Au - 6 - Psa 200 To 265

UL INTEGRATED CPA REVIEW AU-6
2ND SEM SY 2021-2022
PSA 200
Overall Objectives of the Independent Auditor
and the Conduct of an Audit in Accordance with
Philippine Standards on Auditing
FOCUS NOTES:
 Overall objectives of the auditor in conducting an audit of financial statements:

a. To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and
b. To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.
 Requirements
 Ethical Requirements Relating to an Audit of Financial Statements
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality;
e. Professional behavior;
f. Independence.
 Professional Skepticism
 The auditor shall plan and perform an audit with professional skepticism recognizing
that circumstances may exist that cause the financial statements to be materially
misstated.
 Professional Judgment – “HALLMARK OF AUDITING”
 The auditor shall exercise professional judgment in planning and performing an audit
of financial statements.
 Sufficient Appropriate Audit Evidence and Audit Risk
 To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level and thereby enable the
auditor to draw reasonable conclusions on which to base the auditor’s opinion.
 Conduct of an Audit in Accordance with PSAs
 Complying with PSAs Relevant to the Audit
- The auditor shall comply with all PSAs relevant to the audit. A PSA is relevant to
the audit when the PSA is in effect and the circumstances addressed by the PSA
exist.
- The auditor shall not represent compliance with PSAs in the auditor’s report
unless the auditor has complied with the requirements of this PSA and all other
PSAs relevant to the audit.
 Objectives Stated in Individual PSAs
- To achieve the overall objectives of the auditor, the auditor shall use the
objectives stated in relevant PSAs in planning and performing the audit, having
regard to the interrelationships among the PSAs, to:
a. Determine whether any audit procedures in addition to those required by the
PSAs are necessary in pursuance of the objectives stated in the PSAs; and
b. Evaluate whether sufficient appropriate audit evidence has been obtained.
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2ND SEM SY 2021-2022
 Complying with Relevant Requirements

- The auditor shall comply with each requirement of a PSA unless, in the
circumstances of the audit:
a. The entire PSA is not relevant; or
b. The requirement is not relevant because it is conditional and the condition does
not exist.
- In exceptional circumstances, the auditor may judge it necessary to depart from a
relevant requirement in a PSA. In such circumstances, the auditor shall perform
alternative audit procedures to achieve the aim of that requirement.
- The need for the auditor to depart from a relevant requirement is expected to
arise only where the requirement is for a specific procedure to be performed and,
in the specific circumstances of the audit, that procedure would be ineffective in
achieving the aim of the requirement.
 Failure to Achieve an Objective
- If an objective in a relevant PSA cannot be achieved, the auditor shall evaluate
whether this prevents the auditor from achieving the overall objectives of the
auditor and thereby requires the auditor, in accordance with the PSAs, to modify
the auditor’s opinion or withdraw from the engagement (where withdrawal is
possible under applicable law or regulation).
- Failure to achieve an objective represents a significant matter requiring
documentation in accordance with PSA 230.
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2ND SEM SY 2021-2022
MULTIPLE CHOICE
1. Which of the following best describes the objective of an audit of financial statements?
a. To make recommendations for improving performance.

b. To express an opinion whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework.
c. To give assurance as to the future viability of the firm.
d. To measure the efficiency and effectiveness with which the management has conducted
the affairs of the entity.
2. The auditor’s opinion does not assure the future viability of the entity nor the efficiency or
effectiveness with which management has conducted the affairs of the entity.
a. True
b. False
3. Which of the following is not a responsibility of the management?
a. Preparation of financial statements in accordance with applicable financial reporting

framework.
b. Design and implementation of internal control
c. Providing the auditor access to all information, records and documents relevant to the audit.
d. Providing the auditor unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.
e. Expression of opinion on the financial statements.
4. The two classifications of applicable financial reporting framework are
a. Fair presentation framework and compliance framework.

b. Conceptual framework and fair presentation framework
c. Compliance framework and conceptual framework
d. Conceptual framework and regulatory framework
5. Which of the following pertains to fair presentation framework?
a. Requires compliance with the requirements of the framework.

b. Allows management to provide disclosures beyond those specifically required by the
framework in order to achieve fair presentation.
c. In extremely rare circumstances, allows management to depart from a requirement of the
framework in order to achieve fair presentation.
d. All of the above.
e. None of the above.
6. The auditor should make a critical assessment, with a questioning mind, of the validity of the
audit evidence obtained. This attitude is:
a. Professional competence
b. Professional behavior
c. Professional skepticism
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2ND SEM SY 2021-2022
d. Professional ethics
7. It refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of an audit.
a. reasonable assurance
b. audit risk
c. scope of an audit
d. audit procedures.
8. Absolute assurance in auditing is not attainable as a result of such factors as:
a. The need for judgment

b. The use of testing
c. The inherent limitations of any accounting and internal control system
d. The fact that most of the audit evidence available to the auditor is persuasive, rather than
conclusive, in nature
e. All of the above
9. The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated.
a. audit risk
b. control risk
c. detection risk
d. inherent risk
10. The auditor considers the risk of material misstatement at two levels: at the overall financial
statement level and at the assertion level. Which of these risks often relate to the entity’s
control environment and are more pervasive?
a. risks of material misstatement at the overall financial statement level

b. risks of material misstatement at the assertion level.
11. The risks of material misstatement at the assertion level consist of two components. These
are:
a. inherent risk and control risk

b. inherent risk and detection risk
c. control risk and detection risk
12. They exist independently of the audit of financial statements:
a. inherent risk and control risk

b. inherent risk and detection risk
c. control risk and detection risk
13. The susceptibility of an assertion to a misstatement that could be material, either individually
or when aggregated with other misstatements, assuming that there are no related controls.
a. audit risk
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2ND SEM SY 2021-2022
b. inherent risk
c. control risk
d. detection risk
14. The risk that a misstatement that could occur in an assertion and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, or detected
and corrected, on a timely basis by the entity’s internal control.
a. audit risk
b. inherent risk
c. control risk
d. detection risk
15. The risk that the auditor will not detect a misstatement that exists in an assertion that could
be material, either individually or when aggregated with other misstatements.
a. audit risk
b. inherent risk
c. control risk
d. detection risk
16. This component of audit risk is a function of the effectiveness of the design and operation of
the internal control.
a. audit risk
b. inherent risk
c. control risk
d. detection risk
17. This component of audit risk is a function of the effectiveness of an audit procedure and of its
application by the auditor.
a. audit risk
b. inherent risk
c. control risk
d. detection risk
18. It is a concept relating to the accumulation of the audit evidence necessary for the auditor to
conclude that there are no material misstatements in the financial statements taken as a
whole.
a. reasonable assurance
b. absolute assurance
c. persuasive evidence
d. sufficiency of evidence
19. Reasonable assurance is obtained:
a. when the auditor has reduced audit risk to an acceptably low level.
b. when the auditor expresses an unqualified opinion.
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PSA Study Guide and Quizzer
Study Unit 1 PSA 200 – 265 General Principles and Responsibilities
c. when the auditor and the client have no material disagreement regarding application of
accounting principles.
20. The existence of audit risk is recognized by the statement in the auditor’s standard report that
the
a. auditor is responsible for expressing an opinion of the financial statements, which are the
responsibility of management
b. financial statements are presented fairly, in all materials respects, in conformity with
GAAP
c. audit includes examining on a test basis, evidence supporting the amounts and disclosure
in the financial statements
d. auditor obtains reasonable assurance about whether the financial statement are
free of material misstatements.
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PSA 210
AGREEING THE TERMS OF ENGAGEMENTS
FOCUS NOTES:
Objective
 The objective of the auditor is to accept or continue an audit engagement only when the
basis upon which it is to be performed has been agreed, through:
(a) Establishing whether the preconditions for an audit are present; and
(b) Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the audit engagement.
Requirements
 Preconditions for an Audit
 In order to establish whether the preconditions for an audit are present, the auditor
shall:
a. Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its
responsibility:
(i) For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation;
(ii) For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and
(iii) To provide the auditor with:
(a) Access to all information of which management is aware that is relevant to
the preparation of the financial statements such as records, documentation
and other matters;
(b) Additional information that the auditor may request from management for the
purpose of the audit; and
(c) Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
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 AGREEMENT ON AUDIT ENGAGEMENT TERMS

