Performing Preliminary Engagement Activities

PART 1
1. Which of the following would an auditor least likely perform as part of the auditor’s
preliminary engagement activities or pre-planning or pre-engagement phase?
A. Perform procedures regarding the continuance of the client relationship and specific
engagement.
B. Evaluate compliance with ethical requirements, including independence.
C. Establish an understanding of the terms of the engagement.
D. Obtain understanding of the legal and regulatory framework applicable to the entity.

2. In making a decision to accept or continue with a client, the auditor should consider:
A. B. C. D.
Its competence Yes Yes Yes Yes
Its independence Yes No Yes No
Its ability to serve the client properly Yes Yes Yes No
The integrity of client’s management Yes Yes No Yes
Agreement of the terms of engagement with
the management Yes No Yes No

3. The auditor will utilize many resources to asses management integrity in the client
acceptance process. Which of the following will an auditor most likely refrain from using in
this research?
A. Predecessor auditor
B. Other professionals in the business community.
C. Public databases.
D. All of the above will typically be used by an auditor in the search.

4. Engagement risk has been defined as the risk of potential losses that are incurred by the
auditor in being associated with a particular client. Which of the following factors are not
associated with increased engagement risk for the auditor?
A. Management with questionable integrity.
B. A failed company.
C. Materially misstated financial statements.
D. All of these factors increase engagement risk.

5. A CPA who has never audited a commercial bank

A. May not accept such engagement
B. May accept the engagement only if the accounting firm specializes in the audit of
commercial banks.
C. May accept the engagement after attaining a suitable level of understanding of the
transactions and accounting practices unique to commercial banking.
D. May accept the engagement because training as a CPA transcends unique industry
characteristics.

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6. Prior to the acceptance of an audit engagement with a client who has terminated the
services of the predecessor auditor, the CPA should
A. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstances leading to the termination with the understanding
that all information disclosed will be kept confidential.
B. Accept the engagement without contacting the predecessor auditor since the CPA will
include procedures to verify the reason given by the client for termination.
C. Not communicate with the predecessor auditor because this would in effect be asking
the auditor to provide the confidential relationship between auditor and client.
D. Advise the client of the intention to contact the predecessor and request permission
for the contact.

7. Which of the following will an auditor most likely discuss with the former auditors of a
potential client prior to acceptance?
A. Integrity of management.
B. Reasons for changing audit firms.
C. Disagreements with management regarding accounting principles.
D. All of the above must be discussed.

8. If permission from client to discuss its affairs with the proposed auditor is denied by the
client, the predecessor auditor should:
A. Keep silent of the denial.
B. Disclose the fact that the permission to disclose is denied by the client.
C. Disclose adequately to proposed auditor all noncompliance made by the client.
D. Seek legal advice before responding to the proposed auditor

9. The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when:
A. the predecessor auditor has poor relations with the successor auditor.
B. the client is dissatisfied with the predecessor’s work
C. there are actual or potential legal problems between the client and the predecessor.
D. the predecessor believes that the client lacks integrity.

10. When can it be said that the basis of audit engagement has been agreed and the auditor
can accept or continue an audit engagement?
A. The preconditions for an audit have been established.
B. The auditor and management and, where appropriate, those charged with governance
have agreed on the terms of the audit engagement.
C. Either a or b
D. Both a and b

11. The use by management of an acceptable financial reporting framework in the preparation
of the financial statement and the agreement of management and, where appropriate,
those charged with governance to the premise on which an audit is conducted.
A. Terms of audit engagement
B. Preconditions for the audit

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 C. Scope of the audit
D. FS Audit

12. In an audit of FSs, the financial reporting framework used is generally the GAAP. In the
Philippines, which of the following is/are the acceptable framework?
A. Philippine Financial Reporting Standards (PFRSs)
B. PFRS for Small and Medium-sized entities (SMEs)
C. Other acceptable basis of reporting
D. Any of the above depending on the type of client

13. The following are the management’s responsibilities that constitute the premise on which
the audit is conducted, except:
A. Preparation and presentation of the FSs.
B. Design, implementation and monitoring of internal control relevant to FSs.
C. To provide the auditor with access to all information relevant to audit and additional
information the auditor may request.
D. To provide the auditor unrestricted access to persons within and outside of the entity.

14. If management or TCWG impose a limitation on the scope of the auditor’s work in the
terms of a proposed audit engagement such that the auditor believes the limitation will
result in the auditor disclaiming an opinion on the financial statements, the auditor shall
A. Not accept such a limited engagement as an audit engagement, unless required by
law or regulation to do so.
B. Not accept such a limited engagement as an audit engagement, in all cases.
C. Accept such a limited engagement as an audit engagement as the auditor serves the
public interest.
D. Accept such a limited engagement as an audit engagement as long as documented in
audit engagement letter.

15. Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?
A. The complexity of the accounting system
B. The existence of related-party transactions
C. The adequacy of the accounting records
D. The operating effectiveness of control procedures

16. Engagement letters are widely used in practice for professional engagement for all types.
Which of the following best describes the purpose of the engagement letter?
A. The engagement letter relieves the auditor some responsibility for the exercise of due
care.
B. By clearly defining the nature of the engagement, the engagement letter helps to avoid
and resolve misunderstandings between CPA and client regarding the precise nature
of the work to be performed and the type of report to be issued.
C. The engagement letter conveys to management the detailed steps to be applied in the
audit process.

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 D. The engagement letter should be signed by both the client and the CPA and should
be used only for independent audits.

17. When should an auditor obtain an engagement letter?

A. Whenever a prospective client offers to hire the audit firm
B. During the interim audit period, after the auditor has evaluated the client’s internal
control and estimated the amount of time required for the audit
C. When a new client is accepted by the auditor
D. At the conclusion of the field work, just prior to signing the audit report

18. It is in the interest of both client and auditor that the auditor sends an audit engagement
letter, preferably before
A. The performance of substantive testing.
B. The commencement of the engagement.
C. The completion of audit.
D. Before the issuance of audit report

19. The auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate. Which of the following normally signs the
engagement letter for an audit of a public company?
A. Corporate treasurer.
B. Chief financial officer.
C. Chairman of the board of directors.
D. Audit committee.

20. The form and content of audit engagement letters may vary for each client, but they would
generally include reference to the following, except
A. The objective of the audit of financial statements.
B. Auditor’s responsibility for the financial statements.
C. The form of any reports or other communication of results of the engagement.
D. Unrestricted access to whatever records, documentation and other information
requested in connection with audit.

21. Which of the following is not included in an engagement letter?

A. Restriction on cash balances, lines of credit by similar arrangements
B. Accessibility of all financial records
C. Client imposed limitation in the scope
D. Limitation in the scope of examination as imposed by circumstances

22. In determining audit fees, an auditor may take into account each of the following except
A. Volume and intricacy of work involved.
B. Degree of responsibility assumed.
C. Number and cost of man hours needed.
D. Size and amount of capital of client.

23. Retainer’s fee basis is when

A. Billing is done on the basis of actual time spent at the agreed rates/hour.

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 B. The client is charged on a per diem basis with a cap or ceiling amount.
C. The client is billed a fixed periodically for the services rendered during a designated
period of time.
D. The client is billed at a single amount for the entire engagement.

24. A type of billing audit client which combines lump sum and per diem methods is known as
A. Retainer’s fee basis
B. Maximum fee basis
C. Either (a) and (b)
D. None of the above

25. 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. Ethnical requirements
D. Whether a separate audit report is to be issued on the component

26. Assuming a recurring audit, in which of the following situations would the auditor be
unlikely to send a new engagement letter to the client?
A. A recent change in partner and/or staff involved in the audit engagement.
B. A change or revision in the terms of engagement.
C. A recent change of client nature or size or management.
D. A misunderstanding as to the objective and scope of audit.

27. When a change in the type of engagement from higher to lower level of assurance is
reasonably justified, the report based on the revised engagement
A. Should not contain a separate paragraph that refers to the original engagement.
B. Should not refer to any procedures that may have been performed in the original
engagement.
C. Omits reference to the original engagement.
D. All of the above.

28. Which of the following would ordinarily be considered a reasonable basis for requesting a
change in the engagement
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. Both a and b

29. If a change in the type of engagement from higher to lower level of assurance is not
justified, the auditor should
A. Continue with the revised engagement, but make explicit reference about the original
engagement.

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 B. Continue with the revised engagement, and not make explicit reference about the
original engagement.
C. Refuse to agree to management’s request on the change of the engagement and
continue with the original engagement.
D. Withdraw from the engagement.

30. Which of the following actions may be appropriate if the auditor is unable to agree to a
change of the engagement is not permitted to continue the original engagement?
I. Auditor should withdraw from the engagement
II. Consider whether there is any obligation to report to the board of directors or
shareholders the circumstances necessitating withdrawal
A. I C. II
B. I, II D. Neither I nor II

PART 2

1. Which of the following is most likely to occur at the beginning of an initial audit
engagement?
A. Prepare draft of the FSs and auditor’s report.
B. Study and evaluate the system of internal administrative control.
C. Determine the client’s reason for an audit.
D. Consult with and review the work of the predecessor auditor prior to discussing
the engagement with client management.

