Regoris, Roderica A.

FEU - MAKATI

Auditing Theory AT – Quizzer 3

Prof. Francis H. Villamin

PSA 200 Revised and Redrafted “Overall Objective of the Independent Auditor and the
Conduct of an Audit in Accordance with PSA”

1. Which of the following has the primary responsibility for the fairness of the representations made in
the financial statements?
a. Client’s management.
b. Audit committee.
c. Independent auditor.
d. Board of Accountancy

2. An audit of financial statements of Toyota Corp. is being conducted by an external auditor. The
external auditor is expected to
a. Express an opinion as to the fairness of Toyota’s financial statements.
b. Express an opinion as to the attractiveness of Toyota for investment purposes.
c. Certify the correctness of Toyota’s financial statements.
d. Examine all evidence supporting Toyota’s financial statements.

3. Which of the following is one of the limitations of an audit?

a. The possibility that management may prevent the auditor from performing the necessary audit
procedures.
b. The likelihood that the auditor may not be able to detect material misstatements in the financial
statements because the auditor is engaged only after the client’s year-end.
c. The fact that most audit evidence is persuasive rather than conclusive in nature.
d. The risk that the auditor may not possess the training and proficiency required by the
engagement.

4. The independent audit is important to readers of financial statements because it

a. Determines the future stewardship of the management of the company whose financial
statements are audited.
b. Measures and communicates financial and business data involved in financial statements.
c. Involves the objective examination of and reporting on management prepared information.
d. Reports on the accuracy of all information in the financial statements.

5. Which of the following is not one of the general principles governing the audit of financial statements?
a. The auditor should plan and perform the audit with an attitude of professional skepticism.
b. The auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical
procedures to be able to draw reasonable conclusion.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.

6. Which one of the following is not among the conditions that give rise to a demand by external users
for independent audits of financial statements?
a. Remoteness of users.
b. Complexity of making economic decisions.
c. Potential conflict of interest between users and preparers of the statements.
d. Consequence for making decisions.

7. The primary reason for audit by an independent, external audit is

a. To satisfy governmental regulatory requirements.
b. To guarantee that there are no misstatements in the financial statements.
c. To provide increased assurance to users as to the fairness of the financial statements.
d. To ensure that any fraud will be discovered.

8. When a CPA expresses an opinion on financial statements, his or her responsibilities extend to
a. The underlying wisdom of the client’s management decisions.
b. Whether the results of the client’s operating decisions are fairly presented in the financial
statements.
c. Active participation in the implementation of the advice given to the client.
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d. An ongoing responsibility for the client’s solvency.

9. In determining the primary responsibility of the external auditor for a company’s financial statements,
the auditor owes primary allegiance to:
a. The management of the audit client because the auditor is hired and paid by management.
b. The audit committee of the audit client because that committee is responsible for coordinating and
reviewing all audit activities within the company.
c. Stockholders, creditors and the investing public.
d. The Auditing and Assurance Standards Council, because it determines auditing standards and
auditor responsibility.

10. Which of the following would not represent one of the primary problems that would lead to the
demand for independent audits of a company’s financial statements? a. Management bias in
preparing financial statements.
b. The downsizing of business and financial markets.
c. The complexity of transactions affecting financial statements.
d. The remoteness of the user from the organization and thus the inability of the user to directly
obtain financial information from the company.

11. Which of the following is a correct statement?

a. An audit provides limited assurance by attesting to the fairness of the client’s assertions.
b. A review provides positive assurance by attesting the reliability of the client’s assertions.
c. Management consulting services provide attestation in all cases.
d. Accounting services do not provide attestation.

12. Financial statement audits:

a. Reduce the cost of capital.
b. Report on the compliance with laws and regulations.
c. Assess management’s efficiency.
d. Overlook information risk.

13. The audit of historical financial statements should be conducted by the CPA professionals in
accordance with
a. Generally accepted accounting principles.
b. Philippine Standards on Auditing.
c. The auditor’s judgment.
d. The audit program.

14. An audit involves ascertaining the degree of correspondence between assertions and established
criteria. In the case of financial statement audit, which of the following is not a valid criterion? a.
Accounting standards generally accepted in the Philippines.
b. International Accounting Standards.
c. AuthoMyrative financial reporting framework.
d. Philippine Standards on Auditing.

15. The audit process is

a. A special application of the scientific method of inquiry.
b. Regulated by PICPA.
c. The only service a CPA is allowed to perform by law.
d. Performed only by CPAs.

