Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

(LUZON) Manila 87339344 * Calamba City, Laguna * Dasmariñas City, Cavite * Lipa City,
Batangas (0917) 8852769 * (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032)
2537900 loc. 218 (MINDANAO) Cagayan De Oro (0917) 7081465 * Davao City (082) 2250049

AUDITING THEORY
AT.3011 – Considering the Work of R.C.P. SOLIMAN/ K.J. UY
Others MAY 2021

Reference:
a. PSA 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Service Organization
b. PSA 510 (Redrafted), Initial Audit Engagements – Opening Balances
c. PSA 600 (Revised and Redrafted), Special Considerations – Audits of Group Financial Statements
d. PSA 610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming Amendments
e. PSA 620 (Revised and Redrafted), Using the Work of an Auditor’s Expert

DISCUSSION QUESTIONS
Initial Audit Engagements—Opening Balances
1. For initial audit engagements, the auditor should
obtain sufficient appropriate audit evidence that:
a. The opening balances do not contain
misstatements that materially affect the current
period's financial statements.
b. The prior period's closing balances have been
correctly brought forward to the current period or,
when appropriate, have been restated.
c. Appropriate accounting policies are consistently
applied or changes in accounting policies have
been properly accounted for and adequately
disclosed.
d. All of the above.
2. Statement 1: Opening balances include matters
requiring disclosure that existed at the beginning of
the period, such as contingencies and commitments.
Statement 2: Initial audit engagement is an
engagement in which the financial statements for the
prior period were not audited. It does not include an
engagement in which the financial statements for the
prior period were audited by a predecessor auditor.
Statement 3: If the prior period’s financial statements
were audited by a predecessor auditor and there was
a modification to the opinion, the auditor shall
evaluate the effect of the matter giving rise to the
modification in assessing the risks of material
misstatement in the current period’s financial
statements
a. True, true, true c. False, true, true
b. True, false, true d. False, false, true
3. Which of the following is least considered in
determining the sufficiency and appropriateness of the
audit evidence that the auditor will obtain regarding
opening balances?
a. The materiality of the opening balances relative to
the current period’s financial statements.
b. The accounting policies adopted by the entity.
c. The risk of misstatements of accounts.
d. The length of years in operations of the entity.
4. The following audit procedures may be deemed
necessary by the auditor in obtaining sufficient
appropriate audit evidence regarding opening
balances, except:
a. Reading the most recent financial statements, if
any, and the predecessor auditor’s report thereon,
if any, for information relevant to opening
balances, including disclosures.
b. Reviewing the predecessor auditor’s audit
engagement letter.
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c. Evaluating whether audit procedures performed in
the current period provide evidence relevant to the
opening balances.
d. Performing specific audit procedures to obtain
evidence regarding the opening balances.
5. Which of the following accounts is most difficult for the
auditor to be satisfied as to the balance at the
beginning of the period?
a. Accounts receivable c. Inventory
b. Accounts payable d. Accrued interest payable
6. If the opening balances contain misstatements which
could materially affect the current period's financial
statements and the effect of the misstatement is not
properly accounted for and adequately disclosed, the
auditor should express a
a. Unqualified opinion with explanatory paragraph.
b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Adverse or disclaimer of opinion.
The Entity’s Use of a Service Organization
7. Which of the following statements is true with respect
to Type 1 Report as referred to in PSA 402
a. Report on the description and design of controls at
a service organization.
b. A report that comprises a description, prepared by
management of the service organization, of the
service organization’s system, control objectives
and related controls that have been designed and
implemented as at a specified date.
c. A report that comprises a report by the service
auditor with the objective of conveying reasonable
assurance that includes the service auditor’s
opinion on the description of the service
organization’s system, control objectives and
related controls and the suitability of the design of
the controls to achieve the specified control
objectives.
d. All of the above.
8. Which of the following statements is true with respect
to Type 2 Report as referred to in PSA 402
a. Report on the description, design, and operating
effectiveness of controls at a service organization
b. A report that comprises a description, prepared by
management of the service organization, of the
service organization’s system, control objectives
and related controls, their design and
implementation as at a specified date or
throughout a specified period and, in some cases,
their operating effectiveness throughout a
specified period
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c. A report that comprises a report by the service
auditor with the objective of conveying reasonable
assurance that includes: (a) The service auditor’s
opinion on the description of the service
organization’s system, control objectives and
related controls, the suitability of the design of the
