40.

When an auditor assesses control risk below the maximum level, the auditor is required to document the auditor’s
Basis for concluding that control Understanding of the entity’s internal
risk is below the maximum level control structure elements
a. Yes Yes
b. No No
c. Yes No
d. No Yes

41. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
a. Substantive tests, documentation of control structure, and tests of controls
b. Documentation of control structure, tests of controls, and substantive tests
c. Documentation of control structure, substantive tests, and tests of controls
d. Tests of controls, documentation of control structure, and substantive tests

42. In obtaining an understanding of an entity’s internal control structure, an auditor is required to obtain knowledge
about the
Operating effectiveness of Design of policies
Policies and procedures and procedures
a. Yes Yes
b. No Yes
c. Yes No
d. No No

43. Which of the following audit techniques most likely would provide an auditor with the most assurance about the
effectiveness of the operation on an internal control procedure?
a. Confirmation with outside parties c. Re-computation of account balance
b. Observation of client personnel d. Inquiry of client personnel
44. Which of the following is the correct order for performing the auditing procedures A through C below
A = Tests of Controls
B = Preparation of a flowchart depicting the client’s internal control structure
C = Substantive tests
a. ABC b. BAC c. ACB d. BCA

45. After considering a client’s internal control, an auditor has concluded that the system is well designed and is
functioning as anticipated. Under these circumstances, the auditor would most likely
a. Cease to perform further substantive tests
b. Not increase the extent of planned substantive tests
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the preplanned audit program

46. After considering internal control, an auditor might decide to

a. Increase the extent of tests of controls and substantive tests in areas where internal control is strong
b. Increase the extent of substantive tests in areas where internal control is weak
c. Reduce the extent of tests of controls in areas where internal control is strong
d. Reduce the extent of both substantive tests and tests of controls in areas where internal control is strong

47. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of
the following except:
a. Make inquiries c. Make observations
b. Design substantive tests d. Inspect documents and records

48. In an auditor’s consideration of internal control, the completion of a questionnaire is most closely associated with
which of the following?
a. Separation of duties c. Flowchart accuracy
b. Understanding the system d. Tests of controls

49. Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance that the
internal control procedures are in use and operating as planned. The auditor obtains this assurance by performing
planned
a. Substantive tests c. Transaction tests
b. Tests of controls d. Tests of trends and ratios
50. After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of the controls. Which of
the following in not appropriate reason to omit tests of controls?
a. The controls duplicate other controls.
b. The controls appear adequate.
c. Reportable conditions preclude assessing control risk below the maximum.
d. The effort to test controls exceeds the effort saved by not performing substantive tests.

51. 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
circumstance 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 can include audit procedures to
verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

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

53. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry.
b. The competency of the client’s internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.
54. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit
engagement?
a. Analysis of balance sheet accounts
b. Analysis of income statement accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management

55. 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.

56. 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

57. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best
documented in
a. Independent auditor’s report c. Client’s representation letter
b. Audit engagement letter d. Audit program

58. The following are valid reasons why an auditor sends to his client an engagement letter:
A B C D
a. Avoid misunderstanding with respect to
engagement
Yes Yes No Yes
b. Confirms the auditor’s acceptance of the
appointment
Yes Yes Yes No
c. Objective and scope of the audit Yes Yes Yes Yes
d. Assures CPA’s compliance to GAAS Yes No No Yes

59. Which of the following is appropriately included in an audit engagement letter?

I. 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 unavoidable
risk that even some material misstatements may remain undiscovered.
II. The audit will be made with the objective of expressing an opinion on the financial
statements.
III. An audit also includes assessing the accounting procedures used and significant
estimates made by management.
a. I and II c. II and III
b. I and III d. I, II and III

60. Which of the following is least likely included in an audit engagement letter?
a. The objective of financial reporting.
b. Management responsibility for the financial statements.
c. The form of any reports or other communication of the results of the engagement.
d. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit.

61. 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.

62. Which of the following least likely requires the auditor to send a new engagement letter?
a. An indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change in the audit firm’s management.
d. Legal requirements and other government agencies’ pronouncements.

63. Which of the following least likely influence the auditor’s decision to send a separate engagement letter to a
component of parent entity client?
a. Legal requirements
b. Degree of ownership over a component entity by parent company
c. Location of the principal place of business of the component entity
d. Who appoints the auditor of the component

64. According to PSA 210, which of the following statements is correct?

a. The auditor and the client need not agree on the terms of the engagement.
b. Where the terms of the engagement are changed, the auditor and the client need not agree on the new terms if they
already agreed on the old terms.
c. The engagement letter assists in the supervision and review of the audit work.
d. The auditor may agree to a change of engagement where there is reasonable justification for doing so.

65. Which of the following is a NOT valid reason for a change of the engagement to a lower “level of assurance”?
a. Change in circumstances affecting the need for the service.
b. Restriction on the scope of the engagement.
c. Misunderstanding as to the nature of the engagement originally requested.
d. The client’s need is satisfied by an engagement that provides lower level of assurance.

66. 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 contain a separate paragraph that refers to the original engagement.
b. Should always refer to any procedures that may have been performed in the original engagement.
c. Should qualify the opinion due to scope limitation.
d. Omits reference to the original engagement.

67. Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement
and is not permitted to continue the original engagement
I. Issue a qualified opinion due to a significant scope limitation.
II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances
necessitating withdrawal
a. I only c. II and III
b. I and II d. I, II and III

68. The entire set of data about which the auditor wishes to draw conclusions is called
a. Population. c. Sampling frame.
b. Sample. d. Sampling unit.

69. Which of the following constitutes audit sampling?

a. Selecting and examining specific items to determine whether or not a particular procedure is being performed.
b. Examining items to obtain information about matters such as the client’s business, the nature of transactions,
accounting and internal control systems.
c. Examining items whose values exceed a certain amount so as to verify a large proportion of the total amount of an
account balance or class of transactions.
d. Applying audit procedures to less than 100% of items within an account balance or class of transactions such that all
sampling units have a chance of selection.

70. Audit sampling is not involved in the following, except

a. Performing a walkthrough test.
b. Performing analytical procedures
c. Selecting the sample without following a structured technique.
d. Testing controls that leave no audit trail.