Chapter 1:

1. Which of the following is an incorrect phrase regarding auditing? B. Auditing subjectively

obtains and evaluates evidence.
2. Set the following phases in proper order:
I. Pre-Engagement
II. Internal Controls
III. Evidence-Gathering
IV. Completing the Audit
V. Planning
VI. Post-Audit Responsibilities
VII. Reporting

Ans: C. I, V, II, III, IV, VII, VI

3. Which of the following procedures is not required to be performed by the auditor? Tests of
control
4. Which of the following procedures should be performed by the auditor prior to starting an
initial audit?
I. Perform procedures regarding the acceptance of the client relationship and the
specific audit engagement.
II. Communicate with the previous auditor, where there has been a change of auditors,
in compliance with relevant requirements.

Ans: C. Both I and II

5. Confirmation of receivable or bank balance is performed during what phase? B. Substantive

testing phase
6. Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client? D. The client’s probability of achieving an unqualified opinion.
7. Management’s integrity affects all of the following risks except: D. All of these risks are
affected
8. Prior to the acceptance of an audit engagement with a client who has terminated the
services of the predecessor auditor, the CPA should D. Advise the client of the intention to
contact the predecessor auditor and request a permission for the contract
9. When an independent auditor is approached to perform an audit for the first time, he or she
should make inquiries of the predecessor auditor. Inquiries are necessary because the
predecessor may be able to provide the successor with information that will assist the
successor in determining whether B. The engagement should be accepted.
10. Before accepting an audit engagement, a successor auditor should make specific inquiries of
the predecessor auditor regarding: B. Disagreement which the predecessor had with the
client concerning auditing procedures and accounting principles.
11. If the prospective client refuses to permit the predecessor to respond or limits the
predecessor’s response, the successor should: C. Inquire as to the reasons and consider the
implications in deciding whether to accept the engagement.
12. If permission from the client to discuss its affairs with the proposed auditor is denied by the
client, the predecessor auditor should: B. Disclose the fact that the permission to disclosure
is denied by the client.
13. Which of the following factors would most likely cause a CPA to decide not to accept a new
audit engagement? B. Management’s disregard of its responsibility to maintain an adequate
internal control environment.
14. In deciding whether to accept a new audit client, an auditor considers:
I. Part 1 of the Code of Ethics
II. Part 2 of the Code of Ethics
III. Part 3 of the Code of Ethics
IV. Part 4 of the Code of Ethics

Ans: D. I, III, IV

15. Ultimately, the decision about whether or not an auditor is independent must be made by A.
Auditor
16. With regard to independence, which of the following statements is correct? A. Audit
engagements provide assurance to a wide range of potential users; consequently, both
independence in mind and independence in appearance are of particular importance.
17. Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements? D. The adequacy of the accounting records
18. A firm has obtained information that would have caused it to decline an engagement had
the information been available earlier. Actions available to the auditor would include the
following, except: D. Issue a disclaimer of opinion
19. According to PSA 210, the auditor and the client should agree on the terms of agreement.
The agreed terms would need to be recorded in a(n) C. Engagement letter.
20. Which of the following statements is/are correct?
Statement 1: The auditor and the client should agree on the terms of the engagement. Such
an agreement may be in the form of audit engagement letter or other suitable form of
contract.
Statement 2: Even in those countries where the scope of the audit is established by law, an
engagement letter may be informative for the client.
Ans: C. Both statements are correct
21. Engagement letter that documents and confirms the auditor’s acceptance of the
engagement would normally be sent to the client. A. Before the commencement of the
engagement
22. An engagement letter is best described as 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.
23. An engagement letter is prepared with the interest(S) of D. Both the client and the auditor
24. Engagement letters are widely used in practiced for: A. Professional engagements of all
types
25. Which of the following matters is generally included in an auditor’s engagement letter? C.
Management’s responsibility for the entity’s compliance with laws and regulations.
26. Arrangements concerning with which of the following are least likely to be included in the
engagement letter? C. CPA investment in client securities
27. AN audit engagement letter least likely include: C. Identification of specific audit procedures
that the auditor needs to undertake
28. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or
division (component), which of the following factors need not be considered in deciding
whether to send a separate engagement letter to the component? C. Number of reports to
be prepared during the peak audit season
29. Which of the following statements is/are correct?
Statement 1: On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there is a need to remind
the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established
client.
Ans: A. Only statement 1 is correct
30. On recurring audit engagements, the auditor may decide not to send a new engagement
letter each period. In which of the following situations will there be no need to send a new
letter? D. Recent change of middle management and rank and file organizational structure
31. If the auditor concludes that there is reasonable justification for the change in engagement,
the report to be issued would B. Be appropriate for the revised terms of the engagement
32. Which of the following statements is/are correct?
Statement 1: Where the terms of the engagement are changed, the auditor and the client
should agree on the new terms.
Statement 2: The auditor should not agree to a change of engagement when there is no
reasonable justification for doing so.
Statement 3: If the auditor is unable to agree to a change of the engagement and is not
permitted to continue the original engagement, the auditor should withdraw and consider
whether there is an obligation, either contractual or otherwise, to report to other parties,
such as the board of directors or shareholders, the circumstances necessitating the
withdrawal.
Ans: C. All statements are correct
33. IF a change in the type of engagement from higher to lower of assurance is not justified, the
auditor should: D. Refuse to agree to management’s request on the change of the
engagement and continue with the original engagement
34. One of the first things that the auditor will do after accepting a new client is: D. Tour the
client’s facilities
35. IF a company’s external auditor expresses an unqualified opinion as a result of the audit of
the company’s financial statements, readers of the audit report can assume that D. All
material disagreements between the company and the auditor about the application of
accounting principles were resolved in the satisfaction of the external auditor.
Chapter 2:

