ASUPRIN

ACTIVITY WORKSHEET
Compiled by: A. S. MALQUISTO No. 002

Name: RAYNERA, HEINZ DEAN E. Time & Schedule: 9:00 – 11:00 am MW

I. SHORT ANSWER QUESTIONS: Answer each question in a clear and organized paragraph. One or two
sentences that directly answer the short-answer question. Each question is worth 2 points.

1. Explain why an audit is a systematic process?

Auditors provide reasonable assurance that the financial statements are free from material
misstatements and in accordance with the standards. Many stakeholders rely on the result of the audit that is
why careful examination of accounts is needed. The audit follows a systematic process of planning, execution
and the final review before an audit opinion is released. This has to be systematic since each step of the audit is
critical in coming up with an audit opinion on the client.

2. Who is responsible for initiating the communication between the predecessor and successor auditors?

The successor auditor should be the one to reach out to the predecessor auditor. However, there must
be an approval from the potential client prior to contacting the predecessor auditor.

3. Describe the purpose of an engagement letter and list at least four (4) items that are normally included
in an engagement letter.

The audit engagement letter set out the objective, scope and extent of the audit and confirms the
acceptance of the appointment of the auditor. The engagement letter includes the objective of the audit of the
financial statements, the management's responsibility on the financial statements, the scope and extent of the
audit and any risks involved in the performance of the audit.

4. What is the general objective of audit planning?

The audit planning sets out the direction of the audit. This includes the allocation of resources, the
assessment of the risks identified initially, and the setup of materiality levels of the audit.

5. Explain why auditors gather evidences?

The auditors gather corroborative evidence in order to verify the management's representation on the
financial statements. The auditors cannot rely fully on what the management is telling them since this could
possibly be false. The auditors provide an independent check on the financial statements.

II. TRUE OR FALSE: Write the word TRUE for each correct statement; otherwise, write FALSE.

1. FALSE Preliminary arrangements with clients should be set forth in the management letter.
2. TRUE If the audit is not properly planned, the auditor may issue an incorrect audit report or conduct
an inefficient audit.
3. TRUE If the prospective client refuses to allow the predecessor auditor to communicate with the
successor auditor, the successor auditor should have reservations about accepting the client.
4. TRUE The auditor should not agree to a change of the engagement where there is no
reasonable justification for doing so.
5. TRUE Philippine Standards on Auditing require the auditor to obtain and document an understanding of the
entity’s internal control sufficient to plan the audit.
6. TRUE In the case of recurring audits, the auditor need not send a new engagement letter, except in certain
circumstances.
7. TRUE “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.
8. TRUE If an auditor is not independent of the client, it is unlikely that a user of financial statements will
place much reliance on the CPA's work.
9. FALSE Independence from the audit client is required only during the engagement period.
10. TRUE The final phase in the audit process is to evaluate results and choose the appropriate audit report
to issue.
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III. MULTIPLE CHOICE QUESTIONS: Read each item carefully. Select the correct/best answer for each of the
following questions and write the letter of your choice before the number.

_C_ _ 1. Which of the following factors most likely would cause an auditor to decline a new audit
engagement?
A. an inadequate understanding of the entity’s internal control
B. the close proximity to the end of the entity’s fiscal year
C. concluding that the entity’s management probably lacks integrity
D. an inability to perform preliminary analytical procedures before assessing control risk

_A 2. Before accepting an engagement to audit a new client, an auditor is required to

A. make inquiries of the predecessor auditor after obtaining the consent of the
prospective client
B. obtain the prospective client’s signature to the engagement letter
C. prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan
D. discuss the management representation letter with the prospective client’s audit
committee

_A 3. An auditor’s engagement letter most likely will include

A. management’s acknowledgement of the responsibility for maintaining effective internal
control
B. the auditor’s preliminary assessment of the risk factors relating to misstatement arising
from fraudulent financial reporting
C. a reminder that management is responsible for illegal acts committed by employees
D. a request for permission to contact the client’s lawyer for assistance in identifying
litigation, claims and assessments

_C_ _ 4. The auditor should have or obtain knowledge of the client’s business sufficient to
A. Evaluate whether the financial statements are materially misstated
B. Document material weaknesses in accounting and internal control systems
C. Identify and understand events, transactions and practices that may have effect
on financial statements
D. Have an overall evaluation of whether financial assertions are fairly presented in
the financial statements

____D_____ 5. While performing services for their clients, professional accountants have a duty to provide a
level of care which is
A. Free from judgment errors C. Superior
B. Greater than average D. Reasonable

____D_____ 6. Consideration of risk factors and materiality factors is most associated with which stage in the
auditing process?
A. Evaluation of audit evidence C. Collection of audit evidence
B. Communication of audit results D. Audit planning

____A_____ 7. Ultimately, the decision about whether or not the auditor is independent must be made by the
A. Auditor C. Audit committee
B. Client D. Public

____A_____ 8. Which of the following matters is generally included in an auditor's engagement letter?
A. Limitations of the engagement.
B. Factors to be considered in establishing preliminary judgments about materiality.
C. Management's liability for illegal acts committed by its employees.
D. The auditor's responsibility to obtain negative assurance relating to the occurrence
of illegal acts.

_C_ _ 9. The term "except for" in an audit report is:

A. Used in an adverse opinion.
B. No longer considered appropriate.
C. Used in a qualified opinion
D. Used for an unqualified opinion when an explanatory paragraph is added.

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_B
10. The auditor the basis upon which it is to be performed has been agreed, through
may accept I. Establishing whether the preconditions for an audit are present.
or continue II. Confirming that there is a common understanding between the auditor and
an audit management and, where appropriate, those charged with governance of the terms of
engagemen the audit engagement.
t only when A. I only C. II only
B. Both I and II D. Neither I nor II

IV. SITUATIONAL PROBLEM:

Jacky, CPA, audited Viceral Company's financial statements for the year ended December 31, 2019. On
November 1, 2020, Viceral notified Jacky that it was changing auditors and that Jacky's services were being
terminated. On November 5, 2020, Viceral invited Perez, CPA, to make a proposal for an engagement to audit its
financial statements for the year ended December 31, 2020.

What procedures concerning Jacky should Perez, CPA perform before accepting the engagement?

Perez should ask permission from Viceral Company to contact Jacky, the predecessor auditor prior to the
acceptance of the audit. It is important for Perez to understand the reason why Jacky's services were terminated
and if there are any concerns that Perez should know prior to accepting Viceral as an audit client.
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