WEEK 8 ASSIGNMENT/QUIZ
The Financial Statement Audit Process
Compiled by Daisy B. Medina-Cruz, CPA, MBA
1. Auditors accumulate evidence to
Defend themselves in the event of a lawsuit.
Justify the conclusions they have otherwise reached.
Satisfy the requirements of the Securities and Exchange Commission.
Enable them to reach conclusions about the fairness of the financial statements.
2. When the auditor examines the client’s documents and records to substantiate information on
the financial statements, it is commonly referred to as
Inquiry
Confirmation
Vouching
Physical examination
3. After the auditor has completed all audit procedures, it is necessary to combine the information
obtained to reach an overall conclusion as to whether the financial statements are fairly
presented. This is highly subjective process that relates heavily on
Generally accepted auditing standards.
The Code of professional Ethics
PFRS
The auditor’s professional judgment
4. Preliminary knowledge about the client’s business and industry must be obtained prior to the
acceptance of the engagement primarily to
Determine the degree of knowledge and expertise required by the engagement.
Determine the integrity of the management.
Determine whether the firm is independent with the client.
Gather evidence about the fairness of the financial statements.
5. Arnel, CPA is succeeding Von, CPA, on the audit engagement of Jin Corporation. Arnel plans to
consult Von to review Von’s prior year working papers. Arnel may do so if
Von and Jin consent
Jin consents
Von consents
Von and Arnel consent
6. Which of the following factors most likely would influence an auditor’s determination of the
entity’s financial statements?
The complexity of the accounting system
The existence of related party transactions
The adequacy of the accounting records
The operating effectiveness of the control procedures.
7. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
An inadequate understanding of the entity’s internal control structure.
The close proximity to the end of the entity’s fiscal year.
Concluding that the entity’s management probably lacks integrity.
An inability to perform preliminary analytical procedures before assessing control risk.
8. One of the following refers to ethical responsibility of the auditor
Confirm bank balances.
Join a professional society.
Exercise due professional care.
Destroy confidential relationships with clients.
9. Hawkins requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor auditor’s work papers. The prospective client’s refusal to permit this
will bear directly on Hawkin’s decision concerning the
Apparent scope limitation
Integrity of the management.
Adequacy of the preplanned audit program
Ability to establish consistency in applications of accounting principles between years.
10. The risk that the auditor’s procedures will lead to the conclusion that a material error does not
exist in an account balance when in fact, such error does exist is referred to as
Detection risk
Audit risk
Control risk
Inherent risk
11. The risk of a material misstatement occurring in an account, assuming an absence of internal
control is referred to as
Detection risk
Audit risk
Control risk
Inherent risk
12. The concept of materiality would be least important to an auditor in determining the
Transactions that should be reviewed.
Need for disclosure of a particular fact or transaction.
Scope of the CPAs audit program relating to various accounts.
Effects of direct financial interest in the client upon the CPAs independence.
13. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit
function. An effective auditor will
Take any means available to reduce the risk to the lowest possible level.
Set the risk level between 5% to 10%.
Perform the audit procedure first and quantitatively set the risk level before forming an opinion
and writing the report.
Recognize that risks exist and deal with them in an appropriate manner.
14. Which of the following relatively small misstatements most likely could have a material effect on
an entity’s financial statements?
An illegal payment to a foreign official that was not recorded.
A piece of obsolete office equipment that was not retired.
A petty cash fund disbursement that was not properly authorized.
An uncollectible account receivable that was not written off.
15. Religious Corp. has a few large accounts receivable that totals P1,000,000. Pilgrim Corp. has a
large number of small accounts receivable that also total P1,000,000. The importance of an error
in any one account, is, therefore, greater for Religious Corp. than to Pilgrim Corp. This is an
example of the auditor’s concept of
Relative risk
Materiality
Comparative analysis
Reasonable assurance
16. Which of the following descriptions refer to substantive tests?
Obtain understanding of the entity and its environment, including its internal control.
Test the operating effectiveness of controls.
Detect material misstatements at the assertion level.
None of these.