16. In performing a financial statement audit, which of the following would an auditor least likely
consider? a. Internal control.
b. Compliance with GAAP.
c. Quality of management’s business decisions.
d. Fairness of the financial statements amounts.

17. Which of the following is a difference between attestation standards and auditing standards?
a. Attestation standards cover attest engagements, other than those involving GAAP financial
statements.
b. Attestation standards do not require independence in mental attitude.
c. Auditing standards apply only to CPAs while attestation standards apply to all accountants.
d. Attestation standards do not include standards of reporting.

18. Professional skepticism dictates that when management makes statement to the auditors, the
auditors should
a. Disregard the statement because it ranks low of the evidence quality scale.
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b. Corroborate the evidence with other supporting documentation whenever possible.
c. Require that the statement be put in writing.
d. Believe the statement in order to maintain the professional client-auditor relationship.

19. Information risk refers to the risk that

a. The client’s financial statements may be materially false and misleading.
b. The auditor may express an unqualified opinion on financial statements that are materially
misstated.
c. The client may not be able to remain in business.
d. Errors and frauds would not be detected by the auditor’s procedures.

20. The audit committee of the board of directors of a company is responsible for:
a. Hiring the auditor.
b. Preparing the financial statements.
c. The audit working papers.
d. Independence and obtaining evidence.

21. The single feature that most clearly distinguishes auditing, attestation and assurance is
a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPA’s approach to the service.

22. The Philippine Standards on Auditing (PSAs) require that a report be issued whenever a CPA firm
a. Performs an audit.
b. Is engaged to perform any services of any nature.
c. Is associated with financial statements.
d. Does SEC regulated work.

23. Which one of the following is an example of management expectation for independent auditors?
a. An expert providing a written communication as the product of the engagement.
b. Individuals who perform day-to-day accounting functions on behalf of the company.
c. An active participant in management decision making.
d. An internal source of expertise on financial and other matters.

24. An expectation of the public is that the auditor will recognize that the primary users of audit services
are:
a. The employees.
b. The Securities and Exchange Commission.
c. The investors and creditors.
d. The board of directors.

25. Which of the following statements is true concerning an auditor’s responsibilities regarding financial
statements?
a. Making suggestions that are adopted about the form and content of an entity’s financial
statements impairs auditor’s independence.
b. An auditor may draft an entity’s financial statements based on information from management’s
accounting system.
c. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of
the auditor’s responsibilities.
d. An auditor’s responsibilities for audited financial statements are not confined to the expression of
the auditor’s opinion.

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

a. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client
b. Obtain the prospective client’s signature to the engagement letter
c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary
audit plan
d. Discuss the management representation letter with the prospective client’s audit committee

27. Which statement is correct relating to a potential successor auditor’s responsibility for
communicating with the predecessor auditors in connection with a prospective new audit client?
a. The successor auditors have no responsibility to contact the predecessor auditors
b. The successor auditors should obtain permission from the prospective client to contact the
predecessor auditors
c. The successor auditors should contact the predecessors regardless of whether the prospective
client authorizes contact
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d. The successor auditors need not contact the predecessors if the successors are aware of all
available relevant facts

28. An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity, should
a. Engage financial experts familiar with the nature of the business entity
b. Obtain a knowledge of matters that relate to the nature of the entity’s business
c. Refer a substantial portion of the audit to another cpa who will act as the principal auditor
d. First inform management that an unqualified opinion cannot be issued

29. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
a. Awareness of the consistency in the application of generally accepted accounting principles
between periods
b. Evaluation of all matters of continuing accounting significance
c. Opinion of any subsequent events occurring since the predecessor’s audit report was issued
d. Understanding as to the reasons for the change of auditors

30. An auditor who has been invited to submit a proposal for an audit engagement is a
a. Predecessor auditor
b. Successor auditor
c. Principal auditor
d. Interim auditor

31. Lions Inc. has engaged the services of Mr. Reyes, CPA, to make a project study on the expanded
food vending operations of the corporation with the corresponding staffing and compensation
package for its executive staff. Reyes, however, has primarily auditing expertise and only in general
merchandising operations. Mr. Reyes may properly
a. Accept the engagement and carry it out consistent with generally accepted auditing standards
b. Accept the engagement but exercise due professional care
c. Accept the engagement and acquire the necessary competence or consult with established
authorities
d. Decline the engagement for lack of experience or competence in an entirely new line of
specialization

32. Which of the following statements about independent financial statement audit is correct?
a. The audit of financial statements relieves management of its responsibilities for the financial
statements.
b. An audit is designed to provide limited assurance that the financial statements taken as a whole
are free from material misstatement.
c. The procedures required to conduct an audit in accordance with psas should be determined by
the client who engaged the services of the auditor.
d. The auditor’s opinion is not an assurance as to the future viability of the entity as well as the
effectiveness and efficiency with which management has conducted the affairs of the entity.

