Pre-engagement Activities and Audit Planning Quiz 9.
9. For a reporting entity that has participated in related-party transactions that are
1. Which of the following matters most likely would be included in a management
representation letter?
a. An assessment of the risk factors concerning the misappropriation of assets.
b. An evaluation of the litigation that has been filed against the entity.
c. A confirmation that the entity has complied with contractual agreements.
d. A statement that all material internal control weaknesses have been corrected.
2. The objective of performing analytical procedures in planning an audit is to identify the
existence of illegal acts that went undetected because of internal control weaknesses.
F b. Less evidence is required for a low peso amount than for a high peso amount.
3. Analytical procedures used in planning an audit should focus on detecting material
misstatements at the account balance level. F
4. Which of the following factors most likely would lead a CPA to conclude that a
potential audit engagement should not be accepted? A
a. It is unlikely that sufficient evidence is available to support an opinion on the
financial statements.
b. Management continues to employ an inefficient system of information technology
to record financial transactions.
c. There are significant related party transactions that management claims occurred
in the ordinary course of business.
d. Internal control activities requiring the segregation of duties are subject to
management override.
5. If planned detection risk is reduced, the amount of substantive evidence the auditor
accumulates will A
a. Increase
b. Decrease
c. Be indeterminate
d. Remain unchanged
6. One of the elements of the audit planning process most likely to be agreed upon with
the client before implementation of the audit strategy is the determination of the timing
of inventory observation procedures to be performed. T
7. To obtain an understanding of a continuing client's business in planning an audit, an
auditor most likely would:
a. Review prior year working papers and the permanent file for the client.
b. Read specialized industry journals.
c. Reevaluate client's internal control environment.
d. Performs test of details of transactions and balances.
8. Which of the following would an auditor least likely perform as part of the auditor’s
preliminary engagement activities?
a. Perform procedures regarding the continuance of the client relationship and the
specific audit engagement
b. Obtain understanding of the legal and regulatory framework applicable to the
entity
c. Establish an understanding of the terms of the engagement
d. Evaluate compliance with ethical requirements, including independence
material, disclosure in the financial statements should include
a. A reference to deficiencies in the entity’s system of internal accounting control.
b. The nature of the relationship and the terms and manner of settlement
c. Details of the transactions within major classifications.
d. A statement to the effect that a transaction was consummated on terms no less
favorable than those that would have been obtained if the transaction had been
with an unrelated party
10. When setting a preliminary judgment about materiality,
a. The same amount of evidence is required for either low or high peso amounts.
c. More evidence is required for a low peso amount than for a high peso amount.
d. There is no relationship between it and the peso amount of evidence needed.
11. Which of the following is not included in an audit engagement letter? A
a. Representations that the financial statements were prepared in accordance with
the PFRS
b. Objectives of the engagement
c. Management’s responsibilities
d. A clear explanation of the services to be performed on the engagement
12. Why do auditors need to obtain an understanding of a client’s industry and external
environment? D
a. Accounting issues may be highly complex across companies within an industry
b. Inherent risks commonly differ across companies within an industry
c. All of the choices
d. Certain industries have different business risk than others
13. Which of the following conditions most likely would pose the greatest risk in accepting
a new audit engagement? A
a. There will be a client-imposed scope limitation.
b. Staff will need to be rescheduled to cover this new client.
c. The firm will have to hire a specialist in one audit area.
d. The client's financial reporting system has been in place for 10 years.
14. The auditor does not have a responsibility to identify or assess all business risks. T
15. According to PSA 210, which of the following statements is correct? D
a. Where the terms of the engagement are changed, the auditor and the client need
not agree on the new terms if they already agreed on the old terms.
b. The engagement letter assists in the supervision and review of the audit work.
c. The auditor and the client need not agree on the terms of the engagement.
d. The auditor may agree to a change of engagement where there is reasonable
justification for doing so.
16. Which of the following characteristics most likely would heighten an auditor's concern
about the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Management places substantial emphasis on meeting earnings projections.
c. Insiders recently purchased additional shares of the entity's stock.
d. The rate of change in the entity's industry is low.
