 4
The Financial
Statement Audit:
Client Acceptance
and Planning

1. In assessing whether to accept a client for an audit en-

gagement, an auditor should consider the
I. Client's business risk
II. Auditor's business risk
A. I only C. Both I and II
B. II only D. Neither I nor II

2. Which of the following factors most likely would cause an

auditor to decline a new audit engagement?
A. Concluding that the entity's management probably lacks
integrity.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 207

B. An inability to perform preliminary analytical procedures

before assessing control risk.
C. An inadequate understanding of the entity's internal con-
trol. · .
D. The close proximity to the end of the entity's reporting
period.

PSQC 1 requires a firm (including a sole practitioner) to es-

tablish poliCies and procedures for the acceptance and con-
tinuance of client relationships and specific engagements,
designed to provide reasonable assurance that it will only
accept engagements if it:
1) Is competent to perform the engagement;
2) Can comply with relevant ethical requirements; and
3) Has considered the integrity of the client, and does
not have information to conclude that the entity's
management lacks ~ntegrity.

Answer B is incorrect because the auditor performs analyti-

cal procedures after accepting the engagement.

Answer C is incorrect because the au.ditor obtains an under-

standing of the entity's internal control sy~tem subseqm.nt
to the acceptance of the engagement.

Answer Dis incorrect because an auditor may accept an en-

gagement near or after the end of the reporting period.

3. Before accepting an engagement to audit a new client, an

auditor is reqtJired to
A. Obtain a copy of the client's financial statements.
B. Prepare a memorandum setting forth the staffing re-
quirements and documenting the preliminary audit plan.
 CPA EXAMINATION REVIEWER: AUDITING THEORy
208

c. Make inquiries of the prede:esso.r atuditor after obtaining

the consent of the prospective c1ien . .
D. Discuss the management representation letter with the
client's audit committee.

PSA 300 (Planning an Audit of Financial S~atements) states

that the auditor shall undertake the following activities pri-
or to starting an initial audit:
1) Performing procedures required by PSA 220 (Quali-
ty Control for an Audit of Financial Statements) re-
garding the acceptance of the client relationship and
the specific audit engagement; and
2) Communicating with the predecessor auditor, where
there has been a change of auditors, in compliance
with relevant ethical requirements.

Answer A is incorrect because the entity's annual financial

· statements will be prepared after the end of its reporting
period and the auditor's acceptance of the engagement will
likely be prior to that time.

Answers B and D are incorrect because the procedures de-

scribed will be performed only after the acceptance of the
engagement.

4. Which of the following conditions most likely would pose the

greatest risk in accepting a new audit engagement? .
A. There will be a client-imposed scope limitation.
B. The client's financial reporting system has been in place
for 10 years.
C. The firm will have to hire an expert in one audit area.
D. Staff will need to be rescheduled to cover this new client.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 209

According to PSA 210 (Agreeing the Terms of Audit En-

gagements), the auditor shall not accept the engagement if
management or those charged with governance impose a
limitation on the scope of the auditor's work in the terms of
a proposed audit engagement such that the auditor believes
the limitation will result in the auditor disclaiming an opin-
ion on the financial statements.

5. Which of the following circumstances would permit an inde-

pendent auditor to accept an engag~ment after the end of
the reporting period? ·
A. Expectation of the operating effectiveness of controls.
B. Issuance of a disclaimer of opinion as a result of inability
to conduct certain tests required by PSAs due to the tim-
ing of the acceptance of the engagement.
C. Remedy the limitations resulting from accepting the en-
gagement after the end of the reporting period, such as
those relating to the existence of physical inventory.
D. Receipt of an assertion from the predecessor auditor that
the entity will be able to continue as a going concern.

Prior to· accepting a proposed audit engagement subsequent

to the end of the entity's reporting period, the auditor
should determine whether circumstances permit an audit in
accordance with PSAs and expression of an unmodified
opinion. Otherwise, the auditor should discuss with the
prospective client the possibility of rendering a qualified
opinion or a disclaimer of opinion. Howeyer, in some cases,
the auditor may remedy the audit limitations such as by ob-
serving another physical count of inventories.

Answer A is incorrect because sufficient appropriate evi-

dence regarding the operating effectiveness of the entity's
210 CPA EXAMINATION REVIEWER: AUDITING l'l-t
£o~'t

internal control during the year should be available

year-end. after

Answer B is incorrect because a disclaimer of opinio .

propriate only if the auditor cannot resolve an issue~ ap.
15

forming alternative procedures. YPer.

Answer D is incorrect because there is no need to ob .

·
representations regarct·mg th e prospec t.1ve c1.1ent's abilitytain
continue as a going concern from the predecessor a'udito r. to

6. In an audit based ' on Philippine Standards on Auditl

(PSAs), a successor auditor would normally become satisft~
with opening balances by
A. Performing analytic review procedures.
B. Reviewing the predecessor's working papers.
C. Auditing the previous year's working papers.
D. Interviewing client personnel.

7. A predecessor withdrew from the engagement after discov·

ering that a client's financial statements are materially mis-
stated that it would not revise. If asked by the successor
auditor about the termination of the engagement, the pre-
decessor should
A. Suggest that the successor auditor should obtain the di·
ent's consent to discuss the reasons.
B. Indicate that there was a misunderstanding.
C. State that the audit revealed material misstatement that
the client would not revise.
D. Suggest that the successor auditor ask the client.

8. Which of the following is not correct regarding the commu-

nications between successor/incoming and predeces·
sor/previous auditors?
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 21 1

A. The burden of initiating the communication rests with

the predecessor auditor.
B. The burden of initiating the communication rests with
the successor auditor. -
B. The predecessor auditor may choose to provide a limited
response to a successor auditor.
D. The predecessor auditor must receive his/her former cli-
ent's permission prior to disclosing client information to
the auditor.

