MARY ANN V.

DOMINCEL
BSA-4
POST QUIZ – PRE ENGAGEMENT & AUDIT PLANNING
A.1. Adequate planning of the audit work helps the auditor of
accomplishing the following objectives,
except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important
areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.

D.2. The extent of planning will vary according to any of the

following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the
business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.

D.3. Which of the following is least likely considered by the

auditor in developing the overall audit
plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major
component of financial statements
d. The general level of competence of audit assistants.

C.4. Which of the following is not considered by the CPA when he

makes an overall audit plan?
a. Identification of complex accounting areas including those
involving accounting estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with
the entity that are expected
under the engagement.

C.5. Audit plan should

A B C D
A. Precede action Yes No Yes No
B. Be fixed Yes No No Yes
C. Be cost beneficial Yes Yes Yes Yes
C.6. Which of the following least likely affect the form and
content of the overall audit plan?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity’s form of business organization.
d. The size of the entity.

D.7. The audit program should contain the following, except:

a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk

A.8. Which of the following will most likely help the auditor to
identify and understand the events,
transactions and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his
client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.

C.9. The auditor should have or obtain a knowledge of the

client’s business sufficient to:
a. Evaluate whether the financial statements are materially
misstated.
b. Document material weaknesses in accounting and internal
control systems.
c. Identify and understand events, transactions and practices
that may have effect on financial
statements.
d. Have an overall evaluation of whether financial assertions are
fairly presented in the
financial statements.

A.10. The auditor is not expected to have

a. A particular knowledge of the economy and the industry within
which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that
possessed by management.
d. A knowledge of business which is used in assessing inherent
and control risk.
A.11. The management denied the auditor’s request that the
management has to extend its
assessment of its going concern ability. However, the auditor’s
other procedures are sufficient
to assess the appropriateness of management use of the going
concern assumption in the
preparation of the financial statements. he auditor should issue:
a. Unqualified opinion c. Adverse opinion
b. Unqualified opinion with explanatory paragraph d. Disclaimer
of opinion

A.12. Understanding the business and using this information

appropriately assists the auditor in,
except
a. Deciding whether to do tests of controls.
b. Evaluating audit evidence.
c. Assessing risks and identifying potential problems.
d. Planning and performing the audit effectively and efficiently.

A.13. Which of the following is the ultimate concern of the

knowledge about the business?
a. Consideration of how it affects the financial statements taken
as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be
issued.

C.14. A knowledge of the business is a frame of reference within

which the auditor exercises
professional judgment. This assists the auditor in carrying out
the following objectives, except:
a. Assessing risks and identifying problems.
b. Evaluating audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.

D.15. Throughout the course of the audit, the auditors make

judgment about many matters where
knowledge of the business is important. These procedures do not
include:
a. Evaluating accounting estimates and management
representations.
b. Identifying related parties and related party transactions.
c. Assessing inherent and control risks.
d. Assessing the appropriateness of using statistical sampling
instead of judgmental sampling.

A.16. Which of the following factors is inappropriately relevant

to the management’s assessment of
the going concern assumption?
a. The degree of uncertainty associated with the outcome of an
event or condition decreases
significantly the further into the future of judgment being made
about the outcome of an
event or condition.
b. Any judgment about the future is based on information
available at the time at which the
judgment is made.
c. The size and complexity of the entity, and the nature and
conditions of its business affect
the judgment regarding the outcome of events or conditions.
d. Subsequent events can contradict a judgment which was
reasonable at the time it was
made.

A.17. Which of the following may not cast significant doubt about
the going concern assumption of
an entity.
a. The entity heavily used equity financing for investment in
permanent assets.
b. Non-compliance with capital or other statutory requirements.
c. Pending legal or regulatory proceeding against the entity that
may, if successful, result in
claims that are unlikely to be satisfied.
d. Changes in legislation or government policy expected to
adversely affect the entity.

D.18. When events or conditions have been identified which may

cast significant doubt on the entity’s
ability to continue as a going concern, the auditor should:
a. Review management’s plans for future actions based on its
going concern assessment.
b. Gather sufficient appropriate audit evidence to confirm or
dispel whether or not a material
uncertainty exists through carrying out procedures considered
necessary, including
considering the effect of any plans of management and other
mitigating factors.
c. Seek written representations from management regarding its
plans for future action.
d. All of the above.

