Practice Questions Psa 210 Amp 300

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PSA 210 & PSA 300


210: Agreeing the Terms of Audit Engagement
300: Planning an Audit of Financial Statements

1. The use by management of an acceptable 4. Which of the following should be


financial reporting framework in the included in the audit plan?
preparation of the financial statements and I. The nature, timing and extent of
the agreement of management and, where planned risk assessment
appropriate, TCWG to the premise on procedures.
which an audit is conducted. II. The nature, timing and extent of
A. Engagement contract planned further audit procedures at
B. Preconditions for an audit the assertion level.
C. Audit engagement acceptance A. I only
D. Audit Planning B. Both I & II
C. II only
D. Neither I nor II
2. Which of the following statements
concerning audit planning is
incorrect? 5. Which of the following is least likely
A. Planning is a discrete phase of an audit procedure to be performed in planning
B. Planning is a continual & iterative a F/S audit?
process. A. Reading current year’s interim F/S.
C. In a recurring audit, planning often B. Coordinating the assistance of entity
begins shortly after the completion of personnel in data preparation.
the previous audit & continues until the C. Selecting a sample of sales invoices for
completion of the current audit comparison with shipping documents.
engagement. D. Discussing matters that may affect the
D. In planning an audit, the auditor audit with firm personnel responsible
considers timing. for non-audit services.

3. The establishment of an overall audit 6. Early appointment of the


strategy involves independent auditor will enable:
I. Determining the characteristics of A. A more thorough examination to be
the engagement that define its performed
scope B. A more efficient examination to be
II. Ascertaining the reporting planned.
objectives of the engagement to C. A proper study & evaluation of internal
plan the timing of the audit & the control to be performed
nature of the communications D. Sufficient competent evidential matter
required. to be obtained
III. Considering the important factors
that will determine the focus of the
engagement team’s efforts. 7. The following factors may make it
A. I & II appropriate to revise the terms of the audit
B. II & III engagement or to remind the entity of
C. I & III existing terms, except:
D. I, II, & III A. Recent change of senior management.
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B. A significant change in ownership. C. Depreciation methods used on the


C. A significant change in nature or size of client’s tax return differ from those
the entity’s business. used on the books
D. Geographic location of the entity or D. Assets costing less than P10,000 are
department expensed even though the expected life
exceeds 1 year.

8. Client strategy templates provide a means


for an auditor: 12. Research has indicated several factors
A. Acquire, evaluate and document which affect business risk & therefore
evidence acceptable risk. Which of the following
B. Focus on transactions likely to affect does not affect business risk?
audit risk A. Degree to which external users rely on
C. Compile the strategies and the F/S
characteristics of an entity B. The likelihood that client will have
D. Distinguish between engagement risk financial difficulties after the audit
and audit risk report is issued.
C. Weaknesses in client’s internal
control structure
9. Which of the following tasks is most likely D. The integrity of management
to be performed by an audit partner?
A. Analyzing a client’s key financial ratios
B. Assessing the quality of the client’s 13. Senior auditors typically perform all of the
internal controls following tasks, except:
C. Performing substantive tests of key A. Supervise staff assistants
statement of financial position accounts B. Draft the audit report
D. Reviewing the working papers C. Review the working papers prepared
by staff assistants
D. Sign the audit report
10. The principal reason for developing a
written audit program is to help ensure that
the 14. An audit committee’s responsibilities
A. Audit work is properly supervised normally would not include:
B. Audit work is properly planned and A. Discussing meaning & significance of
documented audited F/S
C. Audit report contains only significant B. Discussing problems & experience with
findings independent auditors in completing the
D. Work of different auditors is properly audit of annual financial statements.
coordinated C. Discussing the audit programs of the
independent auditors
D. Nominating the independent auditors
11. Which of the following situations would
most likely require special audit planning
by the auditor? 15. Before accepting an engagement with a
A. Inventory comprises precious stones. new client, the CPA firm shall assess the
B. Some items of factory & office following except:
equipment do not bear identification A. If the client has the financial capacity
numbers. to pay
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B. If the client has integrity D. Client’s business risk & the CPA firm’s
C. If the auditor is competent to perform engagement risk.
the engagement, has the capabilities
including time & resources.
D. The auditor can comply with the 20. Limbaco requested permission to
relevant ethical requirement. communicate with the predecessor auditor
& review certain portions of the
predecessor’s work papers. The prospective
16. Which of the following would not be a client’s refusal to permit this will bear
consideration of a CPA firm in deciding directly on Limbaco’s decision concerning
whether to accept a new client? the:
A. Client’s standing in the business A. Integrity of management
community B. Adequacy of the preplanned audit
B. Client’s probability of achieving an program
unmodified opinion. C. Apparent scope limitation
C. Client’s financial ability D. Ability to establish consistency in
D. Client’s relation with previous CPA firm application of accounting principles
between years.