17. The industry in which the entity operates may give rise to specific risks of material
misstatement arising from the nature of the business or the degree of regulation. T
18. A successor auditor has accepted an engagement that was previously performed by a
predecessor auditor and, prior to accepting the engagement, has communicated with
the predecessor. When the successor believes that the predecessor has performed
satisfactory previous audits, which of the following is correct? D
a. Absent ongoing litigation, a predecessor must provide all working papers
requested by the predecessor.
b. A second communication is required and must include details of previous audits.
c. The client should be informed of the need to perform a detailed audit of all
opening balances.
d. Ordinarily the successor auditors may be able to accept the opening balances of
the current year with a minimum of verification work.
19. Which of the following is not generally considered a financial statement audit risk
factor? A
a. Management operating and financing decisions are dominated by top
management.
b. A new client with no prior audit history.
c. Profitability of the entity relative to its industry is inconsistent.
d. Rate of change in the entity's industry is rapid.
20. Between the auditor and client management, the auditor is expected to have a lesser
understanding of the entity and its environment. T
21. Analytical procedures used in audit planning should focus on
a. Enhancing the auditor's understanding of the client's business.
b. Evaluating the adequacy of evidence of evidence gathered concerning unusual
balances.
c. Testing individual account balances that depend on accounting estimates.
d. Identifying material weaknesses in the control structure.
22. The senior associate most likely would have a supervisory responsibility to explain to
the audit associate how the results of the various auditing procedures should be
evaluated. T
23. What is material is a matter of professional judgment. T
24. Unrestricted access to whatever record, documentation and other information
requested in connection with the audit” is usually one of the items documented in an
audit engagement letter. T
25. The extent of planning will vary according to the size of the entity, the complexity of
the audit, the type of opinion to be expressed and the auditor’s assessment of the
client’s ability to pay the audit fee. F
26. Which of the following industries is usually considered high risk by audit firms? B
a. Legal services such as attorney firms.
b. High technology companies such as Internet firms.
c. Manufacturing companies such as toy producers.
d. Non-profit companies such as trade associations.
27. Which of the following is least likely considered by the auditor in establishing the
overall audit strategy and developing the audit plan?
a. The involvement of other auditors in the audit of major subsidiaries.
b. The terms of payment to other auditors and their respective clients.
c. Understanding of the accounting and internal control systems.
d. Risk and materiality.
28. Planning does not assist in proper assignment of work to assistants; but it facilitates
the coordination of work done by other auditors and experts. F
29. The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with GAAP, while other matters are
not important. T
30. Which of the following is an aspect of scheduling and controlling the audit
engagement? A
a. Including in the audit program a column for budgeted and actual time
b. Performing audit work only after the entity’s books have been closed for the
period under audit
c. Including in the engagement letter an estimate of the minimum and
maximum audit fee.
d. Writing a conclusion in individual working papers indicating how the results
of the audit will affect the auditor’s report
31. Why do auditors establish a preliminary judgment about materiality? A
a. To help the auditor plan the appropriate evidence to accumulate.
b. None of the choices
c. So that the client can what records to make available to the auditor.
d. To determine what level of staffing (i.e., work experience) is required for the
audit.
32. The element of the audit planning process most likely to be agreed upon with the
client before the implementation of the audit strategy is the determination of the C
a. Procedures to be undertaken to discover litigation, claims and assessments.
b. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
c. Timing of inventory observation procedures to be performed.
d. Pending legal matters to be included in the inquiry of the client's attorney.
33. An engagement letter is best described as:
a. A letter from company management to the auditors specifying management’s
expectations for completion of the audit on a timely basis and the fees.
b. A letter from the Board of Directors audit committee to the auditor that indicates
that the auditor has been engaged to perform the audit and the fees to be paid.
c. A letter from the auditors to company management that specifies the
responsibilities of both the company and the auditors in completing the audit and
the timing for its completion.
d. A letter from the auditors to company management specifying that management
is responsible for the financial statements and the auditors will issue an opinion
on the financial statements.