33. The primary purpose of an independent financial statement audit is to

a. Provide a basis for assessing management’s performance
b. Comply with government regulatory requirements
c. Assure management that the financial statements are unbiased and free from material error
d. Provide users with an unbiased opinion about the fairness of information reported in the financial
statements

34. Financial statements need to be prepared in accordance with one or combination of:
Philippine Philippine Other Authoritative or Philippine
Standards on Accounting Comprehensive Financial Financial
Auditing Standards Reporting Framework Reporting Standard
a. yes yes yes yes
b. no yes yes yes
c. no yes no yes
d. yes no no no

35. By providing high level of assurance on audit reports on financial statements, the auditor
a. Guarantees the fair presentation of the financial statements.
b. Confirms the accuracy of the financial statements.
c. Enhances the credibility of the financial statements.
d. Assures the readers that fraudulent activities of employees have been detected.
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36. The auditor may accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed, through
I. Establishing whether the preconditions for an audit are present
II. 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 a. I only
b. II only
c. Both I and II
d. Neither I nor II

37. An audit is conducted on the premise that management and, where appropriate, those charged
with governance, have acknowledged and understand that they have responsibilities that are
fundamental to the conduct of an audit in accordance with PSAs. Which of the following is not one
of those responsibilities?
a. The preparation of financial statements in accordance with relevant pronouncements issued by
the AASC
b. The establishment and maintenance of an adequate internal control system that is necessary to
enable the preparation of financial statements that are free from material misstatement, whether
due to fraud or error
c. To provide the auditor with access to all information that is relevant to the preparation of the
financial statements such as records, documentation, and other matters
d. To provide the auditor with unrestricted access to persons within the entity from which the
auditor determines it necessary to obtain audit evidence

38. The auditor shall undertake which of the following activities prior to starting an initial audit?
I. Performing procedures required by PSA 220 (Quality Control for an Auditor of Financial Statements)
regarding the acceptance of the client relationship and the specific audit engagement
II. Communicating with the predecessor auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements
a. I only
b. II only
c. Either I or II
d. Both I and II

39. The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. The fairness of the financial statements in all material respects.
b. The accuracy of the financial statements.
c. The accuracy of the annual report.
d. The accuracy of the balance sheet and income statement.

40. Auditors accumulate evidence to:

a. Defend themselves in the event of a lawsuit.
b. Justify the conclusions they have otherwise reached.
c. Satisfy the requirements of the Securities and Exchange Commission.
d. Enable them to reach conclusions about the fairness of the financial statements.

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PSA 210 Redrafted “Agreeing the Terms of Audit Engagements”

1. According to PSA 210, the auditor and the client should agree on the terms of engagement. The
agreed terms would need to be recorded in a(n)
a. Memorandum to be placed in the permanent section of the working papers.
b. Engagement letter.
c. Client representation letter.
d. Comfort letter.

2. 1st statement – The auditor and the client should agree on the terms of the engagement. Such an
agreement may be in the form of audit engagement letter or other suitable form of contract.

2nd statement – Even in those countries where the scope of the audit is established by law, an
engagement letter may be informative for the client.

a. 1st statement is true ; 2nd statement is false

b. 1st statement is false ; 2nd statement is true
c. Both statements are true.
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d. Both statements are false.

3. 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. Representation letter
b. Management letter
c. Engagement letter
d. Comfort letter

4. Engagement letters are widely used in practice for professional engagements of all types. The
primary purpose of the engagement letter is to
a. Remind management that the primary responsibility for the financial statements rests with
management.
b. Satisfy the requirements of the CPA’s liability insurance policy.
c. Provide a starting point for the auditor’s preparation of the preliminary audit program.
d. Provide a written record of the agreement with the client as to services to be provided.

5. Which of the following is (are) valid reasons why an auditor sends to his client an engagement letter?
a b c d
To avoid misunderstanding with respect to management Yes Yes No No
To confirm the auditor’s acceptance of the appointment Yes Yes Yes No
To document the objective and scope of the audit Yes Yes Yes Yes To
ensure CPA’s compliance to PSA Yes No No Yes

6. In making arrangements for an audit, there should be a clear understanding between the auditor and
the client as to the following except:
a. The type of audit to be performed.
b. Terms of settlement for audit services.
c. Assurance of auditor’s independence.
d. Official to whom audit report shall be addressed.