9. The auditor may accept or continue an audit engagement

only when the basis upon which it is to be performed has
been agreed, through
I. Establishing whether the preconditions for an audit are
present. '
II. Confirming that there is a common understanding be-
tween the auditor and management and, where appro-
priate, those charged with governance of the terms of
the audit engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

As defined in PSA 210 (Agreeing the Terms of Audit En-

gagements), ,;preconditions for an aµdit" refers to:
a) The use by management of an acceptable financial
reporting framework in the preparation of the finan-
cial statements; and ·
b) The agreement of mc:nagement and, where appro-
priate those charged With governance to the prem-
ise on which an audit is conducted.
212 CPA EXAMINATION REVIEWER: AUDITING·THEO~y

The auditor establishes whether the preconditions for

an
audit are present by:
1) Determining whether the financial reporting frain _
work to be applied in the preparation of the financi:l
statements is acceptable; and
2) Obtaining management's agreement that it acknowl-
edges and understands its responsibilities that ar
fundamental1to the conduct of an audit in accordanc:
with PSAs.

10. An audit is conducted on the premise that management

and, where appropriate, those charged with governance
have acknowledged and understand that they have respon~
sibilities that are fundamental to the conduct of an audit in
accordance with PSAs. Which of the following is not one of
those responsibilities?
A. The preparation of financial statements in accordance
with relevant pronouncements issued by the AASC.
B. The establishment and maintenance of an adequate in-
ternal control system that is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
C. To provide the auditor with access to all information that
is relevant to the preparation of the financial statements
such as records, documentation, and other matters.
D. To provide the auditor with unrestricted access to per-
sons within the entity from which the auditor determines
it necessary to obtain audit evidence.

Management is responsible for the preparation of the finan-

cial statements in accordance with the applicable finan-
cial reporting framework, including where relevant their
fair presentation.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 2 13

11. The auditor shall agree the terms of the audit engagement
with management or those charged with governance, as ap-
propriate. The ~greed terms shall be recorded in a/an
A. Engagement letter
B. Letter of audit inquiry
C. Management representation letter
D. Confirmation letter

The standard states that it is in the interests of both the en-

tity and the auditor that the auditor sends an audit engage-
ment letter before the commencement of the audit to help
avoid misunderstandings with respect to the audit.

The engagement letter shall include:

a) The objective and scope of the audit of the financial
statements;
b) The responsibilities of the auditor;
c) The responsibilities of management;
d) Identification of the applicable financial reporting
framework for the preparation of the financial
statements; and
e) Reference to the expected form and content of any
reports to be issued by the auditor and a statement
that there may be circumstances in which a report
may differ from its expected form and content.

12. The following matters are generally included in an auditor's

engagement letter, except
A. The factors to be considered in determining the overall
materiality.
B. The fact that because of the test nature and other inher-
ent limitations of an audit, together with the inherent
limitations of internal control, there is an unavoidable
214 CPA EXAMINATION REVIEWER: AUDITING T1-t~
...o~v

risk that.even some material misstatements may rern .

und.1scovere
· d. a1n
C. The scope of the audit.
o. Management's responsibility for the financial statements.
13. The following are usually included in an auditor's engage.
ment letter, except ·
A. List of audit procedures to be used in inventory observa.
tion .
B. The financial statements are the responsibility of the
company's management.
C. A reference to PFRS.
D. A reference to PSAs.

14. Which of the following statements would least likely appear

in an auditor's engagement letter?
A. Our audit will be made with the objective of our express-
ing an opinion on the financial statements.
B. We remind you that the responsibility for the preparation
of financial statements including adequate disclosure is
that of the management of the entity.
C. After performing our preliminary analytical procedures,
we will discuss with you the other procedures we consid·
er necessary to complete the engagement.
D. Our fees, which will be billed as work progresses, ar:e
based on the time required by the individuals assigned to
the engagement plus out-of-pocket expenses..

15. An auditor is required to establish an understandiag with a

client regarding the services to be performed for each en·
gagement. This understanding generally includes
A. The auditor's responsibility to apply the concept of mate-
riality in planning ~nd performing the audit.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 2 15

B. Management's responsibility for providing the auditor

with an assessment of the risk of material misstatement
due to fraud.
C. The auditor's responsibility for ensu~ing that those
charged with governance are aware of any significant
deficiencies in internal control that may come to the au-
ditor's attention.
D. Management's responsibility for errors and the illegal ac-
tivities of employees that may cause material misstate-
ment.

An auditor's engagement letter shall include, among other

things, the auditor's responsibility to communicate to those
charged with governance of the client significant internal
control deficiencies that may be discovered during the audit.

Answer A is incorrect because determining materiality in

planning and performing an audit is a respoTl6ibility that the
auditor is not required to share with the client.

Answer B is incorrect because the auditor assesses the risk

of material misstatement.

Answer Dis incorrect because management is not responsi-

ble for the errors and illegal activities of employees.

16. An auditor's engagement letter most likely will include

A. A request for permission to contact the client's lawyer for
assistance in identifying litigation, claims, and assess-
ments.
B. A reminder that management is responsible for illegal
acts committed by employees.
c. The auditor's preliminary assessment of the risk factors
relating to mis~tatements arising from fraudulent finan-
cial reporting.
216 CPA EXAMINATION REVIEWER: AUDITING ii-ii:,.
1;.Q~'f

o. Management's acknowl~dgment ?f i~ responsibility i

such internal control as 1t determines 1s necessary t Or
able the preparation of financial statements that area ~n­
from material misstatement. ee
Among the matters addressed in an engagement lette .
1 1ty for:
management's respons1'b'l' r IS

a) The preparation and fair presentation of the fin

cial statements in accordance with Philippine Finan.
a~
cial Reporting Standards; an d
b) Such internal control as it determines is necessary t
enable the prepara~ion ~f financial statements tha~
are free from matenal misstatement, whether due to
fraud or error.

Answer A is incorrect because management is responsible

for adopting policies and procedures to identify, evaluate,
and account for litigation, claims, and assessments.

Answer B is incorrect because management is responsible

for ensuring that the entity's operations are conducted in
accordance with laws and regulations. However, it is not re-
sponsible for illegal acts of employees that are unrelated to
the entity's business activity.

Answer C is incorrect because an auditor submits an en-

gagement letter before the commencement of the audit.
Prior to performing procedures, the auditor does not assess
the risk factors relating to misstatements that may arise
from fraudulent financial reporting.