17. Where client is changing auditors, PSA


requires communication between 21. Greg, an external auditor is considering
predecessor and successor auditors. to accept a Grant New Corp., a new
The burden of initiating the client. What do you think are the
communication rests with: necessary information he has to obtain?
A. Predecessor A. Preliminary understanding the Grant
B. Successor New Corporation’s industry & business.
C. Client B. Grant New Corp signature &
D. SEC engagement letter.
C. Understanding of Grant New
Corporation’s control environment.
18. According to PSA 210, the auditor and the D. A representation letter
client should agree on the terms of
engagement. The agreed terms would need
to be recorded in a(n) 22. Which of the following is not normally
A. Memorandum to be placed in the performed in the pre planning audit
permanent section of the auditing phase?
working papers A. Inquiring from predecessor auditor
B. Client representation letter B. Preparing an engagement letter
C. Engagement letter C. Making a preliminary estimate of
D. Comfort letter materiality
D. Deciding whether to accept or reject an
audit engagement
19. In making client acceptance decisions the
audit firm will consider:
A. Inherent and control risk of the client 23. Sunshine is confused of the correct order of
B. Audit risk to the CPA Firm steps in the audit process. Would you help
C. CPA firm’s potential ongoing revenue her?
from the audit client. I. Perform tests of control
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II. Develop an overall strategy for the general merchandising operations. Mr. Lee
expected conduct and scope of may properly
audit A. Accept the engagement & carry it out
III. Obtain client’s written consistent with the standards in
representation auditing.
IV. Prepare engagement letter B. Accept the engagement but exercise
V. Perform substantive tests due professional care.
C. Accept the engagement & acquire the
A. IV, I, II, V, III necessary competence.
B. IV, II, I, V, III D. Decline the engagement for lack of
C. V, II, III, I, IV experience or competence in an
D. V, IV, II, I, III entirely new line of specialization.

24. In which of the following situations 27. In making arrangements for an audit, there
would the auditor be unlikely to send a should be a clear understanding between
new engagement letter to a continuing the auditor and the client as to the
client? following except:
A. Change in terms of engagement A. The type of audit to be performed
B. Significant change in the nature or size B. Terms of settlement for audit services
of the client’s business C. Official to whom audit report shall be
C. Recent change in the partner &/or staff addressed.
in the audit engagement D. Assurance of auditor’s independence.
D. Recent change of client management

28. Mr. Tolentino, CPA, requested permission


25. The primary purpose of engagement letter to communicate with the predecessor
is to: auditors of Agri Best Corporation, a
A. Provide a written record of the prospective client. Agri Best Corporation’s
agreement with the client as to services refusal to permit will bear directly on Mr.
to be provided. Tolentino’s decision concerning the:
B. Provide a starting point for the auditor’s A. Adequacy of the preplanned audit
preparation of the preliminary audit program
program B. Integrity of management
C. Satisfy the requirements of the CPA’s C. Apparent scope limitation
liability insurance policy. D. Ability to establish consistency in the
D. Remind management that the application of accounting principles
primary responsibility for the F/S rests between years.
with management