A.19. Which of the following proposed actions may mostly mitigate

the going concern problem of an
entity?
a. Rescheduling of loan payments.
b. More vigorous business expansion.
c. Acquiring asset replacement using short-term loans.
d. Increasing the amount of cash dividends to be paid.

D.20. The following are related to the auditor’s responsibility

to assess the ability of the company to
continue as a going concern?
I. The auditor should consider the appropriateness of the
management’s use of the going
concern assumption in the preparation of the financial
statements.
II. The auditor is to consider whether there are material
uncertainties about the entity’s ability
to continue as a going concern that needs to be disclosed in the
financial statements.
III. The absence of any reference to going concern uncertainty in
the auditor’s report is viewed
as a guarantee as to the entity’s ability to continue as a going
concern.
Which of the foregoing inappropriately describe(s) the auditor’s
responsibility?
a. I only b. I and II only c. II only d. III only

C.21. The auditor consider events and condition relating to the

going concern assumption during the
planning stage in order to:
a. Help management do action that may mitigate its going concern
problems.
b. Identifying the areas of accounting and internal control
systems that need tests of control.
c. To have a timely discussion with management and a review of
management’s plans and
resolutions of any identified going concern issues.
d. In order to shorten assessment period.

C.22. If adequate disclosure is not made by the entity regarding

substantial doubt about its ability to
continue as a going concern, the auditor should include in his
report specific reference to the
substantial doubt as to ability of the company to continue as a
going concern and should
express:
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion.
c. Either an “except for” qualified opinion or an adverse
opinion.
d. A disclaimer of opinion.

C.23. If the auditor believes that the entity will not be able to
continue as a going concern and the
financial statements are prepared on a going concern basis, the
auditor’s report should include:
a. Unqualified opinion with explanatory paragraph. c. Adverse
opinion.
b. Qualified opinion. d. Disclaimer of opinion.

D.24. If the auditor believes that management should extend its

assessment but the latter refuses to
do so, the auditor should:
a. Rectify the lack of analysis by management.
b. Extend his audit procedures to obtain sufficiently appropriate
evidence regarding the use of
the going concern assumption.
c. Emphasize this matter in the audit report.
d. Consider a modification of the report as a result of the
limitation in the scope of the auditor’s
work.

A.25. An independent auditor observed that only one of the

company's ten divisions had a large number of
material sales transactions close to the end of the fiscal
year. In terms of risk analysis, this would most likely
lead the auditor to conclude that:
a. There is a relatively higher risk of overstatement of
revenues for this division than for other divisions.
b. Risks associated with auditing this division are not
affected by this information.
c. There is a high risk that liabilities of this division
are understated.
a. There is a high risk that the other nine divisions
have understated revenues.

D.26. An abnormal fluctuation in gross profit that might

suggest the need for extended audit procedures for sales
and inventories would most likely be identified in the
planning phase of the audit by the use of
a. Tests of transactions and balances.
b. A preliminary review of internal control.
c. Specialized audit programs.
d. Analytical procedures.

B.27. Inherent risk is defined as the susceptibility of an

account balance or class of transactions to error that could
be material assuming that there were no related internal
controls. Of the following conditions, which one does not
increase inherent risk?
a. The client has entered into numerous related party
transactions during the year under audit.
b. Internal control over shipping, billing, and recording
of sales revenue is weak.
c. The client has lost a major customer accounting for
approximately 30% of annual revenue.
d. The board of directors approved a substantial bonus for
the president and chief executive officer, and also
approved an attractive stock option plan for
themselves.

B.28. The understanding between the client and the auditor as

to the degree of responsibilities to be assumed by each
are normally set forth in a(an)
a. Representation letter.
b. Engagement letter.
c. Management letter.
d. Comfort letter.