7. An auditor who has been invited to submit a proposal for an audit engagement is a
a. Predecessor auditor.
b. Successor auditor.
c. Principal auditor.
d. Interim auditor.

8. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
normally be sent to the client.
a. Before the auditor report is issued.
b. After the audit report is issued.
c. At the end of the fieldwork.
d. Before the commencement of the engagement.

9. The nature of an audit engagement changes when there is

a. A change in circumstances.
b. A misunderstanding as to the nature of the audit.
c. A restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
d. All of the above
10. The form and content of the audit engagement letters may vary for each client, but they would
generally include reference to:
a. Management’s responsibility for all the financial statements
b. Restricted access to whatever records, documentation and other information requested in
connection with the audit.
c. The fact that because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control system, there is an avoidable risk
that even some material misstatements may remain undiscovered.
d. The type of opinion that may be given out by the auditor.

11. The form and content of the audit engagement letters may vary for each client, but they would
generally include reference to except:
a. Management’s responsibility for all the financial statements.
b. The scope of the audit, excluding reference to applicable legislation, regulations, or
pronouncements of professional bodies to which the auditor adheres.
c. The form of any reports or any communication of results of engagement.
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d. Unrestricted access to whatever records, documentation and other information requested in
connection with the audit.

12. Which of the following matters is generally included in an auditor’s engagement letter?
a. Management’s responsibility for the entity’s compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management’s vicarious liability for illegal acts committed by its employees.
d. The auditor’s responsibility to search for significant internal control deficiencies.

13. 1st statement – On recurring audits, the auditor should consider whether circumstances require the
terms of the engagement to be revised and whether there is a need to remind the client of the existing
terms of engagement.

2nd statement – The auditor should send a new engagement letter each year to an established client.

a. 1st statement is true ; 2nd statement is false

b. 1st statement is false ; 2nd statement is true
c. Both statements are true.
d. Both statements are false.

14. On recurring audits, the auditor may decide not to send a new engagement letter each period. In
which of the following situations will there be no need to send a new letter?

a. Revision or special terms of the engagement.

b. Significant change in nature or size of the client’s business.
c. Recent change of middle management and rank and file organization structure.
d. Indications of misunderstanding of the objective and scope of the audit.

15. Which of the following will not necessarily lead the client to request for the auditor to change the
engagement to one which provides a lower level of assurance?
a. Restrictions on the scope of engagement, whether imposed by management or caused by
circumstances.
b. Misunderstanding as to the nature of the audit or related service originally requested.
c. Recent changes in senior management, board of directors or ownership.
d. Change in circumstances affecting the need for the service.

16. Examples of changes in the nature of an audit engagement include the following except: a. A change
in circumstances
b. A misunderstanding as to the nature of an audit
c. A restriction on the scope of the engagement, whether imposed by management or caused by
circumstances
d. None of the above

17. This is a gap that exists between what the public, especially users of financial statements, believe
auditors do (or ought to do) and what the auditors actually do is known as:
a. Auditor’s gap
b. User’s gap
c. Business gap
d. Expectation gap

18. 1st statement – Where the terms of the engagement are changed, the auditor and the client should
agree on the new terms.

2nd statement – The auditor should not agree to a change of engagement when there is no reasonable
justification for doing so.

3rd statement – If the auditor is unable to agree to a change of the engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider whether there is any
obligation, either contractual or otherwise, to report to other parties, such as the board of directors or
shareholders, the circumstances necessitating the withdrawal.

a. 1st and 2nd statements are correct; 3rd statement is incorrect.

b. 1st and 3rd statements are correct; 2nd statement is incorrect.
c. 2nd and 3rd statements are correct; 1st statement is incorrect.
d. All statements are correct.
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19. Which of the following factors do not influence the decision of the auditor to send a separate
engagement letter to the parent entity and its component (subsidiary, branch or division) assuming
the same auditor handles both entities? a. Legal requirements
b. Degree of ownership by parent
c. Ethical requirements
d. Whether a separate audit report is to be issued on the component

20. The engagement letter will do one, some, or all of the following:
1. State whether the CPA will perform audit, review, or compilation services.
2. State whether the CPA will perform tax or management advisory or other services.
3. State any restriction to be imposed on the CPA’s work.
4. Identify deadlines for completing the work.
5. State the amount and type of work to be done by client’s personnel in generating auditor’s work
papers.
6. State the CPA’s fees for the engagement.
7. Inform the client that the CPA does not have responsibility for detecting fraud.