17. The auditor of a parent entity is also the a,uditor of its com·
ponent. Which of the following factors may influence the
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 2 17

auditor's decision whether to send a separate engagement

letter to the entity's component?
A. Whether a separate auditor's report is to be issued on
the component.
B. The component's management does not accept its re-
sponsibilities that are fundamental to the conduct of an
audit.
C. The financial reporting framework used by the compo-
nent is unacceptable.
D. The preconditions for an audit of the component's finan-
cial statements are not present.

The following factors may influence the auditor's decision

whether to send a separate audit engagement letter to the
component:
1) Who appoints the component auditor;
2) Whether a separate auditor's report is to be issued
on the component;
3) Legal· requirements in relation to audit appoint-
ments;
4) Degree of ownership by parent; and
5) Degree of independence of the component manage-
ment from the parent entity.

18. On recurring audits, the auditor may decide not to send a

new engagement letter each period. Which of the following
factors may make it appropriate to send a new engagement
letter?
8 .e ~ D
Any revised or special terms of the audit
engagement Yes No Yes No
A recent change of senior management Yes No No No
A change in legal or regulatory requirements Yes Yes Yes Yes
A significant change in nature or size of the
entity's business Yes Yes Yes Yes
218 CPA EXAMINATION REVIEWER: AUDITING THE:O~y

According to the standard, the following fa~tors may rnake it

appropriate to revise the terms of the audit engagement or
to remind the entity of existing terms:
• Any indication that the entity misunderstands th
objective and scope of the audit. e
• Any revised or special terms of the audit engage.
ment.
• A recent change of senior management.
• A significant change in ownership.
• A significant change in nature or size of the entity's
business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework
adopted in the preparation of the financial state-
ments.

19. The auditor shall not agree to a request from the entity to
change the terms of the audit engagement or to change the
audit engagement to an engagement that conveys a lower
level of assurance when there is no reasonable justification
for doing so. Which of the following may be considered rea-
sonable justifications for the change in the audit engage-
ment?
I. A change in circumstances affecting the need for the
service.
II. A misunderstanding as to the nature of an audit as orig-
inally requested.
III. A restriction on the scope of the engagement, whether
imposed by management or caused by other circum-
stances.
A. I and II only
B. I and III only
C. 11 ~nd III only
CHAPTER 4 The Financial Statement Audit: Client .A:ccP.ptance and Pl~nning 2tg

D. I, 11, and III

PSA 210 states that a change in circumstances that affects

the entity's requirements or a misunderstanding concerning
the nature of the service originally requested may be con-
sidered a reasonable basis for requesting a change in the
audit engagement.

A restriction on the scope of the audit would not be consid-

ered a reasonable justification for the change. For example,
a change would not be considered reasonable if the auditor
is unable to obtain sufficient appropriate audit evidence re-
garding receivables and the client requests that the audit
engagement be changed to a review engagement to avoid a
qualified opinion or a disclaimer of opinion.

20. Before the completion of the audit engagement, an auditor

is requested to change the engagement to one that provides
a lower level of assurance. If the auditor concludes that
there is a reasohable justification for the change in engage-
ment, the report to be issued would
A. Be that appropriate for the revised terms of engage-
ment.
B. Include reference to the original engagement.
C. Include reference to any procedures that may have been
performed in the original engagement.
D. Not include reference to any procedures that may have
been performed, particularly When the new engagement
is to undertake agreed-upon procedures.

·PSA 21 O states that if the auditor concludes that there is

reasonable justification to change the engagement and if the
audit work performed complies with the PSAs applicable to
the changed engagement, the report issued would be that
220 CPA EXAMINATION REVIEWER: AUDITING ll-ft:o
..,O~y

appropriate for the revised terms of engagelnent. In Ord

to avoid confusing the reader, the report would not in er
c1llde
reference to:
a) The original engagement; or
b) Any procedures that may have been performed .
the original engagement, except where the en Jn
gage.
ment is changed to an engagement to undertake
agreed-upon procedur~s and thus, reference to the
procedures performed 1s a normal part of the report.

21. If the auditor is unabl~ to agree to. a change ~f .the engage-

ment and is not permitted to continue the original engage-
ment, the auditor should
A. Insist on continuing the original engagement.
B. Express a qualified opinion.
C. Express an adverse opinion.
D. Withdraw from the engagement.

Under PSA 210, if the auditor is unable to agree to a change

of the engagement and is not permitted to continue the orig-
inal engagement, the auditor should withdraw and consider
whether there is any obligation, either contractual or oth-
erwise, to report to other parties, such as the board of direc-
tors or shareholders, the circumstances necessitating the
withdrawal.

22. Planning an audit involves

I. Establishing the overall audit strategy for the engage-
ment.
II. - Developing an audit plan.
A. I only
B. II only
C. Both I and II
 cHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 22 1

D. Neither I nor II

23. Which of the following activities should be performed by the

auditor at the begi~ning of the current audit engagement?
I. Perform procedures regarding the continuance of the
client relationship and the specific audit engagement.
II. Evaluate compliance with relevant ethical requirements,
including independence.
III. Establish an understanding of the terms of the engage-
ment.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

24. Initial audit planning involves the following matters, except

A. Identify the client's reason for the engagement.
B. Schedule engagement staff and auditor's experts.
C. Develop an overall audit strategy.
D. Request that bank balances be confirmed.

.25. Adequate planning helps to ensure that

A ~ ~ D
Appropriate attention is devoted
to important areas of the audit No Yes Yes No
Potential problems are identified
and resolved on a timely basis Yes Yes No No
The audit engagement is properly
organized and managed Yes Yes No No

The benefits of adequate planning include the following:

• Helping the auditor to devote appropriate attention
to important areas of the audit.
222 CPA EXAMINATION REVIEWER: AUDITING TH'="
~o~'<

• Helping the auditor identify and resolve Pot .

· ly basis.
problems on a time · entia1

• Helping the auditor properly organize and rna

.t . f nage
the audit engagement so th a t i is per armed in a
. . t n ef.
fective an d e fflClen manner.
• Assisting in the selection of engagement tearn rn
be rs with appropriate levels of capabilities and cein.
petence to respond to anticipated risks, and t~­
0

proper assignment of work to them. e

• Facilitating the direction and su~ervision of engage•
ment team members and the review of their work.
• Assisting, where applicable, in coordination of work
done by auditors of components and experts.