 The auditor and the client should agree on the terms of the engagement.
 The agreed terms would need to be recorded in:
a. audit engagement letter or
b. other suitable form of contract.
 Audit Engagement Letter
 It documents and confirms the auditor’s acceptance of the appointment, the
objective and scope of the audit, the extent of the auditor’s responsibilities to the
client and the form of any reports.
 Should be sent before the commencement of the engagement to help in avoiding
misunderstandings.
 Principal Contents
 The objective and scope of the audit of the financial statements;
 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the applicable financial reporting framework for the preparation of
the financial statements; and
 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.
 Others that may be included:
 Arrangements regarding the planning and performance of the audit.
 Expectation of receiving from management written confirmation concerning
representations made in connection with the audit.
 Request for the client to confirm the terms of the engagement by acknowledging
receipt of the engagement letter.
 Description of any other letters or reports the auditor expects to issue to the client.
 Basis on which fees are computed and any billing arrangements.
 Arrangements concerning the involvement of other auditors and experts in some
aspects of the audit.
 Arrangements concerning the involvement of internal auditors and other client staff.
 Arrangements to be made with the predecessor auditor, if any, in the case of an
initial audit.
 Any restriction of the auditor's liability when such possibility exists.
 A reference to any further agreements between the auditor and the client.
 Audits of components
Factors that influence the decision whether to send a separate engagement letter to
the component include the following:
 Who appoints the auditor of the component.
 Whether a separate auditor’s report is to be issued on the component.
 Legal requirements.
 The extent of any work performed by other auditors.
 Degree of ownership by parent.
 Degree of independence of the component’s management.
 Recurring Audits
 The auditor may decide not to send a new engagement letter each period.
 The following factors may make it appropriate to send a new letter:
1. Any indication that the client misunderstands the objective and scope of the
audit.
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2. Any revised or special terms of the engagement.

3. A recent change of senior management or those charged with governance.
4. A significant change in ownership.
5. A significant change in nature or size of the client’s business.
6. Legal or regulatory requirements.
7. A change in the financial reporting framework adopted by management in
preparing the financial statements.
 Acceptance of a Change in Engagement
 consider the appropriateness.
 where the terms of the engagement are changed, the auditor and the client should
agree on the new terms.
 the auditor should not agree to a change of engagement where there is no
reasonable justification.
 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.
 Example of an Engagement Letter
To the appropriate representative of management or those charged with governance of

ABC Company:
[The objective and scope of the audit]
You have requested that we audit the financial statements of ABC Company, which
comprise the statement of financial position as at December 31, 2019, and the statement
of comprehensive income, statement of changes in equity and statement cash of flows
for the year then ended, and a summary of significant accounting policies and other
explanatory information. We are pleased to confirm our acceptance and our
understanding of this audit engagement by means of this letter. Our audit will be
conducted with the objective of our expressing an opinion on the financial statements.
[The responsibilities of the auditor]
We will conduct our audit in accordance with Philippine Standards on Auditing (PSAs).
Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements.
Because of the inherent limitations of an audit, together with the inherent limitations of
internal control, there is an unavoidable risk that some material misstatements may not
be detected, even though the audit is properly planned and performed in accordance
with PSAs.
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In making our risk assessments, we consider internal control relevant to the entity’s
preparation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. However, we will communicate to you in
writing concerning any significant deficiencies in internal control relevant to the audit of
the financial statements that we have identified during the audit.
[The responsibilities of management and identification of the applicable financial

reporting framework (for purposes of this example it is assumed that the auditor has not
determined that the law or regulation prescribes those responsibilities in appropriate
terms).]
Our audit will be conducted on the basis that [management and, where appropriate,
those charged with governance] acknowledge and understand that they have
responsibility:
a) For the preparation and fair presentation of the financial statements in accordance
with Philippine Financial Reporting Standards;
b) For such internal control as [management] determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error; and
c) To provide us with:
i. Access to all information of which [management] is aware that is relevant to
the preparation of the financial statements such as records, documentation
and other matters;
ii. Additional information that we may request from [management] for the
purpose of the audit; and
iii. Unrestricted access to persons within the entity from whom we determine it
necessary to obtain audit evidence.
As part of our audit process, we will request from [management and, where appropriate,
those charged with governance], written confirmation concerning representations made
to us in connection with the audit.
We look forward to full cooperation from your staff during our audit.
[Other relevant information]
[Insert other information, such as fee arrangements, billings and other specific terms, as
appropriate.]
[Reporting]
[Insert appropriate reference to the expected form and content of the auditor’s report.]
The form and content of our report may need to be amended in the light of our audit
findings.
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Please sign and return the attached copy of this letter to indicate your acknowledgement of,
and agreement with, the arrangements for our audit of the financial statements including our
respective responsibilities.
XYZ & Co.
Acknowledged on behalf of ABC Company by

(signed)
......................
Name and Title
Date
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MULTIPLE CHOICE
1. The use by management of an acceptable financial reporting framework in the preparation
of the financial statements and the agreement of management and, where appropriate,
those charged with governance to the premise on which audit is conducted.
a. Terms of audit engagement

b. Preconditions for an audit
c. Assurance engagement terms and conditions
d. Acceptability of engagement
2. It documents and confirms the auditor’s acceptance of the appointment, the objective and
scope of the audit, the extent of the auditor’s responsibilities to the client and the form of
any reports.
a. engagement letter
b. comfort letter
c. audit report
d. acceptance letter
3. The understanding between the client and the auditor as to the degree of responsibility to
be assumed by each is normally set forth in a(n)
a. Representation letter.
b. Management letter.
c. Engagement letter.
d. Comfort letter.
4. Which of the following would an auditor most likely consider to decide whether to accept an
engagement or not?
a. The acceptability of financial reporting framework adopted by the management.

b. The nature of the entity.
c. The objective of the financial statements.
5. Documentation of the terms of engagement is required for an audit in accordance with

Philippine Standards on Auditing.
a. True.
b. False.
6. The auditor may accept a change engagement when:
a. there is reasonable justification for doing it.

b. the client permits.
c. there is no change in the amount to be billed.
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7. Arrangement concerning which of the following are least likely to be included in engagement
letter.
a. A predecessor auditor
b. Fees and billing
c. CPA investment in client securities
d. Other services to be provided in addition to the audit
8. When an auditor believes that an understanding with the client has not been established, he
or she should ordinarily
a. Perform the audit with increase professional skepticism.

b. Decline to accept or perform the audit.
c. Asses control risk at the maximum level and perform a primarily substantive audit,
d. Modify the scope of the audit to reflect an increase risk of material misstatement due to
fraud,
9. The auditor should not accept an audit engagement in all of the following cases, EXCEPT:
a. The financial reporting framework to be applied in the preparation of the financial

statements is unacceptable.
b. Management does not acknowledge its responsibility for the preparation of financial
statements.
c. 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 opinion on the financial
statements.
d. If the auditor has determined that the financial reporting framework prescribed by
law or regulation would be unacceptable but for the fact that it is prescribed by
law or regulation.
10. Acceptable financial reporting framework that will result in information provided in financial
statements that is useful to the intended users have the following attributes, EXCEPT:
a. Relevance
b. Completeness
c. Reliability
d. Neutrality
e. Understandability
f. Independence
g. All of the above are attributes of acceptable financial reporting framework.
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PSA 220
QUALITY CONTROL FOR AUDITS OF
HISTORICAL FINANCIAL INFORMATION
FOCUS NOTES:
 Responsibility to establish quality control

a. A firm has an obligation to establish a system of quality control.
b. “Firm” refers to a sole practitioner, partnership, corporation or other entity of
professional accountants.
c. Under Philippine law, CPA Firms cannot be organized as a corporation.
 Objectives
a. Quality controls —The policies and procedures adopted by a firm designed to provide it
with reasonable assurance
1. that the firm and its personnel comply with professional standards and regulatory
and legal requirements, and
2. that reports issued by the firm or engagement partners are appropriate in the
circumstances.
 Requirements
 Leadership Responsibilities for Quality on Audits