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

3. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
A. An inadequate understanding of the entity’s internal control structure.
B. The close proximity to the end of the entity’s fiscal year.
C. Concluding that the entity’s management probably lacks integrity.
D. An inability to perform preliminary analytical procedures before assessing control
risk

4. Kool Connections, Inc. requests that Wreath and Greenworth Auditors make a proposal
to provide audit services for the company. Which of the following is a correct assumption
surrounding the result of the proposal?
A. Greenworth is required to accept Kool Connections if selected as its auditors.
B. Greenworth should interview the prior audit firm prior to releasing the proposal to
Kool Connections
C. Greenworth may decide not to accept Kool Connections based upon the
perceived risk of being associated with Kool.

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 D. Greenworth will contact the BOA or the PICPA and ask for a review of the proposal
prior to acceptance.

5. Which of the following is typically not a significant risk factor that an auditor will consider
in the client acceptance of Stitch Magee Co.?
A. Brad Stitch, the president and 50% owner of Stitch Magee was investigated for
securities violations four years earlier.
B. Stitch-Magee Co. is a public company in the high technology industry.
C. Stitch Magee Co. is a manufacturing company that procures much of its raw
materials from the Detroit, Michigan area.
D. Stitch Magee Co. sells 25% of its inventory to Nani, Inc. which is owned primarily
by Nani Magee, the father of Stitch Magee’s treasurer, vice president of finance
and 50% owner.

6. 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.

7. Which of the following is(are) proper when a change of auditors has taken place or is in
process?
A. The successor auditor should advise the client of his intention to contact the
predecessor auditor and request permission for the contact
B. The integrity of management should not be subject of communication between the
predecessor and successor auditors
C. Communication between the predecessor and successor auditors should take
place only after the successor auditor has accepted the engagement
D. All of the above

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

9. An incoming auditor should request the new client to authorize the predecessor auditor to
allow a review of the predecessor’s
Engagement Letter Working Paper
A. Yes Yes
B. Yes No

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 C. No Yes
D. No No

10. When an independent auditor is approached to perform an audit for the first time, he or
she should make inquiries of the predecessor auditor. Inquiries are necessary because
the predecessor may be able to provide the successor with information that will assist the
successor in determining whether
A. The predecessor’s work should be used.
B. The company rotates auditors.
C. In the predecessor’s opinion, control risk is low.
D. The engagement should be accepted.

11. Upon 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 should
A. State that he found material misstatements that the client would not revise.
B. Suggest that the incoming auditor ask the client.
C. Suggest that the incoming auditor obtain the client’s permission to discuss the
reasons.
D. Indicate that the misunderstanding occurred.

12. Engagement letters are required for?

A. All engagements
B. Audit engagements only
C. Assurance engagements only
D. All engagements except the preparation of ITR

13. The primary purpose of the engagement letters is to

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

14. The following matters are generally included in an auditor’s engagement letter, except
A. Management’s responsibility for the FSs
B. The scope of the audit
C. The fact that because of the test nature and other inherent limitations of the audit,
together with the inherent limitations of internal control, there is an unavoidable
risk that even some material misstatements may remain undiscovered
D. The factors to be considered in setting preliminary judgments about materiality

15. Which of the following matters is generally included in 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 liability for illegal acts committed by its employees.

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 D. The auditor’s responsibility to search for significant internal control deficiencies.

16. An audit engagement letter least likely includes

A. A reference to the inherent limitation of an audit that some material misstatements
may remain undiscovered.
B. Identification of specific audit procedures that the auditor needs to undertake.
C. Description of any letters or reports that the auditor expects to submit to the client.
D. Arrangements concerning the involvement of internal auditors and other client’s
staff

17. In determining estimates of fees, an auditor may take into account each of the following,
except
A. Value of the service to the client.
B. Degree of responsibility assumed by undertaking the engagement.
C. Skills required to perform the service.
D. Attainment of specific findings.

18. 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.

19. On recurring audits, the auditor may decide not to send a new engagement letter each
year. However, he might decide to send a new letter when:
A. There is a change in the auditors who will assist in the conduct of the audit
B. There is a legal requirement
C. There is a change in the client’s accounting policy for inventories.
D. There is a change in the estimated life of the client’s property and equipment.

20. The auditor should not agree for a change of engagement when there is no reasonable
justification for doing so.
If the auditor is unable to agree to a change of the engagement and is not permitted to
continue the original engagement, this will have an effect on the auditor’s report.
A. True, False
B. False, False
C. True, True
D. False, True

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