RESA AUDITING for client acceptance and continuation based on the likelihood

1.Evaluate the following statements: of increased audit fees.

I. Auditors obtain and evaluate evidence regarding assertions c. When the leadership of the audit firm creates an environment
about economic where achieving efficiency is valued, invested in and rewarded.
actions and events to verify the accuracy of those assertions. d. When the leadership of the audit firm ensures financial
II. Management may have incentives to present biased financial considerations drive actions.
information, but the various users of the statements are not likely to
have conflicting interests in the financial information. 9.The following relates to an entity’s internal control. Which
a. Both statements are true. b. Both statements are false statement is true?
c. Only statement II is true d. Only statement I is true a. Internal control helps an organization eliminate the risk of
failing to provide users with reliable financial information.
2.The following statements are correct, except b. Internal control is a process designed to guarantee the
a. The overall objective of an audit is to obtain assurance whether achievement of the objectives of reliable financial reporting,
the financial statements are free of misstatement. compliance with laws and regulations, and operating efficiency.
b. The foundation for the audit opinion formulation process relies c. A deficiency in design of internal controls exists when an
on obtaining evidence to support the auditor’s opinion. existing control is not properly designed so that, even if the
c. Audit staff performing audit work must be appropriately control operates as designed, the control objective would not
supervised by partners and managers. be met.
d. Auditors should conduct their work with an attitude of d. Effective internal control requires an organization to establish
professional skepticism. an appropriate structure and clearly defined lines of
responsibility and authority where everyone in the organization
3.After obtaining an understanding of internal control and arriving at has equal responsibility for the effective operation of internal
a preliminary assessed level of control risk, an auditor decided to control.
perform tests of controls. The auditor most likely decided that:
a. Additional evidence to support a reduction in the assessed 10.What is the primary benefit of effective internal control in an
level of control risk is not available. organization?
b. An increase in the assessed level of control risk is justified for a. Achieving certain organizational goals.
certain financial statement assertions. b. Completing a successful audit for the entity.
c. It would be efficient to perform tests of controls that would c. Maximizing value for shareholders.
result in a reduction in planned substantive procedures. d. Obtaining profitability and financial strength.
d. There were many internal control deficiencies that would allow
misstatements to enter the accounting system. 11.Which of the following is not one of the underlying principles of an
effective control environment?
4.The objective of the System of Quality management (SOQM) is/are a. The organization demonstrates a commitment to integrity and
I. To provide the firm with reasonable assurance that the firm and ethical values.
its personnel fulfill their responsibilities in accordance with b. The board of directors demonstrates independence from
professional standards and applicable legal and regulatory management and exercises oversight for the development and
requirements, and conduct engagements in accordance with such performance of internal control.
standards and requirements; c. Management establishes, with board oversight, structures,
II. To provide the firm with absolute assurance that engagement reporting lines, and appropriate authorities and responsibilities
reports issued by the firm or engagement partners are appropriate in in pursuit of objectives.
the circumstances. d. The organization considers the potential for fraud in assessing
a. Only statement 1 is correct. risks to the achievement of objectives.
b. Both statements are correct.
c. Only statement 2 is correct. 12.Which of the following assertions address whether accounts have
d. Both statements are incorrect. been included in the financial statements at appropriate amounts?
a. Completeness assertion.
5.Based on the provisions of ISQM 1, which is the definition of b. Valuation or allocation assertion.
quality risk? c. Rights and obligations assertion.
a. The risk has a reasonable possibility of occurring or has a d. None of the above.
reasonable possibility of individually, or in combination with
other risks, adversely affecting the achievement of one or more 13.Which of the following is a procedure which analyzes plausible
quality objectives. relationships among financial and nonfinancial data?
b. The risk as probability of occurring and has a probability of a. Analytical procedures. b. Scanning.
individually, or in combination with other risks, adversely c. Reviewing. d. Observation.
affecting the achievement of one or more quality objectives.
c. The risk has a reasonable possibility of occurring and has a 14.Which of the following is a reason why an auditor needs an
reasonable possibility of individually, or in combination with understanding of internal controls?
other risks, slightly affecting the achievement of one or more a. To provide individual comments on internal control non-
quality objectives. compliance.
d. The risk has a reasonable possibility of occurring and has a b. To assess the risk of possible misstatements in the financial
reasonable possibility of individually, or in combination with statements.
other risks, adversely affecting the achievement of one or more c. To become comfortable that the client will pay its audit bills.
quality objectives. d. To assess materiality.