 The engagement partner should take responsibility for the overall quality on each
audit engagement to which that partner is assigned.
 Relevant Ethical Requirements

 The engagement partner should consider whether members of the engagement
team have complied with ethical requirements.
1. Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and
5. Professional behavior.
 Independence. The engagement partner should form a conclusion on compliance
with independence requirements that apply to the audit engagement.
1. identify threats to independence.
2. eliminate threats or reduce to an acceptable level by applying safeguards.
3. document conclusions on independence.
 Acceptance and Continuance of Client Relationships and Specific Audit Engagements

 In deciding to accept or to continue the engagement, consider:
1. The integrity of the principal owners, key management and those charged with
governance of the entity;
2. Whether the engagement team is competent to perform the audit engagement
and has the necessary time and resources; and
3. Whether the firm and the engagement team can comply with ethical
requirements.
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 Assignment of Engagement Teams

 Engagement team collectively must have the appropriate capabilities and
competence to
1. Perform the audit engagement in accordance with professional standards and
applicable legal and regulatory requirements; and
2. Enable an auditor’s report that is appropriate in the circumstances to be issued.
 Engagement Performance
 Engagement partner shall take responsibility
1. For the direction, supervision and performance of the audit engagement in
compliance with professional standards and applicable legal and regulatory
requirements and for the auditor’s report.
2. For review of the audit documentation and discussion with the engagement
team, to determine whether sufficient appropriate audit evidence has been
obtained to support the conclusions reached and for the auditor’s report to be
issued.
3. For consultations that should be made on difficult or contentious matters, agree
on the nature and scope of consultations with the consulted party and
determine that resulting conclusions have been implemented. In case
differences of opinion arise, follow the firm’s policies and procedures for dealing
with and resolving differences of opinion.
4. Engagement Quality Control Review. For audits of financial statements of listed
entities, the engagement partner shall:
a. Determine that an engagement quality control reviewer has been
appointed;
b. Discuss significant matters arising during the audit engagement, including
those identified during the engagement quality control review, with the
engagement quality control reviewer; and
c. Not date the auditor’s report until the completion of the engagement quality
control review.
 An engagement quality control review should include an objective

evaluation of:
1. The significant judgments made by the engagement team; and
2. The conclusions reached in formulating the auditor’s report.
 Monitoring. Effective system of quality control provides for monitoring to determine

 relevance of quality controls
 adequacy of quality controls
 operating effectiveness of quality controls
 compliance with quality controls
 Documentation
 The auditor shall include in the audit documentation:
(a) Issues identified with respect to compliance with relevant ethical requirements
and how they were resolved.
(b) Conclusions on compliance with independence requirements that apply to the
audit engagement, and any relevant discussions with the firm that support
these conclusions.
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(c) Conclusions reached regarding the acceptance and continuance of client

relationships and audit engagements.
(d) The nature and scope of, and conclusions resulting from, consultations
undertaken during the course of the audit engagement.
 The engagement quality control reviewer shall document, for the audit engagement
reviewed, that:
(a) The procedures required by the firm’s policies on engagement quality control
review have been performed;
(b) The engagement quality control review has been completed on or before the
date of the auditor’s report; and
(c) The reviewer is not aware of any unresolved matters that would cause the
reviewer to believe that the significant judgments the engagement team made
and the conclusions it reached were not appropriate.
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MULTIPLE CHOICE:
1. Reasonable assurance that a firm and its personnel comply with professional standards and
regulatory and legal requirements in audit of historical financial information can be provided
by:
a. Maintaining independence in mind and appearance.

b. Internal control on billing of clients.
c. A system of quality control.
d. A system of peer review
2. In order for a firm to have reasonable assurance that reports it issued are appropriate in the
circumstances, it must:
a. Establish a system of quality control.

b. Accept only engagements before year end.
c. Subject itself for a cold review.
d. Coordinate with the stockholders before issuing the report.
3. Who is responsible for the overall quality on each audit engagement?
a. client’s management
b. engagement partner
c. staff
d. engagement quality control reviewer
4. Which one of the following is not a quality control policy and procedure in acceptance of
audit engagements?
a. Consider whether the firm and the engagement team can comply with the ethical
requirements.
b. Consider the integrity of the principal owners, management, and those charged with
governance.
c. Consider the competence of the clients’ management and staff.
d. Consider the competence of the engagement team.
5. Among the possible reasons why an auditor will discontinue servicing an audit client is:
a. Too many errors have to be adjusted to make the financial statements conform with
GAAP.
b. The auditor has to use a specialist in verifying inventory valuation.
c. The auditor is also rendering at the same time, a management advisory engagement for
the same client.
d. A change in the client management and the auditor is worried about the integrity
of the new management.
6. A CPA firm establishes quality control policies and procedures for deciding whether to
accept a new client or continue to perform services for a current client. The primary
purpose of establishing such policies and procedures is
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a. To enable the auditor to attest to the integrity or reliability of a client

b. The comply with the quality control standards established by regulatory bodies.
c. To minimize the likelihood of association with clients whose managements lack
integrity.
d. To lessen the exposure to litigation from failure to detect irregularities in client financial
statement
7. In pursuing a CPA firm’s quality control objectives, a CPA may maintain records indicating
which partners or employees of the CPA firm were previously employed by the CPA firm’s
clients. Which quality control objective would this be most likely to satisfy?
a. Professional relationships
b. Supervision
c. Independence
d. Advancement
8. In pursuing its quality control objectives with respect to independence, a CPA firm may use
policies and procedures
a. emphasizing independence in mental attitude in firm training programs and in

supervision of review of work.
b. prohibiting employees from owning shares of the stock of publicity-traded companies
c. suggesting that employees conduct their banking transaction with banks that do not
maintain accounts with client firms.
d. assigning employees, who may lack independence, research position that do not require
participation in field audit work.
9. In pursuing its quality control objectives with respect to assigning personnel to

engagements, a public accounting firm may use policies and procedures such as
a. Rotating employees from assignment to assignment on a random basis to aid in the

staff training effort.
b. Requiring timely identification of the staffing requirements of specific
engagements so that enough qualified personnel can be made available.
c. Allowing staff to select the assignments of their choice to promote better client
relationships.
d. Assigning a number of employees to each engagement in excess of the number
required so as not to overburden the staff and interfere with the quality of the audit work
performed.
10. A process comprising an ongoing consideration and evaluation of the firm’s system of quality
control, including a periodic inspection of a selection of completed engagements, designed to
enable the firm to obtain reasonable assurance that its system of quality control is operating
effectively.
a. monitoring
b. direction
c. supervision
d. review
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PSA 230
AUDIT DOCUMENTATION
FOCUS NOTES:
 Audit Documentation
- means the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached..
- also known as working papers or workpapers.
 Objectives of Audit Documentation

a. provides a sufficient and appropriate record of the basis for the auditor’s report; and
b. provides evidence that the audit was performed in accordance with PSAs and
applicable legal and regulatory requirements.
 Purposes
a. Assisting the audit team to plan and perform the audit;
b. Assisting members of the audit team responsible for supervision to direct and supervise
the audit work, and to discharge their review responsibilities in accordance with PSA
220, “Quality Control for Audits of Historical Financial Information;”
c. Enabling the audit team to be accountable for its work;
d. Retaining a record of matters of continuing significance to future audits;
e. Enabling an experienced auditor to conduct quality control reviews and inspections;
f. Enabling an experienced auditor to conduct external inspections in accordance with
applicable legal, regulatory or other requirements.
 Nature of Audit Documentation

a. may be recorded on paper or on electronic or other media.
b. Examples:
1. audit programs
2. analyses sheet
3. issues memoranda
4. summaries of significant matters
5. letters of confirmation and representation
6. checklists
7. correspondence (including e-mail) concerning significant matters
8. abstracts or copies of the entity’s records, for example, significant and specific
contracts and agreements.
c. Audit documentation is not a substitute for the entity’s accounting records.
d. The audit documentation for a specific audit engagement is assembled in an audit file.
 Form, Content and Extent of Audit Documentation