34. Arrangements concerning which of the following are least likely to be included in
engagement letter?
a. Other forms of reports to be issued in addition to the audit report
b. auditor’s responsibilities
 c. Fees and billing
d. CPA investment in client securities
35. Which of the following is most likely to require special planning considerations related
to asset valuation? C
a. Accelerated depreciation methods are used for amortizing the costs of factory
equipment.
b. Assets consisting less than P250 are expensed even when the expected life
exceeds one year.
c. Inventory is comprised of diamond rings.
d. The client has recently purchased an expensive copy machine.
36. An audit engagement letter: D
a. Is prepared for the benefit of the auditor, audit client and general public.
b. Shall include the specific audit procedures to be performed by the auditor.
c. Is usually sent by the auditor to the client upon the commencement of the audit.
d. May not be prepared each period for a recurring audit engagement.
37. Which of the following factors most likely would heighten an auditor's concern about
the risk of fraudulent financial reporting? A
a. An overly complex organizational structure involving unusual lines of authority.
b. Low growth and profitability as compared to other entity's in the same industry.
c. Large amounts of liquid assets that are easily convertible into cash.
d. Financial management's participation in the initial selection of accounting
principles.
38. With respect to errors and irregularities, the auditor should plan to D
a. Search for irregularities that would have a material effect and for errors that
would have either material or immaterial effect on the financial statements.
b. Discover errors or irregularities that have either material or immaterial effect on
the financial statements.
c. Search for error that would have a material effect and for irregularities that would
have either material or immaterial effect on the financial statements.
d. Search for errors or irregularities that would have a material effect on FS.
39. Cost-benefit considerations are part of audit planning, In relation to this, which of the
following audit procedures is usually the least costly to perform? A
a. Tests of balances.
b. Substantive tests of transactions.
c. Tests of controls.
d. Analytical procedures.
40. An audit normally includes audit procedures specifically designed to detect illegal acts
that have an indirect but material effect on the financial statements. F
41. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover? C
a. Inability to general positive cash flows from operations.
b. Inadequate monitoring of significant controls.
c. Financial pressures affecting employees.
d. High turnover of senior management.
42. An auditor should design the audit to provide reasonable assurance of detecting errors
and irregularities that are material to the financial statements. T
43. These are the operational approaches by the which management intends to achieve
its objectives
a. Planning methods
b. Strategies
c. Operational plans
d. Business risk approaches
44. The engagement letter: C
a. Is used only if it is an engagement, but has no effect for review or compilation
services.
b. Affects the CPA firm's responsibility to external users of audited financial
statements.
c. Can affect legal responsibilities to the client.
d. Can be issued to alter the auditor's responsibilities under the standards on
auditing.
45. In designing audit programs, an auditor should establish specific audit objectives that
relate primarily to the
a. Cost-benefit of gathering evidence.
b. Financial statement assertions.
c. Timing of audit procedures.
d. Selected audit techniques.
46. Which of the following will an auditor least likely discuss with the former auditor of a
potential client prior to acceptance of an audit engagement? C
a. Integrity of the management
b. Disagreement between the predecessor auditor and the management regarding
accounting principles
c. Fees charged for the services
d. Reasons for changing audit firms
47. The preliminary use of analytical review procedures by the auditor is C
a. only used when other planning procedures cannot be applied.
b. used to assist the auditor in documenting internal control.
c. required to identify areas of heightened risk
d. optional in accordance with auditor judgment.
48. An auditor who accepts an audit engagement and does not possess the industry
expertise of the business entity, should: D
a. First inform management that an unqualified opinion cannot be issued.
b. Engage financial experts familiar with the nature of the business entity.
c. Refer a substantial portion of the audit to another CPA who will act as the
principal auditor.
d. Obtain knowledge of matters that relate to the nature of the entity's business.
49. The audit program usually cannot be finalized until the
a. Reportable conditions have been communicated to the audit committee.
b. Engagement letter has been signed by the auditor and the client.
c. Search for unrecorded liabilities has been performed and documented.
d. Consideration of the entity's internal control has been completed.
