AUDIT OF FINANCIAL STATEMENTS Objective and Conduct of FS Audit Based on PSA 200 Revised and Redrafted 1. An audit of financial statements is a non-assurance engagement. The auditor is engaged for purposes of expressing an opinion designed to enhance the degree of confidence of intended users in the financial statements. In conducting the audit so as to achieve its objective, the overall objective of the independent auditor is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in accordance with the auditor’s findings. a. True, True c. False, True b. False, False d. True, False 2. Which of the following is responsible for the fairness of representations made in financial statements? a. The independent auditor. c. The client's management. b. The internal auditor. d. The audit committee. 3. The auditor shall plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. The auditor shall not represent compliance with PSAs unless the auditor has complied with majority of the PSAs relevant to the audit. a. True, True c. False, True b. False, False d. True, False 4. The PSAs are designed to support the auditor in obtaining reasonable assurance. They require that the auditor exercise professional judgment and skepticism throughout the planning and performance of the audit; and a. Identify and assess risks of material misstatement b. Obtain audit evidence about whether the risks have given rise to material misstatements in order to reduce audit risk to an acceptably low level c. Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained. d. All of the above 5. In order to obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. Reasonable assurance is obtained when the auditor has thereby reduced audit risk to an acceptably high level. In all cases when the overall objective of the auditor cannot be achieved, the PSAs require that the auditor modifies the auditor’s opinion accordingly but not to withdraw from the engagement. a. True, True c. True, False b. False, False d. False, True 6. The following are the general principles governing an audit of FS Audit, except a. Independence c. Confidentiality b. Professionalism d. Professional behavior Based on PSA 200 1. The auditor’s opinion a. Guarantees the credibility of the financial statements. b. Is an assurance as to the future viability of the entity. c. Is not an assurance as to the efficiency with which management has conducted the affairs of the entity. d. Certifies the correctness of the financial statements. 2. The independent auditor lends credibility to client financial statements by a. Stating in the auditor’s management letter that the examination was made in accordance with generally accepted auditing standards b. Maintaining a clear-cut distinction between management’s representation and the auditor’s representations c. Attaching an auditor’s opinion to the client’s financial statements d. Testifying under oath about client financial information 3. The independent auditor’s responsibility in a regular audit is to express an opinion on the financial statements. The auditor’s opinion: a. Helps the company adopt sound accounting policies. b. Assists the company in maintaining an adequate and effective system of accounts. c. Helps establish the credibility of the financial statements. d. Helps management safeguard the company assets.
4. Which of the following is least likely an application of maintaining an attitude of professional skepticism? a. The auditor does not consider representations from management as substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. b. In planning and performing an audit, the auditor assumes that management is dishonest. c. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents or management representations. d. The auditor makes a critical assessment, with a questioning mind, of the validity 5. The objective of the ordinary examination of financial statements is the expression of an opinion on the accuracy of such financial statements. The independent auditor’s opinion is an assurance as to the future viability of the entity. a. The first statement is false, the second statement is true b. The first statement is true, the second statement is true c. The first statement is false, the second statement is false d. The first statement is true, the second statement is false 6. The independent auditor’s opinion helps establish the credibility of the financial statements. The independent auditor’s opinion is an assurance as to the efficiency or effectiveness with which management has conducted the affairs of the entity. a. The first statement is false, the second statement is true b. The first statement is true, the second statement is true c. The first statement is false, the second statement is false d. The first statement is true, the second statement is false TERMS OF AUDIT ENGAGEMENTS 1. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by the auditor. The best place to set forth these arrangements is in a. A memorandum to be placed in the permanent section of the auditing working papers. b. An engagement letter. c. A client representation letter. d. A confirmation letter attached to the constructive services letter. 2. Engagement letters are widely used in practice for professional engagements for all types. The primary purpose of the engagement letters is to a. Remind management that the primary responsibility for the financial statements 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 program 3. 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 in the terms of engagement. c. A recent change of client management. d. A significant change in the nature or size of the client's business. 4. 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. 5. It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before a. The performance of substantive testing c. The completion of audit. b. The commencement of the engagement d. Before the issuance of audit report. 6. 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. 7. Which of the following is not included in an engagement letter? a. Limitation in the scope of examination as imposed by client b. Limitation in the scope of examination as imposed by circumstances c. Restrictions on auditor’s liability, when such possibility exists d. Satisfactory title to assets, liens on assets and assets pledged
8. Which of the following is not included in an engagement letter? a. Restriction on cash balances, lines of credit by similar arrangements b. Accessibility to all financial records c. Client imposed limitation in the scope d. Limitation in the scope of examination as imposed by circumstances 9. 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 the audit. 10. This statement is least likely to appear in an auditor’s engagement letter a. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement. b. During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations. c. Our engagement is subject to the risk that material errors or irregularities, including fraud and defalcations, if they exist, will not be detected. d. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses
