AUDITING THEORY

Quizzer 6:
1. A firm should establish and maintain a system of quality control to
provide it with reasonable assurance that:
I. The firm and its personnel comply with professional standards
and applicable legal and regulatory requirements.
II. Reports issued by the firm or engagement partners are
appropriate in the circumstances.

a. I only c. Both I and II

b. II only d. Neither I nor II

2. The firm’s system of quality control should include policies and

procedures that address each of the following elements, except
a. Monitoring
b. Control Environment
c. Relevant ethical requirements
d. Human resources

3. Which of the following are elements of a CPA firm’s quality control

that should be considered in establishing its quality control policies
and procedures?
Ethical Human Engagement
Requirements Resources Performance
a. No Yes No
b. Yes No No
c. Yes Yes Yes
d. No No Yes

4. Which of the following is an element of a CPA firm’s quality control

system that should be considered in establishing its quality control
policies and procedures?
a. Considering audit risk and materiality.
b. Managing human resources.
c. Using statistical sampling techniques.
d. Complying with laws and regulations.

5. Which of the following quality control elements is most closely

associated with the requirement to promote a culture of quality?
a. Monitoring
b. Leadership responsibilities for quality within the firm.
c. Engagement performance
d. Human Resources

6. This quality control element requires a firm to establish policies

and procedures to provide it with reasonable assurance that

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 engagements are performed in accordance with professional standards
and regulatory and legal requirements, and that the firm or the
engagement partner issue reports that are appropriate in the
circumstances.
a. Ethical requirements
b. Engagement performance
c. Monitoring
d. Human resources

7. In pursuing a firm’s quality control objectives, a firm should adopt

policies and procedures to enable it to identify and evaluate
circumstances and relationships that create threats to independence,
and to take appropriate action to eliminate those threats or reduce
them to an acceptable level by applying safeguards, or, if considered
appropriate, to withdraw from the engagement. Which quality control
element would this be most likely to satisfy?
a. Ethical requirements
b. Monitoring
c. Human resources
d. Leadership responsibilities for quality within the firm.

8. The primary purpose of establishing quality control policies and

procedures for deciding whether to accept a new client is to
a. Anticipate before performing any fieldwork whether an unmodified
opinion can be expressed.
b. Enable the CPA firm to attest to the reliability of the client.
c. Satisfy the CPA firm’s duty to the public concerning the acceptance
of new clients.
d. Minimize the likelihood of association with clients whose
management lacks integrity.

9. As defined in PSQC 1, ___________ is a process comprising an ongoing

consideration and evaluation of the firm’s system of quality control,
including a periodic inspection of a selection of completed
engagements, designed to provide the firm with reasonable assurance
that its system of quality control is operating effectively.
a. Monitoring
b. Inspection
c. Engagement quality control review
d. Supervision

10. The firm shall obtain written confirmation of compliance with its
policies and procedures on independence from all firm personnel
required to be independent by relevant ethical requirements
a. At least annually
b. At least monthly
c. At least semi-annually
d. At the completion of each engagement.
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11. Which element of a system of quality control is addressed by the
establishment of policies and procedures designed to provide the firm
with reasonable assurance that it has sufficient personnel with the
competence, capabilities, and commitment to ethical principles?
a. Monitoring
b. Leadership responsibilities for quality within the firm
c. Human resources
d. Engagement performance

12. The firm shall establish policies and procedures designed to provide
it with reasonable assurance that the firm and its personnel comply
with relevant ethical requirements. The Code of Ethics for
Professional Accountants in the Philippines establishes the
fundamental principles of professional ethics which include the
following, except
a. Integrity
b. Objectivity
c. Relevance
d. Professional behavior

13. The audit work performed by each assistant should be reviewed by

personnel of at least equal competence to determine whether it was
adequately performed and to evaluate whether the
a. Firm’s system of quality control has been maintained at a high
level.
b. Work performed and the results obtained have been adequately
documented.
c. Audit procedures performed are approved in the professional
standards.
d. Audit procedures performed are in accordance with Philippine
Standards on Auditing (PSAs)

14. The nature, timing, and extent of an audit firm’s quality control
policies and procedures depend on
The Nature of Appropriate
The CPA Firm’s the CPA Firm’s Cost-Benefit
size Practice Considerations
a. Yes Yes No
b. Yes Yes Yes
c. No No No
d. Yes No Yes

15. An audit firm should implement quality control policies and procedures
designed to ensure that all audits are conducted in accordance with
PSAs or relevant national standards or practices. These policies and
procedures should be implemented
a. At the audit firm level only
b. On individual audits only

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 c. Either at the audit firm level or on individual audits.
d. Both at the audit firm level and on individual audits.