1. Which of the following statements is incorrect? D. Planning is not a discrete phase of an

audit, but rather a continual and iterative process that often begins shortly after (or in
connection with) the completion of the previous audit and continues until the finalization of
the audit program
2. Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed in an
effective manner
Statement 2: The auditor should develop and document an overall audit plan describing the
scope and conduct of the audit
Ans: C. Only statement 2 is correct
3. Adequate planning of the audit work helps the auditor of accomplishing the following
objectives, except: C. Gathering of all corroborating audit evidence
4. The auditor should plan the audit work so that the audit will be performed in an effective
manner. The extent of planning will vary according to any of the following, except: C. The
assessed level of control risk
5. The auditors plan should C. No, Yes, Yes
6. Which of the following statements is/are correct?
S1: Obtaining knowledge of the entity business is an important part of the planning the audit
work.
S2: The auditor’s knowledge of the entity’s business assists in the identification of events,
transactions and practices which may have a material effect on the FS.
Ans: Both statements are correct
7. Which of the following statements is/are correct?
S1: According to PSA 300, the auditor may discuss elements of planning with those charged
with governance and the entity’s management
S2: The audit plan sets the scope, timing and direction of the audit guides the development
of the more detailed overall audit strategy
S3: The overall audit strategy is more detailed than the audit plan and includes the nature,
timing and extent of audit procedures to be performed engagement team members to
obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level
Ans: Only 1 statement is correct
8. Which of the following helps prevent misunderstandings during audit planning? C. A
preliminary meeting conference with the client to discuss fees, timing, client assistance and
related issues
9. Which of the following statements is/are correct?
S1: The overall audit plan and the audit program should not be revised during the course of
the audit.
S2: The auditor should develop and document an audit program setting out the nature,
timing and extent of planned audit procedures required to implement the overall audit plan.