Factors affecting form, content, and extent:
a. The nature of the audit procedures to be performed;
b. The identified risks of material misstatement;
c. The extent of judgment required in performing the work and evaluating the results;
d. The significance of the audit evidence obtained;
e. The nature and extent of exceptions identified;
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f. The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence obtained;
and
g. The audit methodology and tools used.
 Requirements
 The auditor shall prepare the Audit Documentation on a timely basis.
 The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand:
 The nature, timing and extent of the audit procedures performed to comply with the
PSAs and applicable legal and regulatory requirements;
 The results of the audit procedures performed, and the audit evidence obtained; and
 Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
 In documenting the nature, timing and extent of audit procedures performed, the auditor
shall record :
 The identifying characteristics of the specific items or matters tested;
 Who performed the audit work and the date such work was completed; and
 Who reviewed the audit work performed and the date and extent of such review.
 The auditor shall document discussions of significant matters with management, those
charged with governance and others on a timely basis.
 Discussion of significant matters.
 Nature of significant matters.
 When and with whom discussed.
 If the auditor has identified information that contradicts or is inconsistent with the
auditor’s final conclusion regarding a significant matter, the auditor should document
how the auditor addressed the contradiction or inconsistency in forming the final
conclusion.
 Where, in exceptional circumstances, the auditor judges it necessary to depart from a
basic principle or an essential procedure that is relevant in the circumstances of the
audit, the auditor should document how the alternative audit procedures performed
achieve the objective of the audit, and, unless otherwise clear, the reasons for the
departure.
 The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date
of the auditor’s report.
 After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation before the end of its retention period.
 When the auditor finds it necessary to modify existing audit documentation or add new
audit documentation after the assembly of the final audit file has been completed, the
auditor should, regardless of the nature of the modifications or additions, document:
 When and by whom they were made, and (where applicable) reviewed;
 The specific reasons for making them; and
 Their effect, if any, on the auditor’s conclusions.
 When exceptional circumstances arise after the date of the auditor’s report that require
the auditor to perform new or additional audit procedures or that lead the auditor to
reach new conclusions, the auditor shall document:
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 The circumstances encountered;

 The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached; and
 When and by whom the resulting changes to audit documentation were made, and
(where applicable) reviewed.
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MULTIPLE CHOICE
1. The auditor’s principal record of the audit procedures performed, the audit evidence
obtained and the conclusions the auditor reached is the:
a. audit documentation
b. audit plan
c. audit report
d. audit program
2. Which of the following statements is not correct?
a. Audit documentation facilitates planning and performance of the audit.

b. Audit documentation assists in the direction, supervision and review of audit work.
c. Audit documentation is a substitute for the entity’s accounting records.
d. Audit documentation provides evidence that the audit was performed in accordance with
PSA.
3. Which of the following factors will least affect the independent auditor's judgment as to the
quantity, type, and content of the working papers desirable for a particular engagement?
a. Nature of the auditor's report.

b. Nature of the financial statements, schedules, or other information upon which the
auditor is reporting.
c. Need for supervision and review.
d. Number of personnel assigned to the audit.
4. An auditor's working papers will generally be least likely to include documentation showing
how the
a. Client's schedules were prepared.

b. Engagement had been planned.
c. Client's internal control structure had been reviewed and evaluated.
d. Unusual matters were resolved.
5. Which of the following is not a primary purpose of audit working papers?
a. To coordinate the examination.

b. To assist in preparation of the audit report.
c. To support the financial statements.
d. To provide evidence of the audit work performed.
6. The understanding between the client and the auditor as to the degree of responsibility to
be assumed by each is normally set forth in a(n)
a. Representation letter.
b. Management letter.
c. Engagement letter.
d. Comfort letter.
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7. An auditor's working papers should
a. Not be permitted to serve as a reference source for the client.

b. Not contain comments critical of management.
c. Show that the accounting records agree or reconcile with the financial statements.
d. Be considered the primary support for the financial statements being audited.
8. Which of the following is not a factor affecting the independent auditor's judgment about the
quantity, type, and content of audit working papers?
a. The needs for supervision and review of the work performed by assistants.
b. The nature and condition of the client's records and internal controls.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of the financial statements, schedules, or other information on which the auditor
is reporting.
9. Files which contain information relating primarily to the audit of single period.
a. current audit files

b. permanent audit files
c. working paper files
d. evidence files
10. Contain information of continuing importance in the audit of the same client.
a. current audit files

b. permanent audit files
c. working paper files
d. evidence files
11. An auditor’s permanent file working papers most likely will contain:
a. internal control analysis for the current year.

b. The latest engagement letter.
c. Memoranda conference with management.
d. Excerpts of the corporate charter and by-laws
12. Working papers are the property of the :
a. auditor
b. client
c. auditee
d. management
13. During an audit engagement, data are compiled and included in the audit working papers.
The working papers are
a. A client-owned record of conclusions reached by the auditors who performed the

engagement.
b. Evidence supporting financial statements.
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c. Support for the auditor's compliance with generally accepted auditing standards.
d. A record to be used as a basis for the following year's engagement.
14. The current file of the auditor's working papers generally should include
a. A flowchart of the internal controls.

b. Organization charts.
c. A copy of the financial statements.
d. Copies of bond and note indentures.
15. Audit working papers are used to record the results of the auditor’s evidence gathering
procedures. When preparing working papers, the auditor should remember that
a. Working papers should be kept on the client’s premises so that the client can have access
to them for reference purposes.
b. Working papers should be the primary support for the financial statements being
examined
c. Working papers should be considered as a substitute for the client’s accounting records
d. Working papers should be designed to meet the circumstances and the auditor’s
needs on each engagement.
16. The permanent (continuing) file of an auditor’s working papers most likely would include
copies of the
a. Bank statements
b. Debt agreements
c. Lead schedules
d. Attorney’s letter
17. Assembly of final audit file should be accomplished in:
a. Not more than 45 days after the date of the auditor’s report.
b. Not more than 60 days after the date of the auditor’s report.
c. Not more than 90 days after the date of the auditor’s report.
d. Not more than 30 days after the date of the auditor’s report.
18. Retention period of engagement documentation is:
a. No shorter than 5 years from the date of the auditor’s report.

b. No shorter than 3 years from the date of the auditor’s report.
c. No shorter than 10 years from the date of the auditor’s report.
d. No shorter than 4 years from the date of the auditor’s report.
19. Conclusions are typically documented by auditors in which type of work paper?
a. audit planning memo

b. audit program
c. audit memoranda
d. representation letter
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20. Which of the following documentation is required for an audit in accordance with PSA?
a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the

entity’s internal control policies and procedures
b. A client engagement letter that summarizes the timing and details of the auditor’s planned
fieldwork
c. An indication on the working papers that accounting records agree or reconcile
with the financial statements.
d. The basis for the auditors conclusions when the assessed level of control risk is at the
maximum level for all financial statement assertions
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PSA 240
THE AUDITOR’S RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS
FOCUS NOTES:
 Characteristics of Fraud and Error