26. Which of the following statements concerning audit planning

is incorrect?
A. Planning is a discrete phase of an audit.
B. Planning is a continual and iterative process.
C. In a recurring audit, planning often begins shortly after
(or in connection with) the completion of the previous
audit and continues until the completion of the current
audit engagement.
D. In planning an audit, the auditor considers the timing of
certain planning activities and audit procedures that are
to be completed prior to the performance of further audit
procedures.

The standard states, "Planning is not a discrete phase of an

audit, but rather a continual and iterative process that be·
gins shortly after (or in connection with) the completion of
the previous audit and continues until the completion of the
current audit engagement. Planning, however, includes
consideration of the timing af certain activities....aod audit
CHAPTER 4 The Financial Statement Audit: C:lient Acc.Aotance and Planning 223

procedures that need to be c:ompleted prior to the perfor-

mance of further audit procedures."

27. In pe~orming an audit of financial statements, the flUditor

should obtain a sufficient knowledge of a client's business
and industry to
A. Develop an attitude of professional skepticism concern-
ing management's financial statement assertions
8. Make constructive suggestions concerning improvements
to the client's internal control.
C. Evaluate whether the aggregation of known misstate-
ments 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.

The auditor is required to have or obtain a sufficient

knowledge of the client's business and industry to identify
and understand the events, transactions, and practices that,
in the auditor's judgment, may have a significant effect on
the financial statements.

28. Which of the following is the least likely proc.enure to be per-

formed in planning a financial statement audit?
A. Selecting a sample of sales invoices for comparison with
shipping documents.
B. Coordinating the assistance of entity personnel in data
preparation .
C. Reading the current year's interim financial statemer-its.
D. Discussing matters that may affect the audjt with firm
personnel responsible for non-audit services to the enti-
ty.

Selecting a sample of sales invoices for compar-ison with

shipping documents is a substQntive test procedure. Sub-
224 CPA EXAMINATION REVIEWER: AUOITING THt'.-
i;;;.Q~'t'

stantive tests are performed to accumulate sufficient ap

priate audit evidence, not to plan the audit. Pro.

Answers B, C, and Dare all planning procedures.

29. The establishment of·an overall audit strategy involves

I. Determining the characteristics of the engagement that
define its scope.
II. Ascertaining the. reporting obje~ives 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

PSA 300 (Planning an Audit of Financial Statements) re-

quires the auditor to establish an overall audit strategy that
sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.

In establishing the overall audit strategy, the auditor i~ re-

quired to:

a) Identify the characteristics of the engagement that

define its scope;
b) Ascertain the reporting objectives of the engagement
to plan the timing of the audit and the nature of the
communications required;
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 225

c) Consider the factors that, in the auditor's profession-

al judgment, are significant in directing the engage-
ment team's efforts;
d) Consider the results of preliminary engagement ac-
tivities and, where applicable, whether knowledge
gained on other engagements performed by the en-
gagement partner for the entity is relevant; and
e) Ascertain the nature, timing and extent of resources
necessary to perform the engagement.

30. Which of the following should be included in the audit plan?

I. The nature, timing and extent of planned risk assess-
ment procedures.
II. The nature, timing and extent of planned further audit
procedures at the assertion level.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

The audit plan shall include a description of:

a) The nature, timing and extent of planned risk as-
sessment procedures, as determined under PSA 315
(Identifying and Assessing the Risks of Material Mis-
statement through Understanding the Entity and its
Environment)
b) The nature, timing and extent of planned further au-
dit procedures at the assertion level, as determined
under PSA 330 (The Auditor's Responses to As-
sessed Risks):

31. Which of the following matters would an auditor least likely

consider when setting the direction of the audit?
226 CPA EXAMINATION REVIEWER: AUDITING iH~
~O~y

A. The selection of the engagemen~ team and the assign.

ment of audit work to the team members.
B. The engagement budget which includes consideration Of
the appropriate amount of time to allot for areas Wh
there may be higher ns · ksof ma t ena
· I miss
· tatement. ere
c. The availability of client personnel and data.
o. The manner in which the auditor . d
emphasizes to en
.
gagement team members ~he nee t~ maintain a ques-
tioning mind and to exercise professional skepticism .
the gathering and evaluation of audit evidence. in

The availability of client personnel and data is a matter to

consider when establishing the scope of the audit.

32. Which of the following matters would an auditor most likely

consider when establishing the scope of the audit?
A. The expected audit coverage, including the number and
locations of the entity's components to be included. ·
B. The entity's timetable for reporting, such as at interim
and final stages.
C. The discussion with the entity's management concerning
the expected communications on the status of audit
work throughout the engagement and the expected de·
liverables resulting from the audit procedures.
D. Audit areas where there is a higher risk of material mis·
statement.

Answers Band Care matters to consider when determining

the reporting objectives of the engagement, the timing of the
audit, and the nature of communications required.

Answer D is a matter to consider when setting the direction

of the audit.
CHAPTER 4 The. Financial Statemenl Audit: Client Acceptance and Planning 227

33. In the planning stage of an audit engagement, the auditor is

required to perform audit procedures to obtain an under-
standing of the entity and its environment, including its in-
ternal control. These procedures are called
A. Risk assessment procedures
B. Substantive tests
C. Tests of controls
D. Dual-purpose tests

The audit procedures to obtain an understanding of the en-

tity and its environment, including its internal control are
referred to as "risk assessment procedures" because some
of the information obtained through these procedures may
be used as audit evidence to support assessments of the
risks of material misstatement.

34. In planning the audit engagement, the auditor should con-

sider each of the following, except
A. The type of opinion that is likely to be expressed.
B. The entity's accounting policies and procedures.
C. Matters relating to the entity's business and the industry
in which it operates.
D. Materiality level and audit risk.

The nature of the report expected to be issued (e.g., a report

on consolidated financial.statements) should be considered
in planning an audit engagement. The type of opinion to be
rendered is determined after the performance of audit pro-
cedures.

35. Audit programs are modified to suit the circu.mstances of

particular engagements. A compiete audit program usually
should be developed
A. When the engagement letter is prepared.
228 CPA EXAMINATION REVIEWER: AUDITING iHi::-
--.o~y

B. After obtaining an understanding of the control enviro

ment and control activities component of the entity• .n.
S II).
ternal control.
c. After the a~ditor ~as obtain~d an. un~er~tanding of th
entity and its environment, mc~udm~ its internal contr e
0
and assessed the risks of material misstatement. 1
D. Prior to beginning the actual audit work.