The engagement letter will do

a. Numbers 1, 2, 4 and 6.
b. Numbers 1, 2, 3 4 and 6.
c. Numbers 1, 3, 5 and 7.
d. All seven of the above stated items.

21. The engagement letter

a. Does affect the CPA firm’s responsibility to external users of audited financial statements.
b. Can affect legal responsibilities to the client.
c. Can be used to alter the auditor’s responsibilities under generally accepted auditing standards.
d. Is useful only if it is an engagement, but has no effect for review or compilation services.

22. Audit engagement letters generally include reference to the following except
a. Objective of the audit of financial statements.
b. Management’s responsibility for the financial statements.
c. Scope of the audit.
d. Identification of the audit team members.

23. When a professional accountant is the auditor of a parent entity and also the auditor of its subsidiary,
branch or division (component), which of the following factors need not be considered in deciding
whether to send the separate engagement letter to the component?
a. Who appoints the auditor of the component.
b. Whether a separate audit report is to be issued on the component.
c. Legal requirements.
d. Number of reports to be prepared during the peak audit season.

24. Which of the following would most likely cause a CPA not to accept an audit engagement?
a. Determining that the entity’s management lacks integrity.
b. The inability to perform audit procedures prior to year end.
c. Determining that the entity’s internal control is weak.
d. Appointment after the close of the fiscal year.

25. Which of the following helps prevent misunderstandings during audit planning?
a. Auditor involvement in the preparation of the client’s financial records.
b. Client involvement in determining specific audit planning issues.
c. A preliminary meeting conference with the client to discuss fees, timing, client assistance and
related issues.
d. Involvement of the client’s internal auditors in setting materiality levels and determining the scope
of audit tests.
26. The auditor’s understanding with a client as to the scope and nature of services to be provided is
usually documented in:
a. The preliminary planning memorandum.
b. The engagement letter.
c. Communications with the audit committee
d. The audit report

27. A major difference of opinion concerning an accounting issue has risen between an assistant on an
audit engagement and the auditor with final responsibility for the engagement. If after the
consultation, the assistant believes it necessary to disassociate himself from the resolution of the
matter, both the auditor and his assistant must
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a. Refer the matter to the firm’s peer review committee.
b. Inform management of the nature of disagreement.
c. Inform the company’s audit committee of the nature of disagreement.
d. Document the details of the disagreement and the basis of resolution.

28. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding
a. The predecessor’s assessments of inherent risk and judgment about materiality.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. The degree of cooperation the predecessor received concerning the inquiry of client’s lawyer.
d. Disagreements the predecessor had with the client concerning auditing procedures and
accounting principles.

29. A successor auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor’s
Engagement letter Working papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No
30. Arrangements concerning with which of the following are least likely to be included in the 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

31. An engagement letter should ordinarily include information on the objectives of the engagement and
CPA’s Client’s Limitations of
Responsibilities Responsibilities Engagement
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No No No
32. Before performing any audit procedures, the auditor and the client should agree on the
Type of opinion to be expressed Terms of engagement
a, Yes Yes
b. No Yes
c. Yes No
d. No No

33. Which of the following statements would least likely appear in an auditor’s engagement letter?
a. “Fees for our services are based on regular per diem rates, plus travel and other out-of-pocket
expenses.”
b. “During the course of our audit, we may observe opportunities for economy in, or improved
controls over your operations.”
c. “Our engagement is subject to the risk that material misstatements of fraud, if they exist, will not
be detected.”
d. “After performing our preliminary analytical procedures we will discuss with you the other
procedures we consider necessary to complete the engagement.”

34. Which of the following is not a key issue which need to agreed by the auditor and the client as part of
the “terms of engagement”?
a. Expectation gap
b. Issues of risk assessment
c. Use of experts
d. All of the above are key issues.

35. An engagement letter would not normally include

a. Billing arrangements.
b. Arrangements concerning client’s assistance.
c. Details of procedures that will be performed.
d. Expectation of receiving a representation letter from management.