controls to achieve the specified control
objectives, and the operating effectiveness of the
controls; and (b) A description of the service
auditor’s tests of the controls and the results
thereof.
d. All of the above
9. Which of the following is least likely entitled to the
report of the service organization auditor on the
suitability of the design and operating effectiveness of
the service organization?
a. Service organization’s management
b. Service organization’s customers
c. Client’s auditors
d. Service organization’s stockholders
10. Under PSA 402, the objectives of the user auditor,
when the user entity uses the services of a service
organization, are:
a. To obtain an understanding of the nature and
significance of the services provided by the service
organization and their effect on the user entity’s
internal control relevant to the audit, sufficient to
identify and assess the risks of material
misstatement.
b. To design and perform audit procedures
responsive to those risks.
c. Both a and b
d. Either a or b
11. If the user auditor is unable to obtain a sufficient
understanding from the user entity, the user auditor
shall obtain that understanding from one or more of
the following procedures, except:
a. Obtaining a type 1 or type 2 report, if available.
b. Contacting the service organization, but not
through the user entity, to obtain specific
information.
c. Visiting the service organization and performing
procedures that will provide the necessary
information about the relevant controls at the
service organization.
d. Using another auditor to perform procedures that
will provide the necessary information about the
relevant controls at the service organization.
12. When the user auditor’s risk assessment includes an
expectation that controls at the service organization
are operating effectively, the user auditor shall obtain
audit evidence about the operating effectiveness of
those controls from one or more of the following
procedures: (Choose the incorrect one)
a. Obtaining a type 1 report, if available.
b. Obtaining a type 2 report, if available.
c. Performing appropriate tests of controls at the
service organization.
d. Using another auditor to perform tests of controls
at the service organization on behalf of the user
auditor.
13. Statement 1: The user auditor shall inquire of
management of the user entity whether the service
organization has reported to the user entity, or
whether the user entity is otherwise aware of, any
fraud, non-compliance with laws and regulations or
uncorrected misstatements affecting the financial
statements of the user entity.
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Statement 2: The use of a service organization for
external bookkeeping services (ranging from the
processing of certain transactions such as payment of
payroll taxes and maintenance of their accounting
records to the preparation of their financial
statements) relieves management of the smaller
entity and, where appropriate, those charged with
governance of their responsibilities for the financial
statements.
Statement 3: The user auditor shall evaluate how use
of a service organization affect the nature, timing and
extent of the user auditor’s further audit procedures,
including the effect on the user auditor’s conclusions
and user auditor’s report.
a. True, False, True c. False, True, True
b. True, True, True d. False, False,
True
14. The following statements relate to the reporting
requirements under PSA 402. Which is incorrect?
a. The user auditor shall modify the opinion in the
user auditor’s report if the user auditor is unable
to obtain sufficient appropriate audit evidence
regarding the services provided by the service
organization relevant to the audit of the user
entity’s financial statements.
b. The user auditor shall not refer to the work of a
service auditor in the user auditor’s report
containing an unmodified opinion unless required
by law or regulation to do so.
c. If reference to the work of a service auditor is
relevant to an understanding of a modification to
the user auditor’s opinion, the user auditor’s
report shall indicate that such reference does not
diminish the user auditor’s responsibility for that
opinion.
d. The user auditor may not need the consent of the
service auditor when making such a reference as
it is implicitly and ethically permitted.
Using the Work of Internal Auditors
15. The independent auditors might consider the
procedures performed by the internal auditors
because:
a. They are employees whose work must be reviewed
during substantive testing.
b. They are employees whose work might affect the
independent auditors' work.
c. Their work impacts upon the cost/benefit tradeoff
in evaluating inherent limitations.
d. Their degree of independence may be inferred by
the nature of their work.
16. The work of internal auditors may affect the
independent’s auditor’s
I. Procedures performed in obtaining an
understanding of internal control
II. Procedures performed in assessing the risk of
material misstatement
III. Substantive procedures performed in gathering
direct evidence
a. I and III only c. II and III only
b. I and II only d. I, II and III
17. Which of the following is most correct regarding
external auditors use of internal auditors directly on
the audit engagement?
a. Discourage c. Encourage
b. Prohibit d. Permit
18. In making judgments about the effect of the internal
auditors’ work on the external auditor’s procedures in
specific audit areas, which of the following is not
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among three issues related to the audit areas that