Only after obtaining knowledge of the entity and its en .

VI·
ronment, including its internal control and assessing th
risks of material misstatement can the auditor determine
the nature, timing, and extent of substantive tests of finan~
cial statement assertions.

36. In designing written audit programs, an auditor should es-

tablish specific audit objectives that relate primarily to the
A. Selected audit techniques.
B. Cost-benefit of gathering audit evidence.
C. Timing of audit procedures.
D. Financial statement assertions.

The audit procedures included in the audit program should

enable the auditor to gather sufficient appropriate audit ev-
idence about management representatiuns embodied in the
entity's financial statements. Such management representa·
tions are called management assertions. Hence, in designing
written audit programs, the auditor develops specific audit
objectives in light of those management assertions.

37. An au.dit program should be designed for each individual au-

dit and should incorporate steps and procedures to
A. Detect and eliminate fraud of any type.
B. Gather sufficient amount of management information
available.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 229

C. Provide assurances that the objectives of the audit are

satisfied.
D. Insure that only material items are. audited.

A written audit program sets forth, in reasonable detail, the

specific audit procedures that in the auditor's judgment are
necessary to satisfy the specific audit objectives.

38. Which of the following is an aspect of scheduling and con-

trolling the audit engagement?
A. Including in the engagement letter an estimate of the
minimum and maximum audit fee.
B. Writing a conclusion in individual working papers indicat-
ing how the results of the audit will affect the auditor's
report.
C. Performing audit work only after the entity's books have
been closed for the period under audit.
D. Including in the audit program a column for budgeted
and actual time.

The audit program/plan serves as a set of instructions to as-

sistants involved in the audit and as a means to control and
record the proper execution of the work.

By including a column for estimated and actual time for each

audit step, the audit progr~m can be a useful tool for con-
trolling and scheduling the audit work.

39. In connection with the planning phase of an audit engage-

ment, which of the following statements is always correct?
A. Final staffing decisions must be made prior to completion
of the planning stage.
B. Observation of inventory count should be performed at
year-end.
 CPA EXAMINATION REVIEWER: AUDITING il-fe:o~y
230

c. A portion of the audit of a continuing audit client can be

performed at interim dates.
D. An engagement should not be accepted after the client's
financial year-end.

40. The auditor shall undertake which of the following activiti

prior to starting an initial audit? es
I. Performing procedures r_equir~d by PSA 220 (Quality
control for an Audit of Financial. Statements) regardin
the acceptance of the client relationship and the specifi~
audit engagement.
II. Communicating with the predecessor auditor, where
there has been a change of auditors, in compliance with
relevant ethical requirements.
A. I only
B. II only
C. Either I or II
D. Both I and II

41. Before accepting an audit engagement, a proposed (succes-

sor/incoming) auditor should make inquiries of the previous
(predecessor) auditor regarding the previous auditor's
A. Evaluation of all matters of continuing accounting signifi-
cance.
B. Understanding as to the reasons for the change of audi-
tors.
C. Awareness of the consistency in the application of
PAS/PFRS between periods.
D. Opinion on any subsequent events occurring since the
previous auditor's report was issued.

The standard requires the proposed auditor to communi·

. cate directly with the previous auditor before accepting the
engagement. The proposed auditor should initiate the
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 23 1

communication, although both must obtain client permis-

sion to communicate. The proposed auditor should inquire
about reasons for the change in auditors, disagreements
with management concerning accounting principles and au-
diting procedures, and facts bearing on the integrity of the
entity's management.

42. The auditor is required to determine three different levels of

materiality: (1) materiality for the financial statements as a
whole, (2) performance materiality, and (3)
A. Overall materiality
B. Planning materiality
C. General materiality
D. Specific materiality

The auditor is required to determine three different levels

of materiality. These are:

1. Materiality for the financial statements as a whole

(also called overall materiality, general materiality,
or tolerable misstatement)
2. Performance materiality (also called planning mate-
riality or scoping materiality)
3. Materiality applied to specific classes of transactions,
account balances or disclosures (also called specific
materiality or individual materiality)

43. What materiality level would be considered by the auditor to

determine whether the proposed adjustments are significant
or not?
A. Overall materiality
B. Scoping materiality
C. Specific materiality
D. Performance materiality
 CPA EXAMINATION REVIEWER: AUDITING iHE:oR'i
232

AASC Bulletin, Series 001 of 2010 stat~s, "Materiality for the

financial statements as a whole (heremafter referred to
the "overall materiality") is the materiality determined as
'
the overall financial statement Ieve I. Th'is matenahty
· · levatI
helps the auditor determine whether the p.rop~sed audit a~.
justments are significant or not. If the aud1~ ad1ustrnents ex.
ceed this level, the auditor may need to ad1ust the financial
statements."

44. What materiality level is use9 by the auditor in determining

which line items in the financial statements are to be tested?
A. Overall materiality
B. Performance materiality
C. Specific materiality
D. Individual materiality

Performance materiality, calculated as a certain percent-

age of overall materiality, is used in scoping of financial
statement line items to be tested by the auditor. This will
ensure that significant accounts in the financial statements
are covered by audit testing.

45. is the amount set by the auditor for par-

ticular classes of transactions, account balances or disdo-
sures for which misstatements, well though lower than over-
all materiality could reasonably be expected to influence the
economic decisions of users of the financial statements.
A. Performance materiality
B. Planning materiality
C. Specific materiality
D. General materiality

46. Which of the required materiality levels is calculated by mul-

tiplying a certain .Percentage by the appropriate benchmark
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 233

which is either an element or component of an entity's fi-

nancial statements?
A. Overall materiality
B. Planning materiality
C. Scoping materiality
D. Specific materiality

47. Which of the following factors are normally considered by

the auditor in determining the appropriate benchmark for
the purpose of calculating overall materiality?
I. Components of the entity's financial statements
II. Laws and regulations
III. Nature of the entity
A. I and II only C. II and III only
B. I and III only D. I, II, and III

The following factors are normally considered in choosing

the appropriate benchmark:
• Components of the entity's financial statements
• Focus of the users of the financial statements
• Nature of the entity
• Ownership structure of the entity
• Volatility of the benchmark identified
• Laws and regulations (e.g., SEC)

48. Which of the following statements concerning materiality is

not correct?
A. When establishing the overall audit strategy, the auditor
shall determine materiality for the financial statements
as a whole.
B. If, in the specific cirtumstances of the entity, there is
one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser
234 CPA EXAMINATION REVIEWER: AUDITING THE:o~y

amounts than materiality for the financial statements

a whole coul~ .reasonably be expected to in~uence ~!
economic decisions of users .taken on the basis of the ft.
nancial statements, the auditor shall als? determine th
materiality level or levels to thos~ particular classes ~
transactions, account balances or disclosures.
0
c. Determining materiality involves the exercise of profes-
sional judgment.
D. The materiality level for the financial statements as
whole determined in the planning stage of the aud~
should not be affected by changes in the circumstances
of the engagement.