17. Tests of controls are used to test whether controls are
Operating effectively.
Placed in operation or implemented.
Properly incorporated in the financial statements.
Properly documented by the client.
18. When a company’s financial statements bear an unqualified opinion, readers of the audit report
can assume that
The external auditor found no fraud.
Internal control is effective.
The company is financially sound and the financial statements are accurate.
All material disagreements between the company and external auditor about the application of
accounting principles were resolved to the satisfaction of the external auditor.
19. Which of the following is mandatory if the auditor is to comply with Philippine Standards of
Auditing?
Possession of the auditor of adequate technical training.
Use of analytical procedures in audit engagements.
Use of statistical sampling whenever feasible on an audit engagement.
Confirmation by the auditor of material accounts receivable balances.
20. If the auditor believes that an understanding with the client has not been established, the
auditor should ordinarily
Perform the audit with increased professional skepticism.
Decline to accept or perform the audit
Assess the control risk at the maximum level and perform a primarily substantive audit,
Modify the scope of the audit to reflect an increased risk of material misstatement.
21. This refers to the development of a general strategy and a detailed approach for the expected
nature, timing and extent of audit
Supervision
Direction
Audit planning
Pre-engagement
22. The major reason an independent auditor gathers audit evidence is to
Form an opinion on the financial statements.
Detect fraud.
Evaluate management.
Evaluate internal control.
23. Auditing standards differ from auditing procedures in that procedures relate to
Measure of performance
Audit principles
Acts to be performed
Audit judgments
24. If it is probable that the judgment of a reasonable person would have changed or influenced by
the omission or misstatement of information, then that information is
Relevant
Material
Significant
Immaterial
25. Which of the following is least likely to be included in an audit engagement letter?
Forms of the report
Type of opinion to be issued
Objectives and scope of the audit
Extent of his auditor’s responsibilities to the client.
26. If a change in the type of engagement from higher to lower level of assurance is not justified, the
auditor should
Qualify the report on the original engagement.
Continue with the revised engagement, but make explicit reference about the original
engagement.
Refuse to agree to management’s request on the change of engagement and continue with the
original engagement.
Withdraw from the engagement.
27. One means of informing the client that the auditor is not responsible for the discovery of all acts
of fraud is the
Client letter
Engagement letter
Responsibility letter
Representation letter
28. Which of the following is not normally performed in the pre planning or pre-engagement phase?
Preparing the engagement letter.
Inquiring from the predecessor auditor.
Making a preliminary estimate of materiality
Deciding whether to accept or reject an audit engagement.
29. Jenna, CPA, has been retained to audit the financial statements of JMV Co. JMV’s predecessor
auditor was Moshe, CPA, who has been notified by JMV that Moshe ‘s services have been
terminated. Under these circumstances, which party should initiate the communication
between Jenna and Moshe?
Jenna, the incoming auditor
Moshe, the predecessor auditor
JMV’s controller
The chairman of JMV’s board of directors
30. After discovering material misstatements in a client’s financial statements that the client would not
revise, the auditor withdrew from the engagement. If asked by the incoming auditor about the
termination of the engagement, the predecessor auditor should
State that he found material misstatements that the client would not revise.
Suggest that the incoming auditor ask the client.
Suggest that the incoming auditor obtain the client’s permission to discuss the reasons.
Indicate that a misunderstanding occurred.
31. Which of the following is least likely to be included in an audit engagement letter?
Identification of specific audit procedures that the auditor needs to undertake.
Description of any letters or reports that the auditor expects to submit to the client.
A reference to the inherent limitations of an audit that there is an unavoidable risk that some
material misstatements may remain undiscovered.
Basis on which fees are computed and any billing arrangements.
32. Which statement is incorrect regarding the sufficiency and appropriateness of audit evidence?
Sufficiency and appropriateness are inter-related.
Sufficient is the measure of quantity of audit evidence.
Appropriateness is the measure of quality of the audit evidence.
Merely obtaining more audit evidence may compensate for its poor quality.
33. The type of opinion to be issued when an auditor has not performed an audit sufficient in a scope
to enable him to form an opinion which typically results in an explanatory paragraph followed by a
paragraph stating that no opinion is expressed.