 Misstatements in the FS can arise either from fraud or error.
 Fraud
 an intentional act by one or more individuals among management, those charged
with governance, employees, or third parties, involving the use of deception to
obtain an unjust or illegal advantage.
 it may involve one or more members of management or those charged with
governance referred to as “management fraud;”
 fraud involving only employees of the entity is referred to as “employee fraud.”
 Types of Fraud:
a. Fraudulent financial reporting - intentional misstatements including omissions of
amounts or disclosures in financial statements to deceive financial statement
users.
1. manipulation
2. falsification (including forgery)
3. alteration
4. misrepresentation
5. intentional omission
6. intentional misapplication of accounting principles
b. Misappropriation of assets - involves the theft (physical transfer) of an entity’s
assets.
1. embezzling receipts
2. stealing physical assets or intellectual property
3. causing an entity to pay for goods and services not received
4. using an entity’s assets for personal use
 Three conditions that usually exist when fraud occurs ( the fraud triangle)
a. Incentive or pressure to commit fraud
b. Opportunity to commit fraud
c. Attitude or rationalization to justify fraud
 Error
 an unintentional misstatement in financial statements
 examples
1. mistake in gathering or processing data from which financial statements are
prepared.
2. incorrect accounting estimate arising from oversight or misinterpretation of
facts.
3. mistake in the application of accounting principles
 Responsible for prevention and detection of fraud

a. those charged with governance of the entity and
b. entity’s management.
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 Inherent Limitations of an Audit in the Context of Fraud

 there is an unavoidable risk that some material misstatements of the financial
statements will not be detected, even though the audit is properly planned and
performed in accordance with PSAs.
 the risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting a material misstatement resulting from error because fraud may
involve sophisticated and carefully organized schemes designed to conceal it.
 concealment may be even more difficult to detect when accompanied by collusion.
 the risk of the auditor not detecting a material misstatement resulting from management
fraud is greater than for employee fraud, because management is frequently in a
position to directly or indirectly manipulate accounting records and present fraudulent
financial information.
 Objectives of the auditor are:

(a) To identify and assess the risks of material misstatement of the financial statements due
to fraud;
(b) To obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate responses;
and
(c) To respond appropriately to fraud or suspected fraud identified during the audit.
 Requirements
 The auditor shall maintain an attitude of professional skepticism throughout the audit,
recognizing the possibility that a material misstatement due to fraud could exist,
notwithstanding the auditor’s past experience with the entity about the honesty and
integrity of management and those charged with governance.
 Members of the engagement team shall discuss the susceptibility of the entity’s financial
statements to material misstatement due to fraud.
 Perform procedures to obtain information that is used to identify the risks of material
misstatement due to fraud.
a. inquiries
b. analytical procedures
c. observation
d. inspection
 Identify and assess the risks of material misstatement due to fraud at the financial
statement level and the assertion level; and for those assessed risks that could result in
a material misstatement due to fraud, evaluate the design of the entity’s related
controls, including relevant control activities, and to determine whether they have been
implemented.
 Determine overall responses to address the risks of material misstatement due to fraud
at the financial statement level and consider the assignment and supervision of
personnel; consider the accounting policies used by the entity and incorporate an
element of unpredictability in the selection of the nature, timing and extent of the audit
procedures to be performed.
 Design and perform audit procedures to respond to the risk of management override of
controls.
 Determine responses to address the assessed risks of material misstatement due to
fraud.
 Consider whether an identified misstatement may be indicative of fraud.
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 Obtain written representations from management and, where appropriate, those

charged with governance, that:
(a) They acknowledge their responsibility for the design, implementation and
maintenance of internal control to prevent and detect fraud;
(b) They have disclosed to the auditor the results of management’s assessment
of the risk that the financial statements may be materially misstated as a result
of fraud;
(c) They have disclosed to the auditor their knowledge of fraud, or suspected
fraud, affecting the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the financial
statements; and
(d) They have disclosed to the auditor their knowledge of any allegations of
fraud, or suspected fraud, affecting the entity’s financial statements
communicated by employees, former employees, analysts, regulators or
others.
 Communicate fraud timely with the appropriate level of management.
 Communicate fraud timely with those charged with governance if fraud involves the
following
(a) management;
(b) employees who have significant roles in internal control; or
(c) others where the fraud results in a material misstatement in the financial
statements.
 If the auditor has identified or suspects a fraud, the auditor shall determine whether
there is a responsibility to report the occurrence or suspicion to a party outside the entity
(Regulatory and Enforcement Authorities).
 Documentation requirements:
 Understanding of the entity and its environment and the assessment of the risks of
material misstatement:
a. The significant decisions reached during the discussion among the engagement
team regarding the susceptibility of the entity’s financial statements to material
misstatement due to fraud; and
b. The identified and assessed risks of material misstatement due to fraud at the
financial statement level and at the assertion level.
 Auditor’s responses to the assessed risks of material misstatement required
a. The overall responses to the assessed risks of material misstatement due to
fraud at the financial statement level and the nature, timing and extent of audit
procedures, and the linkage of those procedures with the assessed risks of
material misstatement due to fraud at the assertion level; and
b. The results of the audit procedures, including those designed to address the risk
of management override of controls.
 The auditor shall include in the audit documentation communications about fraud
made to management, those charged with governance, regulators and others.
 If the auditor has concluded that the presumption that there is a risk of material
misstatement due to fraud related to revenue recognition is not applicable in the
circumstances of the engagement, the auditor shall include in the audit
documentation the reasons for that conclusion.
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MULTIPLE CHOICE
1. It refers to an unintentional misstatement in financial statements, including the omission of an
amount or a disclosure.
a. Fraud
b. Error
c. Misappropriation of assets
d. Fraudulent financial reporting
2. It refers to intentional act involving the use of deception to obtain an unjust or illegal
advantage.
a. Fraud
b. Error
c. Misappropriation of assets
d. Fraudulent financial reporting
3. The distinguishing factor between fraud and error is:
a. whether the action is intentional or unintentional

b. whether the amount is material or immaterial
c. whether it affects the financial statements or not
d. all of the above
4. Intentional misstatements of financial statements including omissions of amounts or

disclosures in financial statements to deceive financial statement users.
a. Misappropriation of assets.
b. Fraudulent financial reporting.
c. Employee fraud.
d. Management fraud
5. Theft of an entity’s assets perpetrated by employees or management.
c. Employee fraud.
d. Management fraud
6. Fraud involving one or more members of management or those charge with governance.
c. Employee fraud.
d. Management fraud
7. Fraud involving only employees of the entity.
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c. Employee fraud.
d. Management fraud
8. An example of fraud is:
a. mistake in gathering or processing data

b. incorrect accounting estimates
c. mistake in the application of accounting principles
d. manipulation, falsification or alteration of accounting records.
9. Which of the following is a fraudulent financial reporting?
a. recording fictitious journal entries

b. using an entity’s assets for personal use
c. embezzlement
d. incorrect estimates
10. Which of the following involves fraud?
a. Mathematical or clerical mistakes in the underlying records and accounting data.

b. Oversight or misinterpretation of facts.
c. Misappropriation of assets.
d. Mistake in the application of accounting policies.
11. Statement 1:
The risk of not detecting material misstatement due to fraud is higher than the risk of not
detecting misstatement resulting from error.
Statement 2:
The risk of not detecting misstatement due to management fraud is greater than for
employee fraud.
Statement 3:
Subsequent discovery of material misstatement due to fraud indicate failure to comply
with PSAs.
a. All statements are true.