PSA 320 (Materiality in Planning and Performing an Audit)

states that materiality for the financial statements as a
whole (and, if applical.Jle, the materiality level or levels for
particular classes of transactions, account balances or dis-
closures) may need to be revised as a result of:
• A change in circumstances that occurred during the
audit (e.g., a decision to dispose of a major part of the
entity's business);
• New information; or
• A change in the auditor's understanding of the entity
and its oper~tions as a result of performing further
audit procedures.

49. Which of the following would an auditor most likely use in

determining a preliminary judgment about materiality?
A. The contents of the management representation letter.
B. The anticipated sample size of the planned substantive
tests.
C. The entity's annualized interim financial statements.
D. The results of internal control questionnaire.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 235

The measurement of a preliminary materiality level usually

relates to an annual figure (e.g., net ihcome).

so. An auditor shall consider materiality when

I. Determining the nature, timing, and extent of audit pro-
cedures.
II. Evaluating the effect of misstatements.
A. I only
B. II only
C. Both I and II
·D. Neither I nor II

The auditor considers materiality when determining the na-

ture, timing, and extent of audit procedures and evaluating
the effect of misstatements.

51. It is an appraisal activity established within an entity. Its

functions include, among other things, examining, evaluat-
ing, and monitoring the adequacy and effectiveness of the
accounting and internal control systems. ·
A. External auditing
B. Internal auditing
C. Governmental auditing
D. Internal control

52. Which is not a similarity between external and internal audi-:-

tors?
A. Both consider materiality and risk in their work.
B. Both use similar methodologies in performing their work.
C. Both must be competent.
D. Both must be independent of the company.

53. The external auditor should obtain a sufficient understanding

of the internal audit function because
 CPA EXAMINATION REVIEWER: AUDITING l°l-IE::o
·
236 ~'y

A. The understanding of the internal ..&audit function is an

important substantive test to be pe1 •ormed by the exter.
nal auditor.
B. The audit programs, working papers, and reports of 1 .n
d b .
ternal auditors may often be use as a su st1tute for th
.
work of the external auditor's staff. e
c. The procedures performed b~ t~e internal audit staff
may eliminate the external auditors need for considerin
9
internal control.
D. "'!"he work performed by inte~n~I auditors may be a.factor
in determining the nature, t1m1ng, and extent of the ex-
ternal auditor's procedures.

The standard requires the external auditor to obtain a suffi.

cient understanding_of internal audit activities to identify
and assess the risks of material misstatement in the finan-
cial statements and to design and perform further audit
procedures. Thus, an internal audit function is one of many
factors that influence the nature, timing, and extent of the
external auditor's procedures. ·

54. Internal auditing can affect the scope of the external' audi·
tor's audit of financial statements by
A. Decreasing the external auditor's need to perform de-
tailed tests.
B. Eliminating the need to observe the physical inventory
taking.
C. Allowing the external auditor to limit his/her audit to the
performance of substantive test procedures.
D. Limiting direct testing by the external auditor to man·
agement assertions not directly tested by internal audit·
ing.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 237

55. Which of the following is an incorrect statement concerning

the relationship of the internal auditor and the scope of the
external audit of an entity's financial statements?
A. The external auditor is not required to give consideration
to the internal audit function beyond obtaining a suffi-
.cient understanding to identify and assess the risks of
material misstatement of the financial statements and to
design and perform further audit procedures.
B. · The internal auditors may determine the extent to which
audit procedures should be employed by the external
1
auditor.
C. Under certain circumstances, the intern.al auditors may
assist the external auditor in performing substantive
tests and tests of controls.
D. The nature, timing, and extent of the external auditor's
substantive tests may be affected by the work of internal
auditors.

The standard categorically states that the external auditor

has sole responsibility for the audit opinion expressed, and
that responsibility is not reduced by any use made of inter-
nal auditing. All judgments relating to the audit of an enti-
ty's financial statements are those of the external auditor.

56. In determining whether the work of the internal auditors is

likely to be adequate for purposes of the audit, the external
auditor shall evaluate the internal auditor's
A. Efficiency and experience
B. Independence and review skills
C. Training and supervisory skills
D. Competence and objectivity

The external auditor shall evaluate:

• The objectivity of the internal audit function;
• The technical competence of the internal auditors;
 '
CPA EXAMINATION REVIEWER: AUDITING Tt-te:o~y
\

238

Whether the work of the internal auditors is likel

• · I
be carried out with due pro fess1ona care; and
Yto
Whether ·there is likely to be effective comrnun·
• . d IC~
t ion between the interna l au d itors an the exte rna1
auditor..

57. In assessing the technical competence of an internal audito

an external auditor most likely would obtain inforrnatio~
about the .
A. Quality of working paper documentation, reports, and
recommendations.
B. Organizational level to which the internal auditor reports
c. Influence of management on the internal auditor's du~
ties.
D. Entity's commitment to integrity and ethical values.

In assessing the competence of an internal auditor, the ex.

ternal auditor should consider factors, such as the following:
• Educational level and professional experience
• Professional certification and continuing education
• Audit policies, programs, and procedures
• Supervision and review of the internal auditor's ac-
tivi:.ies
• Departmental practices regarding assignments
• Quality of working paper documentation, reports,
and recommendations
• Evaluation of the internal auditor's performance

Answers B, C, and D are incorrect because they all relate to

objectivity rather than technical competence.