50. Which of the following id not considered by the CPA when he makes an overall audit
plan? C
 a. The nature and timing of reports and other communication with the entity that are d. Chairman of the board of directors.
expected under the engagement.
b. Identification of complex accounting areas including those involving accounting 58. It is necessary for all team members to have a comprehensive knowledge of all
estimates. aspects of the audit. F
c. The content of the representation letter.
d. The effect of information technology on the audit. 59. Which one of the following factors is not a good indicator of potential financial failure?
A
51. As the acceptable level of detection risk decreases, the assurance directly provided a. Client's retained earnings were reduced by half as a result of a large dividend
from: C payout.
a. Tests of controls should increase. b. Client is constantly short of cash and working capital.
b. Tests of controls should decrease. c. Client has had increasing net losses for several years.
c. Substantive tests should decrease. d. Client relies heavily on debt financing, especially by financing permanent assets
d. Substantive tests should increase. with short-term loans.

52. In which of the following situations would an expert be least likely contracted by a
CPA? A
a. Legal opinions concerning interpretations of engagements, statutes and
regulations.
b. Determination of fair values using specialized statistical techniques.
c. Application of accounting methods in computing inventory balances.
d. Valuations of certain types of assets like land and buildings.
53. An auditor is required to establish an understanding with the client regarding the
services to be performed for each engagement. This understanding generally includes
A d. The component management does not accept its responsibilities that are
a. The auditor’s responsibility for ensuring that those charged with governance are
aware of any significant deficiencies in internal control that may come to the
auditor’s attention.
b. Management’s responsibility for providing the auditor with the assessment of the
risk of material misstatement due to fraud.
c. Management’s responsibility for errors and illegal activities of employees that
may cause material misstatement.
d. The auditor’s responsibility to apply the concept of materiality in planning and
performing the audit.
54. Which one of these is not a type of evidence that would be used for both obtaining an
understanding of the control structure and testing the controls? B
a. Inquiries.
b. Reperformance.
c. Inspection.
d. Observation
55. Before accepting an engagement to audit a new client, an auditor is required to make
inquiries of the predecessor auditor without need to obtain the consent of the
prospective client. F
56. Substantive audit procedures are audit procedures designed to obtain an
understanding of the entity and its environment. F
57. Which of the following normally signs the engagement letter for an audit of a public
company? A
a. Audit committee.
b. Chief financial officer.
c. Corporate treasurer.
60. When an auditor believes that an understanding with the client has not been
established, he or she should ordinarily decline to accept or perform the audit. T
61. The auditor of a parent entity is also the auditor of its component. Which of the
following factors may influence the auditor’s decision whether to send a separate
engagement letter to the entity’s component? B
a. The financial reporting framework used by the component is unacceptable.
b. Whether a separate auditor’s report is to be issued on the component.
c. The preconditions for an audit of the component’s material misstatements are not
present.
fundamental to the conduct of an audit.
62. The lower the materiality level, the higher the amount of required evidence from
substantive procedures to compensate for increased risk. T
63. In the case of recurring audits, the auditor need not send a new engagement letter,
except in certain circumstances. T
64. Which of the following matters is least likely to be discussed in an engagement letter?
B
a. Timing of the performance of the examination.
b. The fact that the financial statements are the responsibility of engagement.
c. Assistance to be provided by client personnel.
d. The fact that an auditor does not plan to detect material irregularities.
65. The most common statistical techniques used with analytical procedures:
a. Disaggregated data.
b. Regression analysis.
c. Comparison of current-year data, looking for large peso or large percentage
changes.
d. A decision rule table.
66. Regarding materiality, both amount and nature of misstatements should be
considered. T
67. Preliminary arrangements agreed to by the auditors and the client should be reduced
by the auditors. The best place to set forth these arrangements is in:
a. A client representation letter. C
 b. A memorandum to be placed in the permanent section of the auditing working
papers.
c. An engagement letter.
d. A confirmation letter attached to the constructive services letter.
68. Auditors begin their assessments of inherent risk during the planning phase. Which of
the following would not be a topic of the planning phase that would also help to assess
inherent risk? A
a. Obtaining client’s agreement on the engagement letter.
b. Touring the client’s plant and offices.
c. Identifying related parties.
d. Obtaining knowledge about the client’s business and industry.