b. All statements are false.
c. Statements 1 and 2 are true.
d. Statement 3 is true.
12. In conducting an audit, misstatements arising from suspicion of the fraud are given more
emphasis than the errors. This is an example of applying the criterion of
a. Materiality
b. Relative risk
c. Dual-purpose
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d. Reliability of evidence
13. The responsibility for the prevention and detection of fraud and error rests with:
a. Auditor
b. Stockholders
c. Those charged with governance and the management
d. None of the above
14. Events or conditions that indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud. They are often present in circumstances where frauds have
occurred.
a. Inherent risk
b. Engagement risk
c. Fraud risk factors
d. Business risk factors
15. The fraud triangle includes
a. Audit risk.
b. Opportunity.
c. Dedication.
d. Control risk.
16. Which of the following factors is least likely to represent an opportunity to commit fraud?
a. The audit committee is ineffective.
b. The organizational structure creates unusual lines of authority.
c. The existence of highly complex transactions.
d. Operating losses make a hostile takeover imminent.
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PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN
AN AUDIT OF FINANCIAL STATEMENTS
FOCUS NOTES:
 When designing and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that noncompliance by the entity with laws and
regulations may materially affect the financial statements.
 “Noncompliance” refers to acts of omission or commission by the entity being audited,

either intentional or unintentional, which are contrary to the prevailing laws or regulations.
 Responsibility for the Compliance with Laws and Regulations

- responsibility for the prevention and detection of noncompliance rests with management,
with the oversight of those charged with governance.
- policies and procedures for the prevention and detection of noncompliance:
 Monitoring legal requirements and ensuring that operating procedures are designed
to meet these requirements.
 Instituting and operating appropriate internal control.
 Developing, publicizing and following a code of conduct.
 Ensuring employees are properly trained and understand the code of conduct.
 Monitoring compliance with the code of conduct and acting appropriately to discipline
employees who fail to comply with it.
 Engaging legal advisors to assist in monitoring legal requirements.
 Maintaining a register of significant laws with which the entity has to comply within its
particular industry and a record of complaints.
- In larger entities, these policies and procedures may be supplemented by assigning
appropriate responsibilities to the following:
1. An internal audit function.
2. An audit committee.
3. Compliance function
 Objectives
(a) To obtain sufficient appropriate audit evidence regarding compliance with the provisions
of those laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements;
(b) To perform specified audit procedures to help identify instances of non-compliance with
other laws and regulations that may have a material effect on the financial statements;
and
(c) To respond appropriately to non-compliance or suspected noncompliance with laws and
regulations identified during the audit.
32
 Requirements
 Maintain professional skepticism
- The Auditor’s Consideration of Compliance with Laws and Regulations

 Obtain a general understanding of the legal and regulatory framework applicable to
the entity and the industry and how the entity is complying with that framework.
a. Use the existing understanding of the entity’s industry, regulatory and other
external factors;
b. Inquire of management concerning the entity’s policies and procedures regarding
compliance with laws and regulations;
c. Inquire of management as to the laws or regulations that may be expected to
have a fundamental effect on the operations of the entity;
d. Discuss with management the policies or procedures adopted for identifying,
evaluating and accounting for litigation claims and assessments; and
e. Discuss the legal and regulatory framework with auditors of subsidiaries in other
countries (for example, if the subsidiary is required to adhere to the securities
regulations of the parent company).
 After obtaining the general understanding, the auditor shall perform further audit
procedures to help identify instances of noncompliance with those laws and
regulations where noncompliance should be considered when preparing financial
statements, specifically:
a. Inquiring of management as to whether the entity is in compliance with such laws
and regulations; and
b. Inspecting correspondence with the relevant licensing or regulatory authorities.
 Obtain sufficient appropriate audit evidence about compliance with those laws and
regulations generally recognized by the auditor to have an effect on the determination
of material amounts and disclosures in financial statements.
 The auditor shall obtain written representations that management has disclosed to
the auditor all known instances of noncompliance or suspected non-compliance with
laws and regulations whose effects should be considered when preparing financial
statements.
- Audit Procedures when Noncompliance is Identified or suspected

 If the auditor becomes aware of information concerning an instance of
noncompliance or suspected non-compliance with laws and regulations, the auditor
shall obtain:
 An understanding of the nature of the act and the circumstances in which it has
occurred; and
 Further information to evaluate the possible effect on the financial statements.
 When evaluating the possible effect on the financial statements, the auditor
considers:
a. The potential financial consequences, such as fines, penalties, damages, threat
of expropriation of assets, enforced discontinuation of operations and litigation.
b. Whether the potential financial consequences require disclosure.
c. Whether the potential financial consequences are so serious as to call into
question the true and fair view (fair presentation) given by the financial
statements.
33
 If the auditor suspects there may be non-compliance, the auditor shall discuss the
matter with management and, where appropriate, those charged with governance.
 If management or, as appropriate, those charged with governance do not provide
sufficient information that supports that the entity is in compliance with laws and
regulations and, in the auditor’s judgment, the effect of the suspected non-
compliance may be material to the financial statements, the auditor shall consider the
need to obtain legal advice.
 If sufficient information about suspected non-compliance cannot be obtained, the
auditor shall evaluate the effect of the lack of sufficient appropriate audit evidence on
the auditor’s opinion.
 The auditor shall evaluate the implications of non-compliance in relation to other
aspects of the audit, including the auditor’s risk assessment and the reliability of
written representations, and take appropriate action.
- Reporting of Identified or Suspected Non-Compliance

 To those charged with governance
 the auditor shall communicate with those charged with governance matters
involving noncompliance with laws and regulations that come to the auditor’s
attention during the course of the audit, other than when the matters are clearly
inconsequential.
 If the auditor suspects that management or those charged with governance are
involved in non-compliance, the auditor shall communicate the matter to the next
higher level of authority at the entity, if it exists, such as an audit committee or
supervisory board.
 Where no higher authority exists, or if the auditor believes that the communication
may not be acted upon or is unsure as to the person to whom to report, the auditor
shall consider the need to obtain legal advice.
 To the Users of the Auditor’s Report on the Financial Statements
 If the auditor concludes that the non-compliance has a material effect on the
financial statements, and has not been adequately reflected in the financial
statements, the auditor shall express a qualified opinion or an adverse opinion
on the financial statements.
 If the auditor is precluded by management or those charged with governance
from obtaining sufficient appropriate audit evidence to evaluate whether non-
compliance that may be material to the financial statements has, or is likely to
have, occurred, the auditor shall express a qualified opinion or disclaim an
opinion on the financial statements on the basis of a limitation on the scope of
the audit.
 If the auditor is unable to determine whether non-compliance has occurred
because of limitations imposed by the circumstances rather than by
management or those charged with governance, the auditor shall evaluate the
effect on the auditor’s opinion.
 To Regulatory and Enforcement Authorities (in certain circumstances)
 If the auditor has identified or suspects non-compliance with laws and regulations,
the auditor shall determine whether the auditor has a responsibility to report the
identified or suspected non-compliance to parties outside the entity.
- Documentation
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 The auditor shall include in the audit documentation identified or suspected non-
compliance with laws and regulations and the results of discussion with management
and, where applicable, those charged with governance and other parties outside the
entity.
 Indications that Noncompliance may have Occurred