Ans: Only statement 2 is correct

10. In planning the audit engagement, the auditor should consider each of the following except
A. The kind of opinion (unqualified, qualified or adverse) that is likely to be expressed
11. Which of the following matters should be considered by the auditor in developing the
overall audit strategy? B. all of the choices
12. IN developing the overall audit strategy, the focus of the engagement team’s effort is
considered. Which of the following is not appropriately classified as a factor affecting the
focus of the team’s effort? A. The financial reporting framework on which the financial
information to be audited has been prepared, including any need for reconciliation to
another reporting framework
13. Which of the following is least likely considered by the CPA when he makes an overall audit
plan? D. The content of the representation letters
14. With respect to planning an audit, which of the following statements is always true? D. It is
acceptable to perform a portion of the audit of a continuing client at interim dates
15. Which of the following procedures would an auditor most likely perform in planning an audit
of FS? B. Comparing the FS to anticipated results
16. This serves as the set of instructions to assistants involved in the audit and as a means to
control and record the proper execution of the work of the personnel involved in the
service. B. Audit program
17. The auditor should design the written audit program, so that: C. The audit procedures
selected will achieve specific audit objectives
18. In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the B. FS assertions
19. The auditor should document the overall strategy and the audit plan, including significant
changes made during the audit engagement. Which of the following statements on
documentation is incorrect? C. The auditor’s documentation of any significant changes to
the originally planned overall audit strategy and to the detailed audit plan need not include
the reasons for the significant changes
20. Audit procedures may be classified as risk assessment procedures and further audit
procedures. Which of the following best describes risk assessment procedures? D. These are
procedures for obtaining an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatements at the FS and assertion levels
21. The audit program should contain the following, except: D. The combined assessed level of
inherent and control risk
22. Which of the following procedures is not performed as a part of planning an audit
engagement? D. Test of controls
23. 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? B. Analytical procedures
24. Analytical procedures are required: D. Yes. No. Yes
25. Analytical procedures used in planning an audit should focus on C. Enhancing the auditor’s
understanding of the client’s business
26. Which of the following procedures would an auditor least likely perform in planning a FS
audit? C. Selecting a sample of vendor’s invoices for comparison to receiving reports
27. Audit risk has three components: inherent risk, control risk and detection risk. Which of the
following statements is correct? B. Cash is more susceptible to theft than an inventory of
coal because it has a greater inherent risk.
28. Some accounts balances, such as those for retirement benefits and finance lease, are the
results of complex calculations. The susceptibility to material misstatements in these types
of accounts is referred to as D. Inherent risk
29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk
are C. Functions of the client and its environment while detection risk is not.
30. Which of the following statements is not correct about materiality? B. An auditor considers
materiality for planning purposes in terms of the largest aggregate level of misstatements
that could be material to any one of the FS
31. There is an inverse relationship that exist between the acceptable level of detection risk and
the C. Assurance provided by substantive tests
32. In considering materiality for planning purposes, Ash, auditor believes that misstatements
aggregating 60,000 would have material effect on an entity’s income statement, but the
misstatements would have to aggregate 40,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to
detect misstatements that aggregate: 40,000
33. Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality? B. The entity’s annualized interim FS
34. Which of the following statements is/are correct?
S1: Planning involves developing an overall strategy for the expected conduct and scope of
the audit
S2: Supervision involves directing the efforts of assistants who are involved in accomplishing
the objectives of the audit and determining whether those objectives were accomplished.
Ans: B. Both statements are correct
35. In performing an audit of FS, the auditor should obtain a sufficient knowledge of a client’s
business and industry to D. Understand the events and transactions that may have an effect
on the client’s FS
Chapter 3:

