Audit Planning

Auditing and Assurance Services Polytechnic University of the Philippines Audit Planning College of Accountancy

1) This involves developing an overall strategy for the expected conduct and scope of the examination; the nature, extent, and timing of which vary with the size and complexity, and experience with and knowledge of the entitya) Audit planningb) Audit programc) Audit proceduresd) Audit working papers

2) Audit plans shouldI. Precede actionsII. Be flexibleIII. Be cost beneficiala) II and III onlyb) I and III onlyc) All of the statements aboved) All of the statements above except I

3) Adequate planning of the audit work helps ensure thatI. Appropriate attention is devoted to important areasII. All misstatements will be detectedIII. Potential problems are identifiedIV. The work is completed expeditiouslya) All statements aboveb) II and IV onlyc) I, III and IVd) I and III

4) Which of the following procedures would a CPA ordinarily perform during audit planning?a) Obtain understanding of the client’s business and industryb) Review the client’s bank reconciliationc) Obtain client’s representation letterd) Review and evaluate client’s internal control

5) In developing the overall audit plan for a new client, factor not to be considered isa) Materiality levelsb) The client’s business, including the structure of the organization and accounting systems usedc) The amount of estimated audit feed) The audit risks and procedures to be performed to achieve audit objectives

6) In planning the audit engagement, the auditor should consider each of the following excepta) Matters relating to the entity’s business and the industries in which it operatesb) The entity’s accounting policies and proceduresc) Anticipated levels of control risk and materialityd) The kind of opinion that is likely to be expressed

7) A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor’s working papers. This procedure isa) Acceptable if the client and the predecessor auditor agree to itb) Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor’s workc) Required if the CPA is to render an unqualified opiniond) Unacceptable because the CA should bring an independent viewpoint to a new engagement

Understanding the entity and its environment8) Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

a) Reduce audit risk by lowering the preliminary levels of materialityb) Design special substantive tests to compensate for the lack of industry expertisec) Engage financial experts familiar with the nature of the industryd) Obtain a knowledge of matters that relate to the nature of the entity’s business

9) In performing an audit of financial statements, the auditor should have or obtain a knowledge of the client’s business sufficient toa) Make constructive suggestions concerning improvements in internal controlb) Identify transactions and events that may affect the financial statementsc) Develop an attitude of professional skepticismd) Assess the level of control risk

10) Each of the following may be relevant to an auditor when obtaining knowledge about the client’s business and industry excepta) Discussion with people within or outside the entityb) Publications related to the industryc) Visits of the entity’s premisesd) Performing a walkthrough tests

11) To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely woulda) Perform tests of details of transactions and balancesb) Review prior years working papers and the permanent file for the clientc) Read specialized industry journalsd) Re-evaluate the client’s internal control system

12) Which of the following statements is correct, when obtaining understanding about the client’s business?a) The level of knowledge required of the auditor is ordinarily more than the level of knowledge possessed by managementb) Preliminary knowledge about the entity’ industry must be obtained after accepting the engagement to determine whether the auditor has the necessary

knowledge to perform the audit

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c) Following the acceptance of the engagement, the auditor should obtain detailed knowledge about the client’s business preferably at the start of the engagement

d) For continuing engagements, the auditor may no longer obtain knowledge about the client’s business13) Information about the client’s business appropriately assists the auditor in:

I. Assessing risk and identifying potential problemsII. Planning and performing the audit effectively and efficientlyIII. Evaluating audit evidencea) All of the above statementsb) I and III onlyc) II nad III onlyd) I and II only

14) For initial engagements, PSA 510 does not required the auditor to obtain evidencea) That the opening balances do not contain material misstatements that materially affect the current period’s financial statementsb) That the prior period’s ending balances have been correctly brought forward to the current period or when appropriate, have been restatedc) That appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosedd) That the prior period financial statements were audited by an independent CPA

Materiality15) According to PSA 320, materiality should be considered by the auditor when:

Determining the nature, timing and extent of audit procedures Evaluating the effects of misstatementsa) Yes Yesb) Yes Noc) No Nod) No Yes

16) Which of the following statements is not correct about materiality?a) The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with acceptable financial

reporting framework, while other matters are not importantb) An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the

financial statementsc) Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgmentsd) An auditor’s consideration of materiality is influenced by the auditors perception of the needs