should be considered by the external auditor?
a. Materiality of the financial statement amounts.
b. Risk of material misstatement of the assertions
related to these financial statement amounts.
c. Degree of subjectivity involved in the evaluation of
the audit evidence gathered in support of the
assertions.
d. Review of quality of audit policies, programs, and
procedures.
19. Under what circumstance is it appropriate for the
auditor to rely on the work of an internal auditor?
a. It is never acceptable for the external auditor to
rely upon the work of the internal auditor.
b. The external auditor may rely on certain of the
work of the internal auditor after making a
comprehensive assessment of the auditor and
his/her work.
c. The external auditor may rely on the work of the
internal auditor if he/she is also a CPA.
d. There is no restriction in relying upon the work of
internal auditors.
20. External auditors would consider internal auditors
effective if they are:
a. Independent of the operating units being
evaluated.
b. Competent and well trained.
c. Have performed relevant audit tests of the internal
controls and financial statements.
d. All of the above.
21. To assess the objectivity of the internal auditors, an
independent auditor would most likely
a. Consider the professional qualifications and
experience of the internal auditors.
b. Consider the proper planning, supervision and
documentation of internal auditor’s work.
c. Consider the nature and extent of the internal
auditors’ assignment.
d. Consider the organizational level to which the
internal auditors report the results of their work.
22. Hanlon Corp. maintains a large internal audit staff that
reports directly to the chief financial officer. Audit
reports prepared by the internal auditors indicate that
the system is functioning as it should and that the
accounting records are reliable. An independent
auditor will probably:
a. eliminate tests of controls.
b. increase the depth of the study and evaluation of
administrative controls.
c. avoid duplicating the work performed by the
internal audit staff.
d. place limited reliance on the work performed by
the internal audit staff.
23. For which of the following judgments may an
independent auditor share responsibility with an
entity’s internal auditor who is assessed to be both
competent and objective?
a. b. c. d.
Materiality of
misstatements Yes No No Yes
Evaluation of
accounting No Yes No Yes
estimates
Using the Work of an Auditor’s Expert
24. Which statement is incorrect regarding the auditor’s
use of the work of an expert?
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a. “Expert” means a person or firm possessing
special skill, knowledge and experience in a
particular field other than accounting and auditing.
b. When using the work performed by an expert, the
auditor should obtain sufficient appropriate audit
evidence that such work is adequate for the
purposes of the audit.
c. The auditor's education and experience enable the
auditor to be knowledgeable about business
matters in general, but the auditor is not expected
to have the expertise of a person trained for or
qualified to engage in the practice of another
profession or occupation.
d. In all cases, the auditor cannot obtain sufficient
appropriate audit evidence in areas that are other
than accounting and auditing.
25. Each of the following procedures requires the
assistance of an expert, except
a. Determining the physical condition or quantity of
underground mineral.
b. Determining the value of works of art.
c. Determining the adequacy of disclosure in the
notes to the financial statements.
d. Interpreting major contracts.
26. In accordance with PSA 620, Using the Work of an
Auditor’s Expert, each of the following is the work of
an expert, except
a. Applying methods of accounting for deferred
income tax.
b. Applying legal expertise in taxation law
c. Performing complex modeling for the purpose of
valuing financial instruments.
d. Valuing of environmental liabilities, and site clean-
up costs.
27. When determining the need to use the work of an
expert, the auditor would consider the following,
except
a. The quantity and quality of other audit evidence
available.
b. The materiality of the F/S item being considered.
c. The risk of misstatement based on the nature and
complexity of the matter being considered.
d. The professional certification or licensing by, or
membership in, an appropriate professional body.
28. When planning to use the work of an expert, the
auditor should assess the objectivity of the expert.
This will involve considering the expert's:
I. Professional certification or licensing by, or
membership in, an appropriate professional body.
II. Experience and reputation in the field in which the
auditor is seeking audit evidence.
III. Relationship to the entity.
a. I, II, III c. I and III
b. I and II d. III only
29. The auditor shall apply the guidance of PSA 500, Audit
Evidence, instead of PSA 620, Using the Working of an
Auditor’s Expert, when using the work of
a. Management’s expert. c. Either a or b.
b. Auditor’s expert. d. Both a and b.
30. The risk that an expert’s objectivity will be impaired
increases when the expert is related in some other
manner to the entity (e.g., by being financially
dependent upon or having an investment in the entity)
and the expert is
a. Engaged by the entity
b. Employed by the entity
c. Engaged by the auditor
d. Employed by the auditor
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31. According to PSA 620, Using the Working of an
Auditor’s Expert, which is incorrect?