36. Audit engagement letters generally include reference to the following except
a. Objective of the audit of financial statements
b. Management’s responsibility for the financial statements
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c. Scope of the audit
d. Identification of the audit team members

37. When a professional accountant is the auditor of a parent entity and also the auditor of its subsidiary,
branch or division (component), which of the following factors need not be considered in deciding
whether to send the separate engagement letter to the component?
a. Who appoints the auditor of the component
b. Whether a separate audit report is to be issued on the component
c. Legal requirements
d. Number of reports to be prepared during the peak audit season

38. On recurring audits, the auditor may decide not to send a new engagement letter each period. In which
of the following situations will there be no need to send a new letter?
a. Revision or special terms of the engagement
b. Significant change in nature or size of the client’s business
c. Recent change of middle management and rank and file organization structure
d. Indications of misunderstanding of the objective and scope of the audit

39. Which of the following will not necessarily lead the client to request for the auditor to change the
engagement to one which provides a lower level of assurance?
a. Restrictions on the scope of the engagement, whether imposed by management or caused by
circumstances
b. Misunderstanding as to the nature of an audit or related service originally requested
c. Recent changes in senior management, board of directors or ownership
d. Change in circumstances affecting the need for the service

40. For initial engagements, the auditor should obtain sufficient appropriate audit evidence for the
following, except
a. That the opening balances do not contain misstatement that materiality affect the current period’s
financial statements
b. That the prior period’s closing balances have been correctly brought forward to the current period,
or, when appropriate, have been restated
c. That appropriate accounting policies are consistently applied or changes in accounting policies
have been properly accounted for or adequately disclosed
d. That the client has informed the predecessor auditor of his appointment as the new auditor

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Quizzer – PSA 220 Redrafted “Quality Control for an Audit of F/S”

1. A CPA 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 for establishing such policies
and procedures is
a. To lessen the exposure to litigation resulting from failure to detect irregularities in client’s financial
statements.
b. To enable the auditor to attest to the integrity or reliability of a client.
c. To comply with the quality control standards established by regulatory bodies.
d. To minimize the likelihood of association with clients whose management lacks integrity.

2. The following factors affect the nature, timing and extent of an audit firm’s quality control policies and
procedures, except:
a b c d

• Size and nature of practice Yes Yes No No

• Geographic dispersion Yes Yes Yes No
• Organization Yes No Yes No
• Appropriate cost/benefit
Considerations Yes Yes No No

3. Audit firms are subject to many risks when they carry out an audit assignment. As a result of this, the
firm may suffer:
a. Action through the courts so that damages are payable.
b. Loss of client.
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c. Adverse publicity and loss of reputation.
d. All of the following may be suffered by the firm

4. Which of the following statements is incorrect?

a. Quality controls are the policies and procedures adopted by a firm in all its audit work.
b. Personnel of an auditing firm are presumed to know all the firm’s general quality control policies
and procedures and need not be communicated to them whenever they are sent out for audit
engagements.
c. Quality control policies are objectives and goals, while quality control procedures are steps to be
taken to accomplish the policies adopted.
d. The examination by CPAs of a CPA firm’s auditing practices to ascertain compliance with its
quality control system is known as a peer review.

5. Risk audit firms are subject to when they carry out an audit assignment.
a. Giving an unqualified report when a qualified one was required.
b. Qualifying a report unnecessarily.
c. Being negligent such that loss is caused to the client or third party
d. All of the above

6. 1st statement – It is in the interests of the firm to manage the firm overall and each individual audit
such that the Code of Professional Ethics for CPAs is followed at all times.

2nd statement – It is in the interests of the firm to manage the firm overall and each individual audit
such that the Philippine Auditing Standards (PSAs) are followed at all times.

a. 1st statement is true ; 2nd statement is false

b. 1st statement is false; 2nd statement is true
c. both statements are true
d. both statements are false

7. Factors to consider when designing quality control procedures include all of the following except a.
Size of the practice
b. Organization of the practice
c. Cost-benefit considerations
d. None of the following

8. Quality control in audit firms, both at the firm level and at the level of a specific audit is essential to all
audit firms. Methods of quality control in large firms include all of the following except
a. Peer reviews
b. Use of technical manuals
c. Sub-contracting work to other practices
d. Training

9. A review undertaken by a more experienced member of the audit firm to ensure that the work has
been performed in accordance with the audit plan and that the conclusions expressed are consistent
with the results of the works performed: a. Peer review
b. Post audit review
c. “Hot” review
d. Audit review

10. A CPA firm should establish procedures for conducting and supervising work at all organizational
levels to provide reasonable assurance that the work performed meets the firm’s standards of quality.
To achieve this goal, the firm most likely would establish procedures for a. Evaluating prospective and
continuing client relationships.
b. Reviewing engagement working papers and reports.
c. Requiring personnel to adhere to the applicable independence rules.
d. Maintaining personnel files containing documentation related to the evaluation of personnel.