58. Which of the following is a false statement about the use

of the internal auditor's work by the external auditor?
 ·-
CHAPTER 4 T~e Financial Stalement Audit: Client Acceptance and Planning 239

A. The PSAs do not allow the external auditor to use the

work of the internal auditor.
B. PSAs do not allow the external auditor to substitute the
work of the internal auditor for the work of the external
auditor in critical judgments.
C. The PSAs state that, when specific work of the internal
auditor is to be used, it should be evaluated and tested.
D. PSAs state that, when considering whether to use the
work of the internal auditor, the external auditor should
consider the internal auditor's competence ?ind objectivi-
ty.

59. The coordination of activities between internal and external

auditors
A. Eliminates duplication of audit efforts.
B. Includes the exchange of audit reports and management
letters.
C. Prevents external auditors from having access to the
programs used by internal auditors.
D. Prohibits the internal auditor from using the same audit
techniques as external auditors and vice versa.

Coordination of internal and external audit efforts helps to

ensure adequate audit coverage and to minimize duplication
of audit efforts. Coordination i.nvolves:
'
• Meetings at appropriate intervals during the period
to discuss matters of mutual interest.
• Access to each other's audit programs and working
papers.
• Exchange of audit reports and management letters.

60. Which of the following are included in the activities of the

internal audit function?
 CPA EXAMINATION REVIEWER: AUDITING THE:
240 O~y

I. Monitoring of internal contr~I. f .

II. Examination of financial an opera mg information.
III. Review of operating activities.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

The activities of the internal audit function may include one

or more of the following: ,
• Monitoring of iQternal control.
• Examination of financial and operating information.
• Review of operating activities.
• Review of compliance with laws and regulations.
• Risk management.
• Governance

61. is an individual or organization possessing ex-

pertise in a field other than accounting or auditing, whose
work in that field is used by the auditor to assist the auditor
in obtaining sufficient appropriate audit evidence.
A. Auditor's expert
B. Management's expert
C. Expert
D. Specialist

62. is an individual or organization possessing ex-

pertise 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
B. Management's expert
C. Expert
D. Specialist
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 241

63. When planning to use the work of an expert, the auditor

should evaluate the expert's
I. Professional competence
II. Objectivity
A. I only
B. II only
c. Both I and II
D. Neither I nor II

64. Which of the following statements is correct concerning the

auditor's use of the work of an expert?
A. The auditor is required to perform substantive test pro-
cedures to verify the expert's assumptions and findings.
B. The auditor should obtain an understanding of the
methods and assumptions used by the expert.
C. The entity should not have an understanding of the na-
ture of the work to be performed by the expert.
D. The expert should not have an understanding of-the au-
ditor's corroborative use of the expert's findings.

The expert is responsible for the appropriateness and rea-

sonableness of assumptions and methods used. Because the
auditor does not have the same expertise, he/she is not in
the position to challenge the expert's methods and assump-
tions. However, the standard states that the auditor will
need to obtain an understanding of the assumptions and
methods used and to consider whether they are appropriate
and reasonable, based on his/her knowledge of the entity's
business and the results of other procedures.

Answer A is incorrect because, if the expert's findings cor-

roborate the financial statement assertions being consid-
ered, the auditor may reasonably conclude that sufficient
appropriate evidence has been obtained.
242 CPA EXAMINATION REVIEWER: AUDITING TJ-i~
1;,Q~y

c
Answers and D are incorrect because the auditor, the enr
ty, and the expert should have an understanding about 1•
nature, scope, and objective of the work to be perforrned.the

65. Which of the following is not an expert upon whose Work

auditor may rely? . an
A. An actuary.
B. An individual with expertise in complex modeling for th
purpose of valuing financial instruments. e
C. An expert in taxation law.
D. An individual with expertise in applying methods of ac-
cou·nting for deferred income tax.

66. If the re~ults of the expert's work do not provide sufficient

appropriate audit evidence or are not consistent with other
audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency
of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unmodified opinion with reference to the
work of the expert.

If the results of the expert's work do not provide.sufficient

appropriate audit evidence or are not consi.stent with other
audit evidence, the auditor should resolve the matter. The
auditor may need to discuss the matter with the entity an~
the expert, apply additional audit procedures, possibly en·
gage another expert, or modify the auditor's report.

67. When issuing an unmodified auditor's report, the auditor

A. May refer to the work of an expert.
B. Should refer to the work of an expert to indicate a divi·
sion of responsibility.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 243

C. Should include in the auditor's report the identity of the

expert and the extent.of the expert's involvement.
D. Should not refer to the expert's work.

The standard prohibits the auditor to refer to the expert's

work when issuing an unmodified auditor's report because
such a reference might be misunderstood to be a qualifica-
tion of the auditor's opinion or a division of responsibility,
neither of which is intended.

68. In using the work of an expert, an auditor referred to the

expert's findings in the auditor's report. This is an appropri-
ate reporting practice if the
A. Auditor, as a result of the expert's work, decides to indi-
cate a division of responsibility with the expert.
B. Expert is aware that his/her work will be used to evalu-
ate the assertions in the financial statements.
C. Auditor, as a result of the expert's work, issues a report
that contains a modified opinion.
D. Auditor, as a result of the expert's work, adds an empha-
sis-of-matter paragraph in his/her unmodified auditor's
report.

An auditor shall not refer to the expert's work in an audi-

tor's report containing an unmodified opinion. However, if
as a result of the expert's work, the auditor decides to ex-
press a modified opinion, it may be appropriate-in explain-
ing the nature of the modification-to -refer to or describe
the expert's work.

69. As used in PSA 600, Special Considerations - Audits of

Group Financial Statements (Induding the Work of
Component Auditors), is an entity or business
activity for which group or component management pre-
244 CPA EXAM/NAT/ON REVIEWER: AUDITING TH~
i;,Q~....

pares financial information that should be included in

group financial statements. the
A. Component
B. Group
C. Significant component
D. Group management .