a. The auditor shall not refer to the work of an
auditor’s expert in an auditor’s report unless
required by law or regulation to do so.
b. It may be appropriate to refer to the auditor’s
expert in an auditor’s report containing a modified
opinion to explain the nature of the modification.
c. If the auditor makes reference to the work of an
auditor’s expert in the auditor’s report, the auditor
shall indicate in the auditor’s report that such
reference does not reduce the auditor’s
responsibility for that opinion.
d. The auditor may not need the permission of the
auditor’s expert when making a reference in the
auditor’s report.
Audits of Group Financial Statements—Including
Work of Component Auditors
32. When using the work of another auditor (component
auditor), the principal auditor should ordinarily
perform the following procedure
a. Obtain information regarding the professional
competence of the other auditor in the context of
the specific assignment undertaken by the other
auditor.
b. Advise the other auditor of the applicable
independence requirements as regards both the
entity and the component and obtain
representation as to his compliance with them.
c. Advise the other auditor of the applicable
accounting, auditing and reporting requirements
and obtain representation of compliance.
d. All of the above
33. The financial statements of a company (investee) in
which another company (investor) has a financial
interest are most likely to be included in a set of
consolidated financial statements of the investor
company in which of the following situations?
DO-IT-YOURSELF (DIY) DRILL
1. Which of the following procedures the auditor will least
likely perform in order to obtain sufficient appropriate
audit evidence that opening balances do not contain
material misstatement that could potentially affect the
current period financial statements?
a. Read the most recent financial statements and the
auditor’s report thereon of the client’s
competitors.
b. Determine whether the prior period’s closing
balances have been correctly brought forward to
the current period.
c. Determine whether the opening balances reflect
the application of appropriate accounting policies.
d. Review of the predecessor auditor’s working
papers to obtain evidence regarding the opening
balances.
2. If the user auditor plans to use a type 1 or type 2
report as audit evidence to support the user auditor’s
understanding about the design and implementation
of controls at the service organization, the user auditor
shall: (Choose the incorrect one)
a. Evaluate whether the description and design of
controls at the service organization is at a date or
for a period that is appropriate for the user
auditor’s purposes.
b. Evaluate the sufficiency and appropriateness of
the evidence provided by the report for the
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a. The investee is a joint venture by the investor
company and another company in which each
investor owns a 50% equity interest.
b. The investor owns 30% of the non-voting shares
of the investee.
c. The investor holds 20% of the shares of the
investee as a temporary investment.
d. The investor holds 60% of the outstanding debt of
the investee.
34. A client follows full PFRSs for its domestic operations
and foreign GAAP for a foreign subsidiary. The foreign
subsidiary is audited by a component auditor, while
the group auditor audits the remainder of the
corporation and issues an audit report on consolidated
operations. Which auditor(s) is (are) responsible for
evaluating the appropriateness of the adjustment of
the foreign GAAP statements to full PFRSs?
Group auditor Component auditor
a. Yes Yes
b. Yes No
c. No Yes
d. No No
35. A group engagement partner decides not to refer to
the audit of another CPA who audited a component of
the overall group F/S. After making inquiries about the
other CPA’s professional reputation and independence,
the principal auditor most likely would
a. Add an emphasis-of-matter paragraph.
b. Document in the engagement letter that the
principal auditor assumes no responsibility for the
other CPA’s work and opinion.
c. Obtain written permission from the other CPA to
omit the reference in the principal auditor’s report.
d. Perform additional audit procedures based on the
significance of the subsidiary.
- now do the DIY drill –
understanding of the user entity’s internal control
relevant to the audit.
c. In determining the sufficiency and appropriateness
of the audit evidence provided by a type 1 or type
2 report, the user auditor shall be satisfied as to
the service auditor’s professional competence, but
not the independence from the service
organization; and the adequacy of the standards
under which the type 1 or type 2 report was
issued.
d. Determine whether complementary user entity
controls identified by the service organization are
relevant to the user entity and, if so, obtain an
understanding of whether the user entity has
designed and implemented such controls.
3. When the auditor considers that the service
organization activities are significantly relevant to the
audit and he concludes that it would be efficient to
obtain evidence from tests of controls, such evidence
may be obtained by, except
a. Visiting the service organization
b. Performing tests of client’s control activities of the
service organization
c. Review the service contract between the client and
the service organization
d. Obtaining a service organization auditor’s report
that expresses an opinion as to the operating
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effectiveness of the service organization’s