11. The primary reason why a CPA firm establishes quality control policies and procedures for
professional development of staff accountants is to
a. Comply with the continuing educational requirements imposed by various states for all staff
accountants in CPA firms.
b. Establish, in fact as well as appearance, that staff accountants are increasing their knowledge of
accounting and auditing matters.
c. Provide a forum for staff accountants to exchange their experiences and views concerning firm
policies and procedures.
AT Quizzer 3 PSA 200 (Rev and Redrafted), 210 Redrafted, 220 Redrafted _12
d. Provide reasonable assurance that staff personnel will have the knowledge required to enable
them to fulfill responsibilities.
12. A firm of CPAs may use policies and procedures such as notifying professional personnel as to the
names of audit clients having publicly held securities and confirming periodically with such personnel
that prohibited relations do not exist. This is done to achieve effective quality control in which of the
following areas?
a. Acceptance and continuance of clients.
b. Assigning personnel to engagement.
c. Independence.
d. Inspection.

13. In pursuing a CPA firm’s quality control objectives, a CPA firm 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 relationship.
b. Supervision.
c. Independence.
d. Advancement.

14. Which of the following is not an example of quality control procedure likely to be used by a public
accounting firm to meet its professional responsibilities to clients?
a. Completion of independence questionnaires by all partners and employees.
b. Review and approval of audit plan by the partner in charge of the engagement just prior to signing
the auditor’s report.
c. Evaluating professional staff after the conclusion of each engagement.
d. Evaluating its integrity of management for each new audit client.

15. Which of the following statements regarding quality control policies and procedures is incorrect?
a. Quality control policies and procedures should be implemented at both the level of the audit firm
and on an individual audit.
b. The audit firm should implement quality control policies and procedures designed to ensure that
all audits are conducted in accordance with PSAs or relevant national standards or practices.
c. Quality control policies are objectives and goals while quality control procedures are steps to be
taken to accomplish the policies adopted.
d. PSA 220 prescribes all the procedures to implement each quality control policy applicable to
auditing firms.

16. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting
stated criteria are assigned increased degrees of responsibility. This is evidence of the firm’s
adherence to which of the following prescribed standards: a. Professional ethics.
b. Supervision and review.
c. Accounting and review services.
d. Quality control.

17. A CPA firm’s personnel partner periodically studies the CPA firm’s personnel advancement
experience to ascertain whether individuals increased degrees of responsibility. This is evidence of
the CPA firm’s adherence to prescribed standards of
a. Quality control.
b. Due professional care.
c. Supervision and review.
d. Fieldwork.

18. ABC & Co., a large international CPA firm, is to have an “external peer review”. The peer review will
most likely be performed by
a. Employees and partners of ABC & Co. who are not associated with the particular audits being
reviewed.
b. Audit review staff of the Securities and Exchange Commission.
c. Audit review staff of the PICPA.
d. Employees and partners of another CPA firm.

19. The objective of quality control mandates that a public accounting firm should establish policies and
procedures for professional development which provide reasonable assurance that all entry-level
personnel
a. Prepare working papers which are standardized in form and content.
b. Have the knowledge required to enable them to fulfill responsibilities assigned.
c. Will advance within the organization.
AT Quizzer 3 PSA 200 (Rev and Redrafted), 210 Redrafted, 220 Redrafted _13
d. Develop specialties in specific areas of public accounting.
20. The nature and extent of a CPA firm’s quality control policies and procedures depend on:
CPA firm’s size Nature of CPA Cost-benefit firm’s practice
considerations
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes

21. A basic objective of a CPA firm is to provide professional services to conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through
a. Continuing professional education
b. System of quality control
c. Compliance with generally accepted reporting standards.
d. System of peer review.

22. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting
stated criteria are assigned increased degrees of responsibility. This is evidence of the firm’s
adherence to which of the following prescribed standards:
a. Professional ethics.
b. Supervision and review.
c. Accounting and review services.
d. Quality control.

23. The work performed by each assistant should be reviewed to determine whether it was adequately
performed and to evaluate whether the
a. Auditor’s system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditor’s report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons who have adequate technical training and proficiency as
auditors.