D.29. The element of the audit planning process most likely

to be agreed upon with the client before implementation
of the audit strategy is the determination of the
a. Methods of statistical sampling to be used in
confirming accounts receivable.
b. Pending legal matters to be included in the inquiry of
the client's attorney.
c. Evidence to be gathered to provide a sufficient basis
for the auditor's opinion.
d. Schedules and analyses to be prepared by the client's
staff.
B.30. Which of the following statements concerning
materiality thresholds is incorrect?
a. Aggregate materiality thresholds are a function of the
auditor's preliminary judgments concerning audit risk.
b. In general, the more misstatements the auditor
expects, the higher should be the aggregate
materiality threshold.
c. The smallest aggregate level of errors or
fraud that could be considered material to any one of
the financial statements is referred to as a
"materiality threshold."
d. Materiality thresholds may change between the planning
and review stages of the audit. These changes may be
due to quantitative and/or qualitative factors.

B.31. With respect to errors and fraud, the auditor should

plan to
a. Search for errors or fraud that would have a
material effect on the financial statements.
b. Discover errors or fraud that would have a material
effect on the financial statements.
c. Search for errors that would have a material effect and
for fraud that would have either material or
immaterial effects on the financial statements.
d. Search for fraud that would have a material
effect and for errors that would have either
material or immaterial effects on the financial
statements.

A.32. Why should the auditor plan more work on individual

accounts as lower acceptable levels of both audit risk and
materiality are established?
a. To find smaller errors.
b. To find larger errors.
c. To increase the tolerable error in the accounts.
d. To decrease the risk of overreliance.

B.33. The auditor notices significant fluctuations in key

elements of the company's financial statements. If
management is unable to provide an acceptable explanation,
the auditor should
a. Consider the matter a scope limitation.
b. Perform additional audit procedures to investigate the
matter further.
 c. Intensify the examination with the expectation of
detecting management fraud.
d. Withdraw from the engagement.

D.34. Which of the following audit risk components may be

assessed in non-quantitative terms?
Inherent Control Detection
risk risk risk

a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

B.35. Which of the following statements is true with regard

to the relationship among audit risk, audit evidence, and
materiality?
a. The lower the inherent risk and control risk, the lower
the aggregate materiality threshold.
b. Under conditions of high inherent and control risk, the
auditor should place more emphasis on obtaining
external evidence and should reduce reliance on
internal evidence.
c. Where inherent risk is high and control risk is low,
the auditor may safely ignore inherent risk.
d. Aggregate materiality thresholds should not change
under conditions of changing risk levels.

B.36. In evaluating the effectiveness of a company's credit

and collection policies, the ratio most likely to be used
by an auditor is
a. Quick ratio.
b. Accounts receivable turnover.
c. Working capital turnover.
d. Return on sales.

A.37. Which of the following models expresses the general

relationship of risks associated with the
auditor's evaluation of internal control (CR),
study of the business and application of analytical
procedures (IR), and overall audit risk (AR), that would
lead the auditor to conclude that additional substantive
tests of details of an account balance are not
necessary?
IR CR AR
a. 20% 40% 10%
b. 20% 60% 5%
 c. 10% 70% 4.5%
d. 30% 40% 5.5%

B.38. Of the following procedures, which is the most

important that an auditor should use when performing an
analytical
review of the income statement?
a. Select sales and expense items and trace amounts to
related supporting documents.
b. Compare actual revenues and expenses with the
corresponding figures of the previous year and
investigate significant differences.
c. Obtain from the proper client representatives,
inventory certificates for the beginning and
ending inventory amounts that were used to determine
cost of sales.
d. Ascertain that the net income amount in the statement
of changes in financial position (statement of
cash flows) agrees with the net income amount in
the income
statement.

A.39. The risk of fraudulent financial reporting increases in

the presence of
a. Incentive systems based on operating income.
b. Improved control systems.
c. Substantial increases in sales.
d. Frequent changes in suppliers.

C.40. Which of the following might be considered a "red flag"

indicating possible fraud in a large manufacturing company
with several subsidiaries?
a. The existence of a financial subsidiary.
b. A consistent record of above average return on
investment for all subsidiaries.
c. Complex sales transactions and transfers of funds
between affiliated companies.
d. Use of separate bank accounts for payrolls by each
subsidiary.