16. For audits of financial statements of listed entities, the engagement

partner should not issue the auditor’s report until the completion of
the
a. Engagement Quality Control Review
b. Management Review
c. Engagement Team Review
d. Engagement Partner Review

17. The following statements relate to the engagement partner’s

responsibility to conduct timely reviews of the audit documentation
to be satisfied that sufficient appropriate evidence has been obtained
to support the conclusions reached and for the auditor’s report to be
issued. Which is false?
a. The engagement partner’s review of the audit documentation allows
significant matters to be resolved on a timely basis to his/her
satisfaction before the auditor’s report is issued.
b. The engagement partner should review all audit documentation.
c. The engagement partner should document the extent and timing of the
reviews.
d. The reviews cover critical areas of judgment, especially those
relating to difficult or contentious matters identified during the
course of the engagement, significant risks, and other areas the
engagement partner considers important.

18. The engagement partner should be satisfied that appropriate procedures

regarding the acceptance and continuance of client relationships and
specific audit engagements have been followed, and that conclusions
reached in this regard are appropriate and have been documented.
Acceptance and continuance of client relationships and specific audit
engagements include considering:
I. The integrity of the principal owners, key management, and
those charged with governance of the entity.
II. Whether the engagement team is competent to perform the audit
engagement and has the necessary time and resources.
III. Whether the firm and the engagement team can comply with
ethical requirements.

a. I only
b. I and II only
c. II and III only
d. I, II, and III

19. The engagement partner should take responsibility for the direction,
supervision, and performance of the audit engagement in compliance
with professional standards and regulatory and legal requirements,
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 and for the auditor’s report that is issued to be appropriate in the
circumstances. Supervision includes the following, except
a. Tracking the progress of the audit engagement.
b. Addressing significant issues arising during the audit engagement,
considering their significance, and modifying the planned approach
appropriately.
c. Informing the members of the engagement team of their
responsibilities.
d. Identifying matters for consultation or consideration by more
experienced engagement team members during the audit engagement.

20. Who should take responsibilities for the overall quality on each audit
engagement?
a. Engagement quality control reviewer
b. Engagement partner
c. Engagement team
d. CPA Firm

21. The implementation of quality control procedures that are applicable

to the individual audit engagement is the responsibility of the
a. CPA Firm
b. Engagement Quality Control Reviewer
c. Engagement Team
d. Expert contracted by the firm in connection with the audit
engagement.

22. By obtaining confirmation and taking appropriate action on information

indicating noncompliance, the firm demonstrates the importance that
it attaches to independence and makes the issue current for, and
visible to, its personnel. Written confirmation:
a. May be in paper format only.
b. May be in electronic format only.
c. May be in paper form or electronic form.
d. Is not required since oral confirmation will suffice per PSQC 1.

23. With regard to the integrity of a client, matters that the firm
considers include the following:
a. The identify and business reputation of the client’s principal
owners, key management, related parties and those charged with its
governance.
b. The nature of the client’s operations, including its business
practices.
c. Information concerning the attitude of the client’s principal
owners, key management and those charged with its governance
towards such matters as aggressive interpretation of accounting
standards and the internal control environment.
d. All of the answers.

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24. A CPA, while performing an audit, strives to achieve independence in
appearance in order to
a. Reduce risk and liability of the auditor.
b. Comply with requirements of the various regulators.
c. To achieve independent in fact.
d. Maintain public confidence in the profession.

25. A firm has obtained information that would have caused it to decline
an engagement had the information been available earlier. Actions
available to the auditor include the following, except:
a. Reporting the information and its implications to the person(s) who
appointed the CPA.
b. Withdraw from the engagement.
c. Withdraw from both the engagement and the client relationship.
d. Continue the engagement, since the Code of Ethics requires started
engagements to be finished regardless of subsequent developments
and information.

