AP-01: OVERVIEW OF THE AUDIT PROCESS

PROBLEM 1:
1. The following are considered by a CPA firm in deciding whether to accept a new client, except:
A. The client’s financial ability.
B. The client’s relations with its previous CPA firm.
C. The client’s standing in the business community.
D. The client’s probability of achieving an unqualified opinion.

2. To emphasize auditor independence from management, many corporations follow the practice of
A. Appointing a partner of the CPA firm conducting the audit to the corporation’s audit
committee.
B. Establishing a policy of discouraging social contract between employees of the corporation
and the staff of the independent auditor.
C. Requesting that a representative of the independent auditor be on hand at the annual
stockholder’s meeting.
D. Having the independent auditor report to an audit committee of outside members of the
board of directors.

3. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding:
A. Disagreements which the predecessor had with the client concerning auditing procedures
and accounting principles.
B. The predecessor’s evaluation of matters of continuing accounting significance.
C. The degree of cooperation the predecessor received concerning the inquiry of the client’s
legal counsel.
D. The predecessor’s assessments of inherent risk and judgments about materiality.

4. The primary purpose of the engagement letter is to:

A. Remind management that the primary responsibility for the FS rests with management.
B. Provide a written record of the agreement with the client as to the services to be provided.
C. Provide a starting point for the auditor’s preparation of the preliminary audit program.
D. Satisfy the requirements of the CPA’s liability insurance policy.

5. Which of the following is least likely to be included in an audit engagement letter?

A. Identification of specific audit procedures that the auditor needs to undertake.
B. Description of any letters or reports that the auditor expects to submit to the client.
C. A reference to the inherent limitations of an audit that there is an unavoidable risk that
some material misstatements may remain undiscovered.
D. Basis on which fees are computed and any billing arrangements.

6. One of the considerations in audit planning is obtaining a knowledge of the client’s business. An
auditor obtains knowledge about a new client’s business and its industry to
A. Make constructive suggestions concerning improvements to the client’s internal control.
B. Develop an attitude of professional skepticism concerning management’s financial statement
assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial statements
taken as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client’s financial
statements.

7. Relevant industry conditions include the following, except:

A. The market and competition, including demand, capacity and price competition.
B. Cyclical or seasonal activity.
C. Product technology relating to the entity’s products.
D. Regulatory framework for a regulated industry.

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8. The nature of the entity refers to the following, except:

A. The entity’s operations, its ownership, and governance.
B. The types of investments that it is making and plans to make.
C. The way that the entity is structured and how it is financed.
D. Other external factors, such as general economic conditions.

9. Examples of matters an auditor may consider under measurement and review of the entity’s financial
performance include the following (select the exception):
A. Key ratios and operating statistics.
B. Use of information technology.
C. Competitor analysis.
D. Employee performance measures and incentive compensation policies.

10. According to PSA 315, the auditor uses the understanding of internal control to:
A. Identify types of potential misstatements
B. Consider factors that affect the risk of material misstatements
C. Design the nature, timing and extent of further audit procedures (i.e., tests of controls
and substantive tests)
D. All of these.

11. The primary purpose of the auditor’s consideration of internal control is to provide a basis for
A. Determining whether procedures and records that are concerned with the safeguarding of
assets are reliable.
B. Constructive suggestions to clients concerning deficiencies in internal control.
C. Determining the nature, timing and extent of audit tests to be applied.
D. The expression of an opinion.

12. Which of the following regarding audit planning is a correct statement?

A. The auditor should use professional judgment to assess audit risk and to design audit procedures
to ensure it is reduced to an acceptably high level.
B. Audit risk is the risk that the auditor gives an appropriate audit opinion when the financial
statements are materially misstated.
C. The subsequent discovery that a material misstatement exists in the financial statements is
evidence of inadequate planning, performance, or judgment.
D. The auditor should obtain an understanding of the accounting and internal control systems
sufficient to plan the audit and develop an effective audit approach.

13. Inherent risk and control risk differ from detection risk in that they
A. Arise form the misapplication of auditing procedures.
B. May be assessed in either quantitative or nonquantitative terms.
C. Exist independently of the financial statement audit.
D. Can be changed at the auditor’s discretion.

14. Which of the following is an incorrect statement?

A. Detection risk is a function of the effectiveness of an auditing procedure and its application.
B. Detection risk arises partly from uncertainties that exist when the auditor does not examine 100
percent of the population.
C. Detection risk arises partly because of other uncertainties that exist even if the auditor were to
examine 100 percent of the population.
D. Detection risk exists independently of the audit of the financial statements and cannot be
changed at the auditor’s discretion.

15. The relationship between acceptable level of detection risk and the combined level of inherent and
control risk is
A. Direct
B. Inverse
C. Parallel
D. Independent

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16. Which of the following statements is true?

A. If control risk is assessed at maximum, the nature of related substantive tests should be changed
from more to less effective.
B. If control risk is assessed at maximum, the nature of related substantive tests should be changed
from less to more effective.
C. If control risk is assessed at maximum, the timing of related substantive tests should be changed
from year-end to an interim date.
D. If control risk is assessed at maximum, the extent of related substantive tests should be changed
from a larger to a smaller sample.

17. Which of the following procedures would an auditor most likely perform in planning a financial
statement audit?
A. Inquiring of the client’s legal counsel concerning pending litigation.
B. Comparing the financial statements to anticipated results.
C. Examining computer generated exception reports to verify the effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

18. Which of the following shall not be undertaken during the audit planning?
A. Inquiry of the client legal counsel regarding their assessment of the possible outcome of a
pending litigation case.
B. Analytical procedures in the form of financial analysis to enhance understanding about the
client’s financial condition.
C. Walk-through procedures to confirm understanding of the client’s policies and procedures in
customer order processing.
D. Observation of the performance of policies and procedures in receiving and inspecting
merchandise deliveries from suppliers.

19. In rendering a preliminary financial ratio analysis on Atom Inc.’s financials, you have observed that
the clients’ accounts receivable turn-over ratio decreased from 10 times last year (based on audited
financial statement) to 6 times this year (based on unaudited figures). Which of the following is
correct regarding the implication of this information in your audit plan?
A. Accounts receivables may be materially misstated thus the auditor should issue a qualified
opinion due to departure from PFRS.
B. Accounts receivables are materially misstated thus the auditor should issue an adverse opinion
due to material and pervasive departure from PFRS.
C. The auditor increases his assessment of inherent risk in the financial statement thus shall plan
to do extensive substantive analytical procedures.
D. The auditor increases his assessment of risk of misstatement in the financial statement thus
shall plan to render test of details at year-end.

20. To obtain an understanding of the client’s internal control over its revenue/receipt transactions, an
audit staff was assigned to do inquiries with the department’s involved (Sales Department, for order
processing; Credit Department, for credit authorization; Warehouse, for determining the availability
of goods; Shipping, for the preparation and actual shipment of goods, and; Billing Department, for
the invoice preparation). Which of the following shall be rendered next?
A. Assessment of control risk at below the maximum level if the staff is satisfied that the design,
operation and effectiveness of internal control can reasonably detect/prevent potential
misstatements in the financial statements.
B. Assessment of the control risk at the maximum level if the design and operations of the internal
controls are inappropriate to detect or prevent potential misstatement in the financial
statements.
C. Confirm his understanding of the internal control through inspection of documents and/or
observation of the performance of policies and procedures.
D. Test the effectiveness of the controls as to consistency of their application.

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21. After obtaining and understanding of the Atom Inc.’s internal control policies and procedures over
its purchasing and disbursements transactions, the auditor was satisfied regarding’s the internal
control’s potential reliability. Which of the following shall be rendered next?
A. Test the effectiveness of the internal control in terms of their consistent application by extending
the analytical procedures done during the audit planning.
B. Sending confirmation letters to suppliers to confirm their agreements with Atom Inc.’s reported
balances.
C. Examine the consistency of the application of the control by inspecting documents where control
performance are documented.
D. Render purchases cut-off to ascertain whether purchases were recorded in the correct period.

22. After the audit planning procedures, your audit team decided to place the preliminary audit risk at
a high level. Which of the following is correct?
A. The risk the planned further audit procedures will not be able to detect misstatement should be
increased.
B. The audit materiality levels should be decreased.
C. The auditors should plan extensive substantive testing through analytical procedures.
D. The auditors should plan set the timing of its extensive compliance testing at year-end.

23. Which of the following is generally incorrect when auditing account balances resulting from non-
routinary transaction cycle such as stockholders’ equity balances arising from financing cycle?
A. The auditor should render risk assessment procedure to understand the client’s internal control
and regardless of the design and operation, should place audit risk at a high level so as to render
directly extensive substantive testing.
B. The auditor should render risk assessment procedure to understand the client’s internal control
after which should test the control’s effectiveness where controls are potentially reliable as to
design and operation.
C. The auditor after rendering risk assessment procedure to understand the client’s internal control
should plan to gather more persuasive evidence using more extensive evidence gathering
procedures.
D. The auditor after rendering risk assessment procedure to understand the client’s internal control
should plan to place the timing of his substantive test procedures at year-end.

24. Which of the following is generally correct when auditing account balances resulting from routinary
transaction cycles such as trade receivable and trade payable balances arising from revenue and
purchasing cycles?
A. The auditor should render risk assessment procedure to understand the client’s internal control
and regardless of the design and operation, should place audit risk at a high level so as to render
directly extensive substantive testing.
B. The auditor should render risk assessment procedure to understand the client’s internal control
after which should test the control’s effectiveness where controls are potentially reliable as to
design and operation.
C. The auditor after rendering risk assessment procedure to understand the client’s internal control
should plan to gather more persuasive evidence using more extensive evidence gathering
procedures.
D. The auditor after rendering risk assessment procedure to understand the client’s internal control
should plan to place the timing of his substantive test procedures at year-end.

25. The following circumstances result in a modified but unqualified report, except:
A. Inconsistent application of accounting principles.
B. Emphasis of a related party transaction that is disclosed in a footnote.
C. Lack of disclosure of a restriction on payment of dividends.
D. Other auditors perform work for which the principal auditor does not assume responsibility.

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26. An auditor is confronted with an exception sufficiently material to warrant departing from the
standard wording of an unqualified report. If the exception relates to a departure from the generally
accepted accounting principles, the auditor must decide between a(n)
A. adverse opinion and an unqualified opinion
B. adverse opinion and a qualified opinion
C. adverse opinion and a disclaimer of opinion
D. disclaimer of opinion and a qualified opinion

27. If the auditor concludes that the fraud or error has a material effect on the financial statements and
has not been properly corrected in the financial statements, the auditor should issue a:
A. Unqualified opinion with explanatory paragraph.
B. Qualified or adverse opinion.
C. Qualified or disclaimer of opinion.
D. Adverse or disclaimer of opinion.

28. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or error
that may be material to the financial statement has, or is likely to have, occurred, the auditor should
issue a(n):
A. Unqualified opinion with explanatory paragraph.
B. Qualified or adverse opinion.
C. Qualified or disclaimer of opinion.
D. Adverse or disclaimer of opinion.

29. Because of inadequate records the auditor is uncertain as to whether property and equipment is
stated at cost. The auditor should issue a (n):
A. Qualified opinion
B. Unqualified opinion
C. Adverse opinion
D. Standard opinion

30. In your audit of the financial statements of VIVAR CORP. you were unable to observe the counting
of the physical inventories as of the statement of financial position date under audit since the count
was conducted prior to the time you were initially engaged as auditors for the Company. Owing to
the nature of the company’s records, you were unable to satisfy yourself as to inventory quantities
by other audit procedures. What type of opinion is deemed appropriate in the circumstance?
a. Unqualified c. Qualified or Adverse
b. Qualified or Disclaimer d. Disclaimer or Adverse

31. In your audit of the financial statements of LINDSAY COMPANY you failed to convince the
management to provide the proper depreciation expense. The provision for the year under audit
should be at a certain amount on the straight-line method of depreciation using annual rates of 5%
for the building and 20% for the equipment. Accordingly fixed assets should be reduced by
accumulated depreciation adjusted for the supposed depreciation and loss for the year and
accumulated deficit should have been increased by the same amount. What type of opinion is
deemed appropriate in the circumstance?
a. Unqualified c. Qualified or Adverse
b. Qualified or Disclaimer d. Disclaimer or Adverse

32. In your audit of the financial statements of LARANANG CORP. you ascertained that the company
issued debentures of material amounts for the purpose of financing its planned plant expansion.
The debenture agreement restricts the payment of future cash dividends to earnings after December
31, 2021. These information which you deemed necessarily be disclosed in the financial statements
were failed to be disclosed by the company in its financial statements.
a. Unqualified c. Qualified or Adverse
b. Qualified or Disclaimer d. Disclaimer or Adverse

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33. If adequate disclosure has been made by the entity regarding substantial doubt about its ability to
continue as a going concern and the auditor opted to make specific reference about the matter in
his report as to the company’s ability to continue as a going concern, the auditor should express:
a. Unqualified c. Qualified or Adverse
b. Qualified or Disclaimer d. Disclaimer or Adverse

34. In a case where an auditor observed that the accounting for a certain material item is not in
conformity with the applicable PAS and/or PFRS, and that this fact is prominently disclosed in a
footnote to the financial statements, the auditor should:
a. Unqualified c. Qualified or Adverse
b. Qualified or Disclaimer d. Disclaimer or Adverse

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