70. As used in PSA 600, financial statements that include th

financial information of more than one component are callede
A. Component financial statements
B. Group financial statements
C. Consolidated financial statements
D. Common financial statements

71. The is the partner or other person in the ftrm

who is responsible for the group audit engagement and its
performance, and for the auditor's report on the group fi-
nancial statements that is issued on behalf of the firm.
A. Engagement partner
B. Component engagement partner
C. Principal auditor
D. Group engagement partner

72. The group engagement team shall obtain an understanding

that is sufficient to
I. Confirm or revise its initial identification of components
that are likely to be significant.
II. Assess the risks of material misstatement of the group
financial statements, whether due to fraud or error.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning 245

73, If the group engagement team plans to request a compo-

nent auditor to perform work on the financial information of
a component, the group engagement team shall nbtain an
understanding of
I. Whether the component auditor understands and will
comply with the ethical requirements that are relevant
to the group audit and, in particular, is independent.
II. The component auditor's professional competence.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

74. Which of the following statements concerning group audits is

incorrect?
A. The group engagement team has the responsibility to es-
tablish an overall group audit strategy and audit plan.
B. The group engagement team shall determine the materi-
ality for the group financial statements as a whole when
establishing the overall group audit strategy. ·
C. The component engagement partner shall review the
overall group audit strategy and group audit plan.
D. The group engagement partner shall agre~ on .the terms
of the group audit engagement in accordance with PSA
210.

75. An auditor who, at the request of the group eng~gement

team, performs work on financial information related to a
component for the group audit is a
A. Group auditor
B. Component auditor
C. Component engagement team
D. Group engagement team
 CPA EXAMINATION REVIEWER: AUDITING THE:o~y
246

TRUE OR FALSE

l. Inherent risk is a measure of th~ a udl~or~stassessment of the

possibility that there are matena1 _miss a ements in an ac.
count before considering the effectiveness of the client's in-
ternal control.

2. Acceptable audit risk is a me~sure of the auditor's w.illing.

ness to accept that the financial stat~m~nts do not contain
material misstatements after the audit 1s completed and a
modified opinion has been expressed.

3. The purpose of an engagement letter is to document the

terms of the engagement.

4. Early appointment of the independent auditor will enable a

more thorough examination to be performed.

5. Related party transactions may be indicated when another

entity has had a distributor relationship with the company
for 10 years.

6. During audit planning, the auditor uses analytical procedures

primarily to understand the client's business and industry
and to indicate possible misstatements.

7. Increased fraud risk could also result in higher inherent risk,

lower control risk, and lower detection risk.

8. A properly planned and performed audit may fail to detect a

material misstatement resulting from fraud because an audit
is planned and performed to pro.vide reasonable assurance
of detecting material misstatements caused by errors but not
by fraud.
CHAPTER 4 The Financial Statement Audit: Client Acce.ptance and Planning 247

9. An auditor's consideration of materiality is influenced by the

auditor's perception of the needs of a reasonable person
who will rely on the financial statements. ·

10. Comparison of recorded amounts of major disbursements

with appropriate invoices a typical analytical procedure.

11. Analytical procedures are required for planning, substantive

testing, and overall review of the financial statements.

12. In assessing the competence of an internal auditor, an inde-

pendent CPA most likely would obtain information about the
quality of the internal auditor's work.

13. The successor auditor has the responsibility to initiate con-

tact with the predecessor auditor to ask about th!= client be-
fore the engagement is accepted; the predecessor has no
responsibility to initiate this contact, even when aware of
matters bearing on the integrity of management.

14. Materiality and audit"risk are considered thr~ughout the au-

dit.

15. Analytical procedures are seldo1 n used for planning an audit

enyagement because they are substantive test procedures.

16. A predecessor auditor is required to attempt to initiate

communication with the successor auditor pri1.,;r to the suc-
cessor's acceptance of the engagement.

17. Audits of financial statements are designed to obtain rea-

sonable assurance of ·detecting material misstatements due
to errors and fraud.
248 CPA EXAMINATION REVIEWER: AUDITING TH~
ii;:.O~y

18. All uncorrected misstatements that are below the amou t

materiality established in the planning stage of the audi~ ~
always be evaluated as immaterial. Will

19. If the prospectiv~ client. refuses to allow the predecessor au.

ditor to communicate with the successor auditor, the succ
. b es-
sor auditor should have reservat•ons a out accepting the
proposed audit engagement.

20. A written understa~di~g betwee~ .t~e auditor ~nd the client

concerning the auditors respons1b1hty for the discovery of il-
legal acts is usually set forth in letter of audit inquiry.

21. When a company has changed auditors, the predecessor

auditor has no responsibility 1to initiate contact with the suc-
cessor auditor, even when the predecessor is aware of mat-
ters bearing on the integrity of management.

22. An example of fraudulent financial reporting is when an em-

ployee diverts customer payments to his personal use, con-
cealing his actions by debiting an expense account, thus
overstating expenses.

23. Generally, the external auditor may rely on the work of an

internal auditor if the internal auditor is competent and ob-
jective.

24. An independent auditor might consider the procedures per·

formed by the internal auditors because they are employees
whose work must be reviewed during substantive testing.

25. An auditor obtains knowledge about a new client's business

and its industry in order to maintain professional skepticism
concerning management's financial statement assertions.
CHAPTER 4 The Financial Statement Audit: Client Acceptance and Planning
249

KEY ANSWERS

1. c 26. A 51. B
2. A 27. D 52. D
3. c 28. A 53. D
4. A 29. D 54. A
5. c 30. c 55. B
6. B 31. c 56. D
7. A 32. A 57. A
8. A 33. A 58. A
9. c 34. A 59. B
10. A 35. c 60. D
11. A 36. D 61. A
12. A 37. c 62. B
13. A 38. D 63. c
14. c 39. c 64. B
15. c 40. D 65. D
16. D 41. B 66. B
17. A 42. D 67. D
18. A 43. A 68. c
19. A 44. B 69. A
20. A 45. c 70. B
21. D 46. A 71. D
22. c 47. D 72. c
23. D 48. D 73. c
24. D 49. c 74. c
25. B 50. c 75. B
250 CPA EXAMINATION REVIEWER: AUDITING iHE
. O~y

TRUE OR FALSE

1. True 6. True 11. False 16. False 21. True

2. False 7. False 12. True 17. True 22. False
3. True 8. False 13. True 18. False 23. True
4. False 9. True 14. True 19. True 24. False
5. False 10. False 15. False 20. False 25. False