Qualified opinion
Adverse opinion
Disclaimer of opinion
Unqualified opinion
34. An opinion that communicates a favorable signal about financial statements, but with
modifications as when the auditor may wish to alert users that financial position, results of
operations, and cash flows are fairly presented “except for” the effects of misapplying an
accounting principle.
Qualified opinion
Adverse opinion
Disclaimer of opinion
Unqualified opinion
35. Debriefing involves the following except
Analyzing the activities within the audit.
Producing recommendations.
Performing final analytical procedures.
Considering events during the audit.
POP-UP QUIZ COMPILATION
1.
The auditor has the responsibility for the preparation of a complete set of financial statements.
False
The overall objective of an independent auditor is to obtain reasonable assurance about
whether the financial statements are prepared in all material respects, in accordance with an
applicable financial reporting framework.
True
Professional skepticism refers to having an unbiased opinion both on the state of mind of the
auditor and in appearance.
False
Scope of an audit refers to compliance with all PSAs relevant to the audit.
False
Audit evidences are representations made by management that the financial statements are presented
fairly, in all material respects, in accordance with the applicable financial reporting framework.
False- Management assertions
2
The susceptibility of an assertion (i.e. accounts and amounts) to a misstatement that could be
material, individually or when aggregated with other misstatements assuming that there were
no related internal controls.
Inherent risk
Control risk
Detection risk
Business risk
Control risk function of the effectiveness of an audit procedure and of the application by
the auditor.
False
It is evidence that is able to convince the user of its truthfulness.
Persuasive evidence
Conclusive evidence
Skepticism
None of the above
Professional judgment is necessary for the proper conduct of an audit and is dependent on
the auditor’s perception and therefore highly objective
False
Pre-engagement carries out initial audit activities that does NOT include
inquiring from predecessor auditor
designing overall risk response
client acceptance and continuance
agreement on the terms of engagement.
3
When the auditor examines the client’s documents and records to substantiate information on the
financial statements, it is commonly referred to as
Inquiry
Confirmation
Vouching
Physical examination
Factors that may lead the auditor to send a new engagement letter does NOT include
A recent change of junior management.
A significant change in ownership.
A change in legal or regulatory requirements.
.A change in other reporting requirements.
Which of the following is least likely to be included in an audit engagement letter?
Forms of the report
Type of opinion to be issued
Objectives and scope of the audit
Extent of his auditor’s responsibilities to the client.
Risk assessment procedures are also performed to understand the entity’s internal control, to identify and
assess the risks of material misstatement, whether due to fraud or error, at the financial statement and
assertion level.
True
Is issued when the conditions are appropriate for a qualified opinion, yet the issue leading to qualification
is so material that a less favorable signal is warranted e.g. an auditor may wish to alert users that the
effects of misapplying an accounting principle are so material that financial position, results of operations,
and cash flows are not fairly presented.
Qualified opinion
Adverse opinion
Disclaimer of opinion
Unqualified opinion
Assignment: Discussion Cases
Andoy, CPA is approached by Buttons Manufacturing Company. Buttons desires to engage Andoy to
perform an audit which in prior years was performed by Mae, another CPA.
Requirement:
Identify the procedures which Andoy should follow in accepting or declining the engagement.
Please submit your case analysis (3) days after Week 8. Should there be any changes in the submission
of this assignment you will be informed accordingly.
Possible procedures that Andoy should follow in accepting or declining the
engagement
1. Evaluate auditor’s qualifications as well as the auditability of the prospective client’s financial
statements.
2. Preliminary understanding of the client’s business and background investigation of the
prospective client’s integrity.
3. Evaluating compliance with ethical requirements including independence.
4. Inquiring from predecessor auditor with client’s permission.
5. Ability to serve the client properly making sure enough qualified personnel are available to
perform the audit.
6. Establishing an understanding of the terms of engagement from the client that it acknowledge
and understands its responsibility.
7. Preparation of letter of engagement to document the agreement on the terms of the engagement.