69. In which of the following situations would the auditor be unlikely to send a new
engagement letter to a continuing client?
a. a recent change of the client’s management
b. a recent change in the partner and/or staff in the audit engagement
c. a significant change in the nature or size of the client’s business
d. a change in terms of the engagement
70. An engagement letter sent to an audit client usually would not include a(n): D
a. reference to management’s responsibility for the financial statements.
b. estimation of the time to be spent on the audit work by audit staff and
management.
c. reference to the auditor’s responsibility for the detection of errors or irregularities.
d. statement that management advisory services would be made available upon
request.
71. When obtaining an understanding of an entity's internal control, an auditor should
concentrate on the substance of controls rather than their form because
a. Management may implement controls with costs in excess of benefits.
b. The controls may be so inappropriate that no reliance is contemplated by the
auditor.
c. The controls may be operating effectively but may not be documented.
d. Management may establish appropriate controls but not act on them.
72. The auditor should design the written audit program so that: B
a. Each account balance will be tested under either tests of controls or tests of
transactions.
b. The audit procedures selected will achieve specific audit objectives.
c. All material transactions will be selected to substantive testing.
d. Substantive tests prior to the balance sheet date will be minimized.
73. Which of the following is not one of the three main reasons why the auditor should
properly plan engagements? B
a. To help keep audit costs reasonable
b. To enable proper on-the-job training of employees
c. To enable the auditor to obtain sufficient competent evidence
d. To avoid misunderstandings with the client
74. Auditors generally allocate the preliminary judgment about materiality to
a. The income statement only
b. The income statement and balance sheet
c. The statement of cash flows
d. The balance sheet only
75. R & O, CPAs, have been retained as the auditors of City Corporation. What are R &
O’s responsibilities with regards to contacting City Corporation’s predecessor
auditors?
a. It would be unethical for R & O to ask the predecessor auditors about the integrity
of City Corporation’s management.
b. R& O is not required to attempt communication with the predecessor auditors
under any circumstances.
c. R& O should attempt communications with the predecessor auditors and ask if
they had any accounting policy disagreements with City Corporation.
d. If City Corporation had a disagreement with the predecessor auditors, R & O
should not contact the predecessor auditors.
76. Regardless of how the allocation of the preliminary judgment about materiality was
done, when the audit is complete the auditor must be confident that the combined
errors in all accounts are B
a. Less than the preliminary judgment.
b. Less than or equal to the preliminary judgment.
c. Equal to the preliminary judgment.
d. More than the preliminary judgment.
77. Which of the following is not correct regarding the communications between successor
and predecessor auditors? A
a. The burden of initiating the communication rests with the predecessor auditor
b. The predecessor auditor may choose to provide a limited response to a
successor auditor.
c. The burden of initiating the communication rests with the successor auditor
d. The predecessor auditor must receive their former client’s permission prior to
divulging information to the successor auditor
78. One of the major parts of audit planning is pre-planning, which of the following is not
involved during the pre-planning phase?
a. Selecting staff for the engagement.
b. Deciding whether to accept or continue an audit engagement.
c. Obtaining information about client's legal obligations.
d. Obtaining an engagement letter.
79. An audit engagement letter: C
a. Is prepared for the benefit of the auditor, audit client and general public.
b. Shall include the specific audit procedures to be performed by the auditor.
c. May not be prepared each period for a recurring audit engagement.
d. Is usually sent by the auditor to the client upon the commencement of the audit.
80. Which of the following statement would least likely appear in an auditor’s engagement
letter? A
a. Our fees, which will be billed as work progresses, are based on the time required
by the individuals assigned to the engagement plus out-of-pocket expenses.
b. After performing our preliminary analytical procedures, we will discuss with you
the other procedure we consider necessary to complete the engagement.
c. Our audit will be made with the objective of our expressing an opinion on the
financial statements.
d. We remind you that the responsibility for the preparation of financial statements
including adequate disclosure is that of the management of the entity.

81. If permission from client to discuss its affairs with the proposed auditor is denied by
the client, the predecessor auditor should:
a. Seek legal advice before responding to the proposed auditor
b. Disclose adequately to proposed auditor all noncompliance made by the client.
c. Keep silent of the denial.
d. Disclose the fact that the permission to disclose is denied by the client.
82. The auditor’s understanding of the entity and its environment assists in the
identification of events, transactions and practices which may have a material effect
on the financial statements. T
83. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then that information is C
a. Relevant
b. Insignificant
c. Material
d. Significant
84. Business risk is broader in scope than the risk of material misstatement of the financial
statements. T
85. With respect to planning an audit, which of the following statement is always true?
a. An inventory count must be observed at year end.
b. Financial staffing decisions must be made prior to completion of the planning
stage.
c. It is acceptable to perform a portion of the audit of a continuing client at interim
dates.
d. An engagement should not be accepted after the client's year end.
86. The senior auditor responsible for coordinating the field work usually schedules a pre-
audit conference with the audit team primarily to D
a. Establish the need for using the work of specialists and internal auditors.
b. Provide an opportunity to document staff disagreements regarding technical
issues.
c. Discuss staff suggestions concerning the establishment and maintenance of time
budgets.
d. Give guidance to the staff regarding both technical and personnel aspects of the
audit.
87. The basic premise underlying analytical procedures is that: B
a. The study of financial ratios is an acceptable alternative to the investigation of
unusual fluctuations.
b. Relationships among data may reasonably be expected to exist and continue in
the absence of known conditions to the contrary.
c. These procedures cannot replace tests of balances and transactions.
d. Statistical tests of financial information may lead to the discovery of material
errors in the financial statements.
88. Planning means developing a general audit plan and a detailed audit strategy for the
expected nature, timing and extent of the audit. T
89. Which of the following matters is not included under "regulatory environment"? B
a. Legislation and regulation that significantly affect the entity's operations.
b. General level of economic activity (for example, recession, growth)
c. Accounting principles and industry specific practices.
d. Government policies currently affecting the conduct of the entity's business.
90. Strategies are the overall plans for the entity, while objectives are the operational
approaches by which management intends to achieve its objectives. F
91. To which of the following matters would materiality limits not apply when obtaining
written client representations?
a. Disclosure of line-of-credit arrangements.
b. Instances of fraud involving management.
c. Information about related party transactions.
d. Violations of state labor regulations.
92. If justifiable, terms of the new engagement must be agreed with the client, and the
auditor will issue a report based on the new engagement. T
93. If an auditor establishes a relatively low level for materiality, then the auditor will B
a. Accumulate an undetermined amount of evidence.
b. Accumulate more evidence than if a higher level had been set.
c. Accumulate less evidence than if a higher level had been set.
d. Accumulate approximately the same evidence as would be the case were a
higher level set.
94. Which of the following will not necessarily lead the client to request for the auditor to
change the engagement to one which provides a lower level assurance? C
a. Misunderstanding as to the nature of an audit or related service originally
requested.
b. Restrictions on the scope of the engagement, whether imposed by management
or caused by circumstances.
c. Recent changes in senior management, board of directors or ownership.
d. Change in circumstances affecting the need for the service.
95. Regarding communications between auditors, the predecessor auditor has the duty to
initiate communications with the successor auditor. F
96. The objective of performing analytical procedures in planning an audit engagement is
to identify the existence of A
a. Unusual transactions and events.
b. Recorded transactions that were not properly authorized.
c. Related party transactions.
d. Illegal acts that went undetected because of internal control weaknesses.
97. As part on obtaining an understanding of internal controls, an auditor is not required to
a. Obtain knowledge about the operating effectiveness of internal control.
b. Consider factors that affect the risk of material misstatement.
c. Identify the types of potential misstatements that may occur.
d. Ascertain whether internal control policies and procedures have been placed in
operation.
98. If the engagement is revised from an audit to a review, the review report should not
mention the original engagement. T
99. An auditor should design the written audit program so that all material transactions will
be selected for substantive testing. F

100. The auditor program usually cannot be finalized until the consideration of the entity’s
internal controls has been completed. T