26. Regarding identified threats to independence, appropriate action by

the firm and the relevant engagement partner includes the following,
except:
a. Application of safeguards to eliminate threats to independence.
b. Application of safeguards to reduce threats to independence to an
acceptable level.
c. Expression of a qualified or adverse opinion on the subject matter
under audit.
d. Withdrawal from engagement.

27. The familiarity threat that may be created by using the same senior
personnel on an assurance engagement over a long period of time and
the safeguards that might be appropriate to address such a threat.
Accordingly, safeguards may include:
a. Rotation of senior management
b. Engagement quality control review
c. Both a and b
d. Neither a nor b

28. The firm should obtain acceptance and continuance information as it

considers necessary in the following circumstances:
a. When accepting an engagement with a new client
b. When deciding whether to continue an existing engagement.
c. When accepting a new engagement with an existing client.
d. All of these.

29. A firm has obtained information that would have caused it to decline
an engagement had the information been available earlier.
a. Reporting the information and its implications to the person(s)
who appointed the CPA.
b. Withdraw from the engagement.
c. Withdraw from both the engagement and the client relationship.
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 d. Continue the engagement, since the Code of Ethics requires started
engagements to be finished regardless of subsequent developments
and information.

30. The following methods are most likely to develop capabilities and
competence, except:
a. Professional education.
b. Continuing professional development, including training.
c. Work experience and coaching by less experienced staff.
d. Self-study modules on professional accounting and auditing
literature.

31. Supervision includes:

a. Tracking the progress of the engagement
b. Considering the capabilities and competence of individual members
of client personnel.
c. Addressing all issues arising during the engagement and modifying
the planned approach appropriately.
d. Identifying matters for consultation or consideration by less
experienced engagement team members during the engagement.
e. All of the above.

32. Review responsibilities are determined on the basis that ________

experienced team members review the work of _______ experienced team
members.
a. More, more c. Less, more
b. More, less d. Less, less

33. Consultation is usually undertaken for:

a. Difficult or contentious matters.
b. Matters for which there is readily available support.
c. Matters for which the judgment of the engagement leader is deemed
sufficient.
d. Straightforward matters involving accounting and auditing.

34. An engagement quality control review is required to be performed:

a. Immediately after the re-assessment of control risk.
b. For all audits of financial statements of listed entities.
c. For all types of audits, regardless of the subject matter of the
engagement.
d. At engagement completion after the report is issued.

35. What aspects are most important in determining the eligibility of

engagement quality control reviewers?
a. Technical qualifications and objectivity
b. Integrity and objectivity
c. Competence and independence
d. All of these.

36. In case of difference of opinion among members of a team.

a. The engagement partner shall issue a disclaimer of opinion due to
a scope limitation.
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 b. An increase in the audit fee will be requested due to the extension
of the time required to complete the engagement.
c. Documentation will be made regarding the unresolved matter, and
the auditor will withdraw from the engagement altogether.
d. The report shall not be issued until the matter is resolved.

37. In the case of an audit, final engagement files should be completely

assembled not more than:
a. 60 days after the date of the audit report
b. 30 days after the date of the audit report
c. 10 days after the date of the audit report
d. 5 days after the date of the audit report

38. An inspection cycle ordinarily spans no more than:

a. One year c. Three years
b. Two years d. Four years

39. What is the normal retention period for audit engagement

documentation?
a. No shorter than one year from the date of the audit report.
b. No shorter than three years from the date of the audit report.
c. No shorter than five years from the date of the audit report.
d. No shorter than seven years from the date of the audit report.

40. Monitoring of the firm’s system of quality control is performed by

competent individuals and covers
a. Appropriateness of the design of quality controls.
b. Effectiveness of the operation of quality controls.
c. Both a and b
d. Neither a nor b

41. The firm would communicate the results of the monitoring of its
quality control system to engagement partners and other appropriate
individuals within the firm at least:
a. Every six months
b. Every twelve months
c. Every two years
d. Every three years

42. The firm should establish policies and procedures requiring

appropriate documentation to provide evidence of the operation of
each element of its system of quality control, based on:
a. PSQC No. 1
b. PSA 220
c. Philippine Audit Practice Statements
d. The firm’s decision/methodology of documentation.

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