29. The predecessor auditor is required to


26. Prime Corporation Inc. engages the services respond to the request of the successor
of Mr. Lee, CPA, to make a project study on auditor for information, but the response
the expanded food vending operations of can be limited to stating that no
the corporation with the corresponding information will be provided when
staffing & compensation package for its A. Predecessor auditor has poor relations
executive staff. Mr. Lee, however, has with successor auditor.
primarily auditing expertise & only in
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B. Client is dissatisfied with predecessor’s A. Preparation of F/S in accordance with


work relevant pronouncements issued by the
C. There are legal problems between AASC.
client & predecessor B. Establishment & maintenance of an
D. Predecessor believes that client lacks adequate internal control.
integrity. C. Provide the auditor with access to all
information that is relevant to the
preparation of F/S such as records,
30. Engagement letter will do one, some or all documentation, etc.
of the following: D. Provide auditor with unrestricted access
1. State whether the CPA will perform to persons & records.
audit, review or compilation services
2. State whether the CPA will perform tax
or MAS or other services 33. Which of the following circumstances would
3. State any restriction to be imposed on permit an independent auditor to accept an
the CPA’s work engagement after the end of the reporting
4. Identify deadlines for completing the period?
work A. Expectation of the operating
5. State the amount & type of work to be effectiveness of controls.
done B. Remedy the limitations resulting from
6. State the CPA’s fees for engagement accepting the engagement after the
7. Inform the client that the CPA does end of the reporting period, such as
not have responsibility for detecting those relating to the existence of
fraud. physical inventory.
C. Receipt of an assertion from the
A. 1, 2, 4, 6 predecessor auditor that the entity will
B. 1, 2, 3, 4, 6 be able to continue as a going concern.
C. 1, 3, 5, 7 D. Issuance of a disclaimer of opinion as
D. All of the above a result of inability to conduct certain
tests required by Philippine Standards
of Auditing due to the timing of the
31. The following are usually included in acceptance of the engagement.
an auditor’s engagement letter,
except:
A. List of audit procedures to be used in 34. Which of the following conditions most
inventory observation. likely would pose the greatest risk in
B. The financial statements are the accepting a new audit engagement?
responsibility of the company’s A. The client’s financial reporting system
management. has been in place for 10 years.
C. A reference to PFRS. B. The firm will have to hire an in one
D. A reference to PSA. audit area.
C. There will be a client-imposed scope
limitation.
32. An audit is conducted on the premise that D. Staff need to be rescheduled to cover
management &, where appropriate, TCWG, this new client.
have acknowledged & understood 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?
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35. Mar Co, CPA, was offered the engagement


to audit the F/S of Grace Key Corp for the 37. An auditor’s document includes the
year ended, Dec. 31, 2017. Mar Co had following:
served as a director of Grace Key Corp until “We will conduct our audit in accordance
Dec. 31, 2015, and her wife currently owns with PSA. Those standards require that we
1,000 of the 200,000 outstanding shares of comply with ethical requirements and plan
Grace Key Corp. Mar Co disassociated from and perform the audit to obtain reasonable
Grace Key Corp prior to being offered the assurance whether the F/S are free of
engagement. Moreover, the engagement material misstatement.”
does not cover any period that includes The above passage is most likely from a/an
Mar Co’s employment with Grace Key Corp. A. Emphasis of matter paragraph
Under the Code of Ethics, Mar Co should: B. Engagement letter
A. Accept the engagement C. Letter of representation
B. Decline the engagement because D. Audit findings
he had served as director.
C. Accept the engagement because her
wife’s stock ownership is an indirect 38. PSA 300 requires in part, that audit work be
financial interest. properly planned. Proper planning as
D. Decline the engagement because of intended by the Standard would occur
her wife’s stock ownership. when the auditor
A. Eliminate the possibility of counting
inventory items more than once by
36. The engagement letter documents and arranging to make extensive test
confirms the controls
A. Auditor’s acceptance of the appointment – YES B. Uses negative accounts receivable
Objective and scope of an audit – YES confirmations instead of second
Extent of the auditor’s responsibilities to requests and review of subsequent cash
the client – NO collections
Form of any reports – YES C. Physically observes the movement of
securities already counted to guard
B. Auditor’s acceptance of the appointment – YES against the substitution of such
Objective and scope of an audit – NO securities for others that are not
Extent of the auditor’s responsibilities to actually on hand.
the client – YES D. Compares all cash as a particular date
Form of any reports – NO to avoid performing time consuming
cash cutoff procedures.
C. Auditor’s acceptance of the appointment – YES
Objective and scope of an audit – YES
Extent of the auditor’s responsibilities to
39. Which of the following statements would
the client – NO
least likely appear in an auditor’s
Form of any reports – NO
engagement letter?
A. After performing our preliminary
D. Auditor’s acceptance of the appointment – YES
analytical procedures, we will discuss
Objective and scope of an audit – YES
with you the other procedures we
Extent of the auditor’s responsibilities to
consider necessary to complete the
the client – YES
engagement.
Form of any reports – YES
B. Fees for services and out of pocket
expenses
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C. Management is responsible for C. Decline the engagement