1. Investigation by government departments or payment of fines or penalties.
2. Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
3. Sales commissions or agent’s fees that appear excessive in relation to those ordinarily
paid by the entity or in its industry or to the services actually received.
4. Purchasing at prices significantly above or below market price.
5. Unusual payments in cash, purchases in the form of cashiers’ checks payable to bearer
or transfers to numbered bank accounts.
6. Unusual transactions with companies registered in tax havens.
7. Payments for goods or services made other than to the country from which the goods or
services originated.
8. Payments without proper exchange control documentation.
9. Existence of an information system which fails, whether by design or by accident, to
provide an adequate audit trail or sufficient evidence.
10. Unauthorized transactions or improperly recorded transactions.
11. Media comment.
35
MULTIPLE CHOICE
1. It refers to acts of omission or commission by the entity being audited, either intentional or
unintentional, which are contrary to the prevailing laws and regulations.
a. noncompliance
b. nonconformance
c. violation
d. inconsistency
2. Noncompliance does not include personal misconduct.
a. True b. False
3. The fact that noncompliance may materially affect the financial statements should be
recognized by the auditor during planning and performing audit procedures and in evaluating
and reporting the results thereof.
a. True b. False
4. An audit is expected to bring to light all noncompliance.
a. True b. False
5. Detection of noncompliance, whether material or immaterial, may have bearing on

management’s integrity.
a. True b. False
6. The auditor should seek legal advice to determine if an act constitutes noncompliance.
a. True b. False
7. Responsibility for the prevention and detection of noncompliance rests with:
a. management c. lawyer
b. auditor d. court
8. During the planning phase, the auditor shall
a. obtain general understanding of the legal and regulatory framework applicable to

the entity under audit.
b. document the noncompliance found and discuss it with management.
c. report the noncompliance to audit committee.
9. Which of the following procedures would an auditor perform to identify instances of

noncompliance?
36
a. Inquiring management about compliance with laws and regulations.

b. Inspecting correspondence with the relevant licensing or regulatory authorities.
c. Determining the effect of noncompliance on the financial statements.
e. Choices a and b.
10. If the auditor becomes aware of information concerning an instance of noncompliance or

suspected non-compliance with laws and regulations, the auditor shall
a. Obtain an understanding of the nature of the act and the circumstances in which it has
occurred.
b. Obtain further information to evaluate the possible effect on the financial statements.
c. Document the findings and discuss with management.
11. If members of the senior management including board of directors are involved in
noncompliance, to whom should the auditor communicate or report the matter?
a. audit committee
b. chief executive officer
c. chief operating officer
d. internal auditor
12. If noncompliance has a material effect on the financial statements and has not been properly
reflected on the financial statements, the auditor shall:
a. Express a qualified opinion or an adverse opinion.
b. Express an adverse opinion or disclaimer of opinion.
c. Add an explanatory paragraph and express an unqualified opinion.
d. Express an unmodified opinion.
13. If the auditor is precluded by management or those charged with governance from obtaining
sufficient appropriate audit evidence to evaluate whether non-compliance that may be
material to the financial statements has, or is likely to have, occurred, the auditor shall:

b. Express a qualified or a disclaimer of opinion.
c. Express an adverse opinion.
d. Express a qualified opinion.
14. If the auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances the auditor shall

b. Express a qualified or a disclaimer of opinion.
c. Express an adverse opinion.
d. Express a qualified opinion.
15. Which of the following may indicate that noncompliance have occurred?
a. Investigation by government departments or payment of fines or penalties.
b. Unauthorized transactions or improperly recorded transactions.
c. Payments for unspecified services.
37
d. Unusual payments in cash.

e. All of the above
PSA 260
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
FOCUS NOTES:
 Those charged with governance – The person(s) or organization(s) (e.g., a corporate trustee)
with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity. This includes overseeing the financial
reporting process.
 Management – The person(s) with executive responsibility for the conduct of the entity’s
operations. For some entities in some jurisdictions, management includes some or all of those
charged with governance, for example, executive members of a governance board, or an
owner-manager.
 The objectives of the auditor are:
a. To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned
scope and timing of the audit;
b. To obtain from those charged with governance information relevant to the audit;
c. To provide those charged with governance with timely observations arising from the
audit that are significant and relevant to their responsibility to oversee the financial
reporting process; and
d. To promote effective two-way communication between the auditor and those charged
with governance.
 Requirements
 The auditor shall determine the appropriate person(s) within the entity’s governance
structure with whom to communicate.
 If the auditor communicates with a subgroup of those charged with governance, for
example, an audit committee, or an individual, the auditor shall determine whether the
auditor also needs to communicate with the governing body.
- Matters to be communicated
 The auditor shall communicate with those charged with governance the responsibilities
of the auditor in relation to the financial statement audit
 forming and expressing an opinion on the financial statements that have been
prepared by management with the oversight of those charged with governance; and
 the audit of the financial statements does not relieve management or those charged
with governance of their responsibilities.
 The auditor shall communicate with those charged with governance an overview of the
planned scope and timing of the audit, which includes communicating about the
significant risks identified by the auditor
 The auditor shall communicate with those charged with governance the significant
findings from the audit.
38
 auditor’s views about significant qualitative aspects of the entity’s accounting

practices, including accounting policies, accounting estimates and financial statement
disclosures.
 significant difficulties, if any, encountered during the audit;
 significant matters arising during the audit that were discussed, or subject to
correspondence, with management and written representations the auditor is
requesting;
 circumstances that affect the form and content of the auditor’s report, if any; and
 any other significant matters arising during the audit that, in the auditor’s professional
judgment, are relevant to the oversight of the financial reporting process.
 In the case of listed entities, the auditor shall communicate with those charged with
governance:
 statement that the engagement team and others in the firm as appropriate, the firm
and, when applicable, network firms have complied with relevant ethical requirements
regarding independence;
 All relationships and other matters between the firm, network firms, and the entity
that, in the auditor’s professional judgment, may reasonably be thought to bear on
independence.
 The related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.
- The Communication Process

 The auditor shall communicate with those charged with governance the form, timing and
expected general content of communications.
 The auditor shall communicate in writing with those charged with governance regarding
significant findings from the audit if, in the auditor’s professional judgment, oral
communication would not be adequate. Written communications need not include all
matters that arose during the course of the audit.
 The auditor shall communicate in writing with those charged with governance regarding
auditor independence.
 The auditor shall communicate with those charged with governance on a timely basis.
 The auditor shall evaluate whether the two-way communication between the auditor and
those charged with governance has been adequate for the purpose of the audit. If it has
not, the auditor shall evaluate the effect, if any, on the auditor’s assessment of the risks of
material misstatement and ability to obtain sufficient appropriate audit evidence, and shall
take appropriate action.
- Documentation
 Where matters required by this PSA to be communicated are communicated orally, the
auditor shall include them in the audit documentation, and when and to whom they were
communicated. Where matters have been communicated in writing, the auditor shall
retain a copy of the communication as part of the audit documentation.
39
MULTIPLE CHOICE
1. The term used to describe the role of persons with responsibility for overseeing the strategic
direction of the entity and obligations related to the accountability of the entity including
overseeing the financial reporting process.
a. client
b. management
c. governance
d. executive
2. Which of the following must the auditor communicate with those charged with governance
on timely basis?
a. Auditor’s responsibilities in relation to the financial statement audit.