1. It is the process designed and effected by those charged with governance, management and
other personnel to provide reasonable assurance about the achievement of the entity’s
objectives. C. Internal control
2. Internal controls are not designed to provide reasonable assurance that D. Irregularities will
be eliminated
3. This is a basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived from it: D. Reasonable assurance
4. An internal control system that is working effectively C. Reduces the need for management
the review exception reports on a day-to-day basis
5. Which of the following is an example of an inherent limitation in a client’s internal control
system? C. In the performance of most control procedures, there are possibilities of errors
arising from mistakes on judgment
6. Which of the following statements best describes ‘control environment’? D. This includes
the governance and management functions and the attitudes, awareness, and actions of
those charged with governance and management concerning the entity’s internal control
and its importance to the entity
7. Which of the following considered control environment elements? A. Yes. No. Yes
8. An entity’s risk assessment process includes how management: A. Yes, Yes, Yes
9. Risks can arise or change due to circumstances such as the following, except: D. The
accounting and financial reporting framework has remained stable for the past five years,
and no new pronouncements have been made
10. As part of a periodic planning exercise, Cedric Naranjo Company discovers that a political
dispute may interfere with the company’s supply sources. This is an example of: B. Risk
assessment
11. Control activities constitute one of the five components of internal control. Which of the
following is not included in this internal control component? C. An internal audit function
12. Control activities are the policies and procedures that help ensure that management
directives are carried out. These include activities relating authorization, performance
reviews, information processing, physical controls and segregation of duties. There is proper
segregation of duties when an individual who D. records a transaction do not compare the
accounting record of the asset with the asset itself
13. Under PSA 315, monitoring of controls is an internal control component that involves a
process of assessing the quality of internal control performance over time. It involves
assessing the design and operation of controls on a timely basis and taking necessary
corrective actions. Monitoring of controls is accomplished through ongoing monitoring of
activities, separate evaluations, or a combination of the two. An entity’s ongoing monitoring
activities often include D. Reviewing the purchasing account
14. The primary purpose of the auditor’s consideration of internal control is to provide a basis
for C. Determining the nature, timing and extent of audit tests to be applied
15. Which of the following statements concerning the relevance of various types of controls to a
FS audit is correct? C. Controls over the reliability of financial reporting are ordinarily most
directly relevant to a FS audit, but other controls may also be relevant
16. PSA 315 redrafted requires the auditor to obtain an understanding of the client’s internal
controls A. For every audit
17. When obtaining knowledge about an entity’s internal control, it is important for the auditor
to consider the competence of its employees, because their competence bears directly and
importantly upon the C. Achievement of the objectives of internal control
18. Obtaining an understanding of internal control involves: B. Yes, yes, no
19. The primary objective of procedures performed to obtain an understanding of internal
control is to provide an auditor with C. Knowledge necessary to plan the audit
20. To obtain an understanding of the relevant policies and procedures of internal control, the
auditor performs all of the following except: C. Design substantive tests
21. After obtaining an understanding of an entity’s internal control, an auditor may assess
control risk at the maximum level for some assertions because the auditor A. Believe the
internal control policies and procedures are unlikely to be effective
22. After obtaining an understanding of internal control and assessing control risk, an auditor
decided to perform tests of controls. The auditor most likely decided that B. It would be
efficient to perform tests of controls that would result in a reduction in planned substantive
tests
23. Information about segregation of duties ordinarily is best obtained by C. observing
employees as they apply specific controls
24. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess
the risks of material misstatement at the FS level, and at the assertion level for classes of
transactions, account balances and disclosures. Some of these risks, in the auditor’s
judgment, require special audit consideration, such as those that involve fraud or complex
transactions. Such risks are called B. Significant risks
25. The auditor’s primary objective in obtaining an understanding of the client’s control over the
purchasing function is to B. Determine the reliability of financial reporting by the purchasing
function
26. When obtaining an understanding of an entity’s internal control, an auditor should
concentrate on the substance of controls rather than their form because: B. Management
may establish appropriate controls but not act on them
27. When obtaining an understanding of the accounting and internal control system the auditor
may trace a few transactions through the accounting system. This technique is: C. Walk-
through
28. Control risk assessment procedures include all of the following, except: B. Confirmation of
bank balances
29. Evidence of the performance of control risk assessment procedures includes all of the
following, except C. Lead schedule
30. Which of the following statements regarding auditor documentation of the client’s internal
control structure is correct? D. No particular form of documentation is necessary, and the
extent of documentation may vary
31. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of
the risk that: C. Material misstatement may exist in the FS
32. An auditor may decide to assess control risk at the maximum level for certain assertions
because the auditor believes A. Evaluating the effectiveness of policies and procedures is
inefficient
33. An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that
depicts the auditor’s C. Understanding of the system
34. Which of the following statements is true? C. The auditor can simultaneously obtain an
understanding of internal control and perform tests of controls
35. After documenting internal control in an audit engagement. The auditor may perform tests
on: A. Those controls that the auditor plans to rely on
36. In a FS audit, the auditor is required to perform test of controls when
I. The auditor’s risk assessment includes expectation of the operating effectiveness of
controls
II. When substantive procedures alone do not provide sufficient appropriate audit
evidence at the assertion level

Ans: B. Either I or II

37. Tests of controls are used to test whether controls are: D. operating effectively
38. Tests of controls may include the following, except: D. Analytical procedures involving
comparison of operating expenses with budget amount
39. An auditor intends to perform test of controls on a client’s control procedures that leaves no
audit trail to documentary evidence. The auditor most likely will test the procedure by B.
Inquiry and observation
40. Which of the following is the auditor’s purpose of further testing internal control
procedures? A. Provide a basis for reducing the assessed level of control risk below that
which resulted from the auditor’s initial understanding of internal control
41. Which of the following is not a characteristic of the lower control risk approach? C. Control
risk is usually assessed at maximum level
42. A control that reduces the risk that an existing or potential control weakness will result in a
failure to meet a control objective is referred to as: A. Compensating control
43. When a compensating control exists, a weakness in the system: A. Is no longer a concern
because the potential for misstatement has been sufficiently reduced
44. If no changes have occurred since the controls were last tested, a CPA should D. Test the
operating effectiveness of such controls at least once in every third audit
45. Regardless of the assessed level of control risk, the auditor would perform some C.
Substantive test to restrict detection risk for significant classes of transactions