accounting and internal control systems for the
processing applications relevant to the audit

4. When obtaining an understanding and performing a

preliminary assessment of the internal audit function,
the auditor should consider the internal auditors’
Organizational Scope of Technical
status functions competence
(Objectivity) and due care
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No Yes No

5. In connection with the examination of financial

statements by an independent auditor, the client
suggests that members of the internal audit staff be
utilized to minimize audit costs. Which of the following
tasks could most appropriately be delegated to the
internal audit staff
a. Selection of accounts receivable for confirmation,
based upon the internal auditor's judgment as to
how many accounts and which accounts will
provide sufficient coverage.
b. Preparation of schedules for negative accounts
receivable responses.
c. Evaluation of the internal control for accounts
receivable and sales.
d. Determination of the adequacy of the allowance
for doubtful accounts.

6. Which of the following is most likely to require special

planning considerations related to asset valuation?
a. Inventory is comprised of diamond rings.
b. The client has recently purchased an expensive
copy machine.
c. Assets costing less than P250 are expensed even
when the expected life exceeds one year.
d. Accelerated depreciation methods are used for
amortizing the costs of factory equipment.

7. Which of the following statements is correct about the

auditor's use of the work of a specialist?
a. The specialist should not have an understanding of
the auditor's corroborative use of the specialist's
findings.
b. The auditor is required to perform substantive
procedures to verify the specialist's assumptions
and findings.
c. The client should not have an understanding of the
nature of the work to be performed by the
specialist.
d. The auditor should obtain an understanding of the
methods and assumptions used by the specialist.

8. In the auditor’s report, the group engagement partner

decides not to make reference to a component auditor
who audited a client’s subsidiary. The group
engagement partner could justify this decision if,
among other requirements, he or she
a. Issues an unmodified opinion on the consolidated
financial statements.
b. Learns that the component auditor issued an
unmodified opinion on the subsidiary’s financial
statements.
c. Is unable to review the audit plan (programs) and
working papers of the component auditor.
d. Is satisfied as to the independence and
professional reputation of the other CPA.

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