b. Overview of the planned scope and timing of the audit including significant risks identified.
c. The significant findings from the audit.
d. Matter about compliance with independence.
e. All of the above.
3. Corporate governance is a process by which the owners and creditors of an organization:
a. Exert control.
b. Require accountability.
c. Exert control and require accountability.
d. Neither exert control nor require accountability.
4. The responsibility for operating an enterprise is delegated to the:
a. Auditor.
b. Audit committee.
c. Management.
d. Board of directors.
5. The audit client of the CPA firm is:
a. Management.
b. The SEC.
c. The board of directors.
d. The stockholders.
40
PSA 265
COMMUNICATING DEFICIENCIES IN INTERNAL
CONTROL TO THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT
FOCUS NOTES:
 Objective
 to communicate appropriately to those charged with governance and management
deficiencies in internal control that the auditor has identified during the audit and that, in
the auditor’s professional judgment, are of sufficient importance to merit their respective
attentions.
 Definition
 Deficiency in internal control – This exists when:
a. A control is designed, implemented or operated in such a way that it is
unable to prevent, or detect and correct, misstatements in the financial
statements on a timely basis; or
b. A control necessary to prevent, or detect and correct, misstatements in the
financial statements on a timely basis is missing.
 Significant deficiency in internal control – A deficiency or combination of deficiencies in
internal control that, in the auditor’s professional judgment, is of sufficient importance
to merit the attention of those charged with governance.
 Requirements
 The auditor shall determine whether, on the basis of the audit work performed, the
auditor has identified one or more deficiencies in internal control.
 If the auditor has identified one or more deficiencies in internal control, the auditor shall
determine, on the basis of the audit work performed, whether, individually or in
combination, they constitute significant deficiencies.
 The auditor shall communicate in writing significant deficiencies in internal control
identified during the audit to those charged with governance on a timely basis.
 The auditor shall also communicate to management at an appropriate level of
responsibility on a timely basis:
(a) In writing, significant deficiencies in internal control that the auditor has
communicated or intends to communicate to those charged with governance,
unless it would be inappropriate to communicate directly to management in the
circumstances; and
(b) Other deficiencies in internal control identified during the audit that have not been
communicated to management by other parties and that, in the auditor’s
professional judgment, are of sufficient importance to merit management’s
attention.
 The auditor shall include in the written communication of significant deficiencies in
internal control:
(a) A description of the deficiencies and an explanation of their potential effects; and
(b) Sufficient information to enable those charged with governance and management to
understand the context of the communication. In particular, the auditor shall explain
that:
(i) The purpose of the audit was for the auditor to express an opinion on the
financial statements;
41
(ii) The audit included consideration of internal control relevant to the preparation
of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of internal control; and
(iii) The matters being reported are limited to those deficiencies that the auditor has
identified during the audit and that the auditor has concluded are of sufficient
importance to merit being reported to those charged with governance.
 Examples of matters that the auditor may consider in determining whether a deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:
1. The likelihood of the deficiencies leading to material misstatements in the financial
statements in the future.
2. The susceptibility to loss or fraud of the related asset or liability.
3. The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.
4. The financial statement amounts exposed to the deficiencies.
5. The volume of activity that has occurred or could occur in the account balance or class
of transactions exposed to the deficiency or deficiencies.
6. The importance of the controls to the financial reporting process; for example:
a. General monitoring controls (such as oversight of management).
b. Controls over the prevention and detection of fraud.
c. Controls over the selection and application of significant accounting policies.
d. Controls over significant transactions with related parties.
e. Controls over significant transactions outside the entity’s normal course of business.
f. Controls over the period-end financial reporting process (such as controls over non-
recurring journal entries).
7. The cause and frequency of the exceptions detected as a result of the deficiencies in
the controls.
8. The interaction of the deficiency with other deficiencies in internal control.
 Indicators of significant deficiencies in internal control include, for example:

1. Evidence of ineffective aspects of the control environment, such as:
a. Indications that significant transactions in which management is financially
interested are not being appropriately scrutinized by those charged with
governance.
b. Identification of management fraud, whether or not material, that was not prevented
by the entity’s internal control.
c. Management’s failure to implement appropriate remedial action on significant
deficiencies previously communicated.
2. Absence of a risk assessment process within the entity where such a process would
ordinarily be expected to have been established.
3. Evidence of an ineffective entity risk assessment process, such as management’s
failure to identify a risk of material misstatement that the auditor would expect the
entity’s risk assessment process to have identified.
4. Evidence of an ineffective response to identified significant risks (for example, absence
of controls over such a risk).
5. Misstatements detected by the auditor’s procedures that were not prevented, or
detected and corrected, by the entity’s internal control.
6. Restatement of previously issued financial statements to reflect the correction of a
material misstatement due to error or fraud.
42
7. Evidence of management’s inability to oversee the preparation of the financial

statements.
Multiple Choice
1. The auditor may identify deficiencies in internal control
a. During the risk assessment process stage of the audit

b. When performing test of controls.
c. When performing substantive procedures.
d. All of the above
2. A deficiency or combination of deficiencies in internal control that, in the auditor’s

professional judgment, is of sufficient importance to merit the attention of those charged with
governance.
a. Material weaknesses in internal control

b. Significant deficiency in internal control
c. Control risk
d. Significant risk
3. A deficiency in internal control to be considered significant should have resulted in actual

misstatement that the auditor has found out.
a. True
b. False
4. The auditor is not obligated to search deficiencies in internal control.
a. True
b. False
5. The auditor is required to communicate to those charged with governance and management
the significant deficiencies in internal control.
a. True
b. False
6. Communicating significant deficiencies in internal control assists those charged with

governance in fulfilling their oversight responsibilities.
a. True
b. False
7. In assessing control risk, the auditor considers internal control for the purpose of expressing
an opinion on the effectiveness of internal control.
a. True
b. False
43
8. Significant deficiencies in internal control that are already known to management and those
charged with governance but are not remedied because of cost or other considerations
should no longer be communicated.
a. True
b. False
9. Significant deficiencies in internal control that were communicated in previous audit should
be included in the current year communication if remedial action has not yet been taken.
a. True
b. False
10. When an auditor has identified significant deficiency in internal control, he is required to
a. Communicate with those charged with governance and to management, unless not
appropriate to communicate directly to management.
b. Modify his opinion due to scope limitation.
c. Assess control risk at below maximum.
End of Study Unit 1.
44

Au - 6 - Psa 200 To 265

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UL INTEGRATED CPA REVIEW AU-6

2ND SEM SY 2021-2022

 Overall objectives of the auditor in conducting an audit of financial statements:

 Complying with Relevant Requirements

a. To make recommendations for improving performance.

3. Which of the following is not a responsibility of the management?

a. Preparation of financial statements in accordance with applicable financial reporting

4. The two classifications of applicable financial reporting framework are

a. Fair presentation framework and compliance framework.

5. Which of the following pertains to fair presentation framework?

a. Requires compliance with the requirements of the framework.

8. Absolute assurance in auditing is not attainable as a result of such factors as:

a. The need for judgment

a. risks of material misstatement at the overall financial statement level

a. inherent risk and control risk

12. They exist independently of the audit of financial statements:

a. inherent risk and control risk

19. Reasonable assurance is obtained:

 AGREEMENT ON AUDIT ENGAGEMENT TERMS

2. Any revised or special terms of the engagement.

 Example of an Engagement Letter

To the appropriate representative of management or those charged with governance of

[The objective and scope of the audit]

[The responsibilities of the auditor]

[The responsibilities of management and identification of the applicable financial

[Other relevant information]

XYZ & Co.

Acknowledged on behalf of ABC Company by

a. Terms of audit engagement

a. The acceptability of financial reporting framework adopted by the management.

5. Documentation of the terms of engagement is required for an audit in accordance with

6. The auditor may accept a change engagement when:

a. there is reasonable justification for doing it.

a. Perform the audit with increase professional skepticism.

a. The financial reporting framework to be applied in the preparation of the financial

 Responsibility to establish quality control

 Leadership Responsibilities for Quality on Audits

 Relevant Ethical Requirements

 Acceptance and Continuance of Client Relationships and Specific Audit Engagements

 Assignment of Engagement Teams

 An engagement quality control review should include an objective

 Monitoring. Effective system of quality control provides for monitoring to determine

(c) Conclusions reached regarding the acceptance and continuance of client

a. Maintaining independence in mind and appearance.

a. Establish a system of quality control.

3. Who is responsible for the overall quality on each audit engagement?

a. To enable the auditor to attest to the integrity or reliability of a client

a. emphasizing independence in mental attitude in firm training programs and in

9. In pursuing its quality control objectives with respect to assigning personnel to

a. Rotating employees from assignment to assignment on a random basis to aid in the

 Objectives of Audit Documentation

 Nature of Audit Documentation

 Form, Content and Extent of Audit Documentation

 The circumstances encountered;

2. Which of the following statements is not correct?

a. Audit documentation facilitates planning and performance of the audit.

a. Nature of the auditor's report.

a. Client's schedules were prepared.

5. Which of the following is not a primary purpose of audit working papers?

a. To coordinate the examination.

7. An auditor's working papers should

a. Not be permitted to serve as a reference source for the client.

a. current audit files