making all financial records and D. Issue an adverse opinion
related information available to us.
D. Our engagement is subject to the risk
that material errors or fraud, if they 43. An auditor has withdrawn from an audit
exist, will not be detected. engagement of a publicly listed company
after finding irregularities which may
materially affect the F/S. The auditor should
40. An auditor who, before the completion of set forth the reasons & finding in
engagement is requested to change the correspondence to the
engagement to one which provides a lower A. SEC
level of assurance, should B. Client’s legal counsel
A. Withdraw and consider whether there C. Makati stock exchange
is any obligation to report to the other D. Board of Directors
parties the circumstances necessitating
the withdrawal
B. Not agree to a change of engagement 44. An auditor is about to commence a
where there is no reasonable recurring annual audit engagement, the
justification for doing so continuing auditor’s independence would
C. Issue a report that includes reference to ordinarily be considered to be impaired if
the original engagement & any the prior year’s audit fee
procedures that may have been A. Was only partially paid and the balance
performed in the original engagement is being disputed
D. Consider the change reasonable if it B. Has not been paid and will not be
relates to information that is incorrect, paid for at least 12 months
incomplete or otherwise unsatisfactory. C. Has not been paid and the client has
filed a voluntary petition for bankruptcy
D. In all given choices
41. An auditor should accept an assurance
engagement only when the engagement
exhibits all of the following characteristics 45. The risk that the client’s financial
except statements may be materially false and
A. Subject matter is appropriate misleading is referred to as the
B. Criteria to be used are suitable and are A. Business risk
available to the intended users B. Information risk
C. Sufficient appropriate evidence to C. Client risk
support the auditor’s conclusion D. Risk assessment
is accessible to the auditor
D. Auditor is assured of being paid the
engagement fee

1. PSA 220 deals with the auditor’s


42. When restrictions that significantly limit the responsibilities in agreeing the terms of the
scope of the audit are imposed by the client audit engagement with management and,
at the engagement phase, the auditor where appropriate, those charged with
generally should governance. FALSE
A. Disclaimer
B. Unmodified opinion
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2. PSA 510, if the prior period’s F/S were 10. An auditor who accepts an audit
audited by a predecessor auditor, the engagement and does not possess the
auditor may be able to obtain sufficient industry expertise of the business entity
appropriate audit evidence regarding the should engage financial experts familiar
opening balances by reviewing the with the nature of the business entity.
predecessor auditor’s working papers. TRUE FALSE

3. In conducting the initial audit engagement, 11. Opening balances are based upon the
the auditor’s objective with respect to the closing balances of the prior period and
opening balances is to obtain sufficient reflect the effects of transactions and
evidence whether misstatements that events of prior periods and accounting
materially affect the current period’s F/S policies applied in the current period. FALSE
are present. TRUE
12. The auditor shall obtain sufficient
4. Audit engagement letter generally include appropriate audit evidence about whether
reference such as identification of the audit the opening balances contain
team members. FALSE misstatements that materially affect the
current period’s financial statements. TRUE
5. For initial engagements, the auditor should
obtain sufficient appropriate audit evidence 13. If the prior period’s financial statements
that the opening balances do not contain were audited by a predecessor auditor and
misstatement that materially affect the there was a modification to the opinion, the
current period’s financial statements. TRUE auditor shall evaluate the effect of the
matter giving rise to the modification in
6. Before accepting an engagement with new assessing the ROMM in the prior period’s
client, the CPA firm shall assess if the client financial statements in accordance with PSA
has the financial capacity to pay the 450. FALSE
estimated audit fee. FALSE
14. On recurring audits, the auditor may decide
7. Making inquiries of the predecessor not to send a new engagement letter each
auditor after obtaining the consent of the period. An example of this situation is when
prospective client, is generally done before there is a recent change of middle
accepting an engagement to audit a new management and rank and file organization
client. TRUE structure. TRUE

8. Client’s financial ability is a consideration 15. The objective of the auditor is to accept or
for a CPA firm in deciding whether to accept continue an audit engagement only when
a new client. TRUE the basis upon which it is to be performed
has been agreed, through confirming that
there is a common understanding between
9. After preliminary audit arrangements have the auditor and management and, where
been made, an engagement confirmation appropriate, TCWG of the terms of the
letter should be sent to the client. Usually audit engagement. TRUE
the letter would not include a statement
that MAS would be made available upon 16. Request to Change the Terms of the
request. TRUE Audit Engagement should consider the
justification given for the request,
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particularly the implications of a restriction information needs of specific users cannot


on the scope of the audit engagement. be met, there are financial information
TRUE needs that are common to a wide range of
users. FALSE
17. The auditor may decide to send a new
audit engagement letter or other written 23. When an entity is registered or operating in
agreement each period. FALSE a jurisdiction that does not have authorized
or recognized standards setting
18. The fact that because of the inherent organization, or where use of the financial
limitations of an audit, together with the reporting framework is not prescribed by
inherent limitations of internal control, law or regulation, the SEC identifies a
there is an unavoidable risk that some financial reporting framework to be applied
material misstatements may be detected, in the preparation of the financial
even though the audit is properly planned statements under good corporate
and performed in accordance with PSAs. governance. FALSE
FALSE
24. An independent audit conducted in
19. It is in the interests of both the entity and accordance with the PSAs does not act as a
the auditor that the auditor sends an audit substitute for the maintenance of internal
engagement letter before the control necessary for the preparation of
commencement of the audit to help avoid financial statements by management. TRUE
misunderstandings with respect to the
audit. TRUE 25. PSAs require that the auditor shall not
represent compliance with PSAs unless the
20. The auditor is required to obtain the auditor has complied with all of the PSAs
agreement of management that it relevant to the audit. TRUE
acknowledges and understands its
responsibility for internal control. 26. This Philippine Standard on Auditing (PSA )
However, the agreement does not imply 200 deals with the auditor’s responsibility
that the auditor will find that internal to plan an audit of financial statements.
control maintained by management has FALSE
achieved its purpose or will be free of
deficiencies. TRUE 27. The engagement partner and other key
members of the engagement team shall be
21. The use by management of an acceptable involved in planning the audit, including
financial reporting framework in the planning and participating in the discussion
preparation of the financial statements and among engagement team members. TRUE
the agreement of management and, where
appropriate, those charged with The involvement of the engagement partner
governance to the premise on which an and other key members of the engagement
audit is conducted is referred to as financial team in planning the audit draws on their
reporting risk. FALSE experience and insight, thereby enhancing
the effectiveness and efficiency of the
22. Many users of financial statements are planning process.
not in a position to demand financial
statements tailored to meet their specific
information needs. While all the
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28. The auditor shall update and change


the overall audit strategy and the audit
plan during the course of the audit.
FALSE

29. Adequate planning benefits the audit of


financial statements in assisting in the
selection of engagement team members
with appropriate levels of capabilities and
competence to respond to anticipated risks,
and the proper assignment of work to
them. TRUE

30. The auditor may decide to discuss


elements of planning with the entity’s
management to facilitate the conduct and
management of the audit engagement for
example, to coordinate some of the
planned audit procedures with the work of
the entity's personnel). TRUE

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