24. In pursuing quality control objectives with respect to acceptance of a client, a CPA firm is likely to
a. Make inquiries of the proposed client’s legal counsel.
b. Review financial statements of the proposed client.
c. Make inquiries of previous auditors.
d. Review the personnel practices of the proposed client.
25. Within the context of quality control, the primary purpose of continuing professional education and
training activities, is to enable a CPA firm to provide personnel within the firm with a. Technical
training that assures proficiency as an auditor.
b. Professional education that is required in order to perform with due professional care.
c. Knowledge required to fulfill assigned responsibilities and to progress within the firm.
d. Knowledge required in order to perform a peer review.
26. 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. Inspection
b. Engagement quality control reviewer
c. Quality review
d. Monitoring

27. In relation to completed engagements, these are procedures designed to provide evidence of
compliance by engagement teams with firm’s quality control policies and procedures.
a. Inspection
b. Quality control
c. Monitoring
d. Engagement quality control reviewer

28. The inspection of a selection of completed engagements is ordinarily performed on a cyclical basis.
Engagements selected for inspection include at least:
a. One engagement for each engagement partner over an inspection cycle
b. Two engagements for each engagement partner over an inspection cycle
c. One engagement for each firm over an inspection cycle
d. Two engagements for each firm over an inspection cycle

29. An inspection cycle ordinarily spans no more than:

a. One year
b. Two years
AT Quizzer 3 PSA 200 (Rev and Redrafted), 210 Redrafted, 220 Redrafted _14
c. Three years
d. Four years

30. FHV and Company has just completed its annual independence review. Francis, the partner incharge
for independence, is reviewing a completed copy of the independence declaration form and noticed
that Miss Myra, an audit manager declared that her husband was newly hired as a controller of a
Company where Miss Myra is the engagement manager. As partner-in-charge for independence what
is the best course of action to take in the situation?
a. Discuss the matter with Miss Myra and the engagement partner and ensure that all work done by
Miss Myra is properly reviewed by the engagement partner.
b. Assigned an Engagement Quality Control Reviewer to ensure that all judgment made by Miss
Myra are reviewed and ensure she remains objective.
c. Transfer Miss Myra to another engagement to reduce to risk of non-compliance with the
independence requirement.
d. Discuss the matter with management and those charged with governance and if they agree to
continue with Miss Myra as audit manager, then should continue managing the engagement.

31. In performing an acceptance and continuance procedures for a newly accepted engagement,
Justine, a new partner in the Firm should obtain information relating to: I. The integrity of the clients
management
II. Independence of the firm
III. Competency to serve the client appropriately
a. I and II only
b. II and III only
c. I and III only
d. I, II, III

32. Who is responsible for forming a conclusion on compliance with independence requirements that
apply to the audit engagements?
a. Audit staff
b. Audit supervisor
c. Engagement manager
d. Engagement partner

33. The firm should communicate the results of the monitoring of its quality control system to
engagement partners and other appropriate individuals within the firm at least:
a. Every six months
b. Every twelve months
c. Every two years
d. Every three years

34. The firm should establish policies and procedures requiring appropriate documentation to provide
evidence of the operation of each element of its system of quality control. How such matters are
documented is based on: a. PSQC1
b. PSA 220
c. Philippine Audit Practice Statements
d. The firm’s decision

35. A firm has obtained information that would have caused it to decline an engagement had the
information been available earlier. Actions available to the auditor include the following, except: a.
Reporting the information and its implications to the person(s) who appointed the CPA
b. Withdraw from the engagement
c. Withdraw from both the engagement and the client relationship
d. Continue the engagement, since the Code of Ethics requires started engagements to be
finished regardless of subsequent developments and information

36. The following methods are most likely to develop capabilities and competence, except:
a. Professional education
b. Continuing professional development, including training
c. Work experience and coaching by less experienced staff
d. Self-study modules on professional accounting and auditing literature

37. Supervision includes:

a. Tracking the progress of the engagement
b. Considering the capabilities and competence of individual members of client personnel
c. Addressing all issues arising during the engagement and modifying the planned approach
appropriately
AT Quizzer 3 PSA 200 (Rev and Redrafted), 210 Redrafted, 220 Redrafted _15
d. Identifying maters for consultation or consideration by less experienced engagement team
members during the engagement

38. Review responsibilities are determined on the basis that ______ experienced team members,
review the work of ______ experienced team members
a. more, more
b. more, less
c. less, more
d. less, less

39. An engagement quality control review is required to be performed:

a. Immediately after the re-assessment of control risk
b. For all audits of financial statements of listed entities
c. For all types of audits, regardless of the subject matter of the engagement
d. At engagement completion after the report is issued

40. What aspects are most important in determining the eligibility of engagement quality control
reviewers?
a. Technical qualifications and objectivity
b. Integrity and objectivity
c. Competence and independence
d. All of these

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