6.Which of the following is not part of the systematic process called 15.Which of the following is not a reason why an auditor obtains an
auditing? understanding of internal controls?
a. Communicating results of the audit to users. a. Understanding the entity's internal control is a requirement of
b. Procuring and evaluating evidence. professional auditing standards.
c. Assisting management in designing internal controls. b. The auditor must use the information to assess the risk of
d. Comparing evidence regarding assertions to certain material misstatements arising from the lack of internal control.
established criteria. c. It is the primary basis for the audit report.
d. It assists the auditor in designing the nature, timing, and extent
7.Which of the following is not a primary driver of audit quality? of further audit procedures.
a. Skills and personal qualities of audit staff.
b. Size of the audit firm. 16.Evaluate the following statements:
c. Effective audit processes. Statement 1: From among PRBOA members, the Chairman of
d. Audit firm culture. the PRBOA is tasked to appoint a vice-chairman for a term of three
(3) years. (False)
8.When is the culture of an audit firm likely to provide a positive Statement 2: The public practice of accountancy is confined to
contribution to audit quality? sole proprietorship and partnership only. (True)
a. When the leadership of the audit firm ensures partners and a. Only statement 1 is correct.
other staff have sufficient time and resources to deal with b. Both statements are correct.
difficult issues as they arise. c. Only statement 2 is correct.
b. When the leadership of the audit firm ensures robust systems d. Both statements are incorrect.
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 c. Tests of signatures on purchase orders.
17.Which statement is true concerning materiality? d. Recalculation of payroll deductions.
a. Misstatements are material if they could reasonably be
expected to influence the decisions of users of the financial 27.Which of the following components is the foundation for all other
statements. components of internal control?
b. Materiality guidelines are specifically prescribed by the law. a. Control risk assessment.
c. Materiality is not a useful concept in assessing internal control b. Control environment.
effectiveness. c. Information and communication.
d. Materiality is a concept applied to financial statement d. Monitoring.
presentation but not to disclosures.
28.An audit program is created to specify which of the following?
18.Which of the following statements is true regarding client a. The type of audit opinion to be rendered based upon
acceptance or continuance decisions? procedures performed.
a. An audit firm cannot discontinue providing audit services to a b. The audit procedures that will be performed every year for the
client without just cause. client.
b. Potential audit fees are not a valid consideration in the c. How an auditor should think while performing audit procedures.
acceptance or continuance decision. d. Audit objectives and procedures to be followed during the audit
c. The client acceptance/continuance decision is one of the most process.
important factors in audit quality.
d. Audit firms are not permitted to conduct background checks on 29.Which one of the following is the primary reason for documenting
the management of a potential client. audit work?
a. To prevent litigation by other parties that question the audit
19.What type of relationship exists between audit risk and detection performance.
risk? b. To provide a stand-alone medium that gives audit conclusions
a. Direct. b. Inverse. and supports the opinion.
c. Indirect. d. No relationship. c. To give the client a full reporting of all work performed on their
behalf.
20.Which of the following statements best describes what is meant d. To supply a point of reference for all auditors performing the
by setting control risk at 100%? work subsequently.
a. Controls are effective.
b. Controls are relevant. 30.Which item is correct concerning the risk of material
c. Controls are ineffective. misstatement?
d. Cannot be determined from the information given. a) Risk of material misstatement arises because audit procedures
have been misapplied.
21.An increase in the risk of material misstatement would lead to b) Risk of material misstatement can be controlled and changed
which of the following responses? by the auditor.
a. Increase in the extent of audit procedures. c) Risk of material misstatement must be assessed in non-
b. Decrease in the extent of audit procedures. quantitative terms.
c. Earlier performance of audit procedures. d. Risk of material misstatement is controllable by the client.
d. No change in the extent or timing of audit procedures.
31.In considering internal control within the revenue/receipt cycle,
22.An audit program provides an effective means for which of the what is the purpose of a transaction walk-through?
following? a. To assure that employees are performing assigned functions
a. Reviewing the completeness and persuasiveness of accurately.
procedures performed. b. To confirm the auditor's understanding of the internal control
b. Recording the audit work performed and those responsible for structure.
performing the work. c. To select documents for detailed tests of controls.
c. Organizing and distributing the work. d. To verify the results of the auditor's sampling plan.
d. All the above.
32.Which of the following factors would lead an auditor to assess
23.What is the first phase in an audit? inherent risk at a higher level?
a. Client acceptance or client continuance. a. The account balance is easily determined without estimation.
b. Understanding the client. b. The account balance is composed of a high volume of
c. Understanding internal controls. nonroutine transactions.
d. Testing of account balances. c. The account balance is composed of simple transactions.
d. All of the above would lead the auditor to assess a higher level
24.The extent of procedures is affected mostly by which of the of inherent risk.
following factors?
a. The sheer volume of procedures to be applied by the auditor. 33 .Which of the following is a reason a predecessor auditor can
b. The time of year in which the client takes a physical inventory decline to reply to a firm’s current auditor?
in the warehouse. I. Data is under court order. II. They must always respond.
c. The auditor's judgment that misstatements are probable in III. The client does not approve of confidential information being
certain balances. shared.
d. The availability of the client's staff at or near the balance sheet a. I, II, III b. I and III only
date. c. II only d. III only

25.Which components of the SOQM comprise quality objectives the 34.Which of the following statements is false?
firm is required to establish, that form the basis for identifying and a. Inherent risk is inversely related to the level of control risk.
assessing quality risks and designing and implementing responses? b. Inherent risk is directly related to the amount of evidence
I. Governance and Leadership required in account testing.
II. The firm’s risk assessment process c. Inherent risk is the susceptibility of the financial statements to
III. Relevant Ethical Requirements material misstatement, assuming no internal controls.
IV. Acceptance and continuance of client relationship d. Inherent risk and control risk are assessed by the auditor and
V. Monitoring and remediation controlled by the client.
VI. Engagement performance
VII. Resources 35.If the results of tests of controls support the design and
VIII. Information and communication operations of controls as expected, the auditor uses control risk as
a. All of the above components b. Only II and VI the preliminary assessment.
c. All except I and III d. All except II and V a. a lower b. the same
c. a higher d. either a lower or higher
26.Which of the following would be least likely to be regarded as a
test of a control?
a. Tests of the additions to property by physical inspection.
b. Comparisons of the signatures on cancelled checks to the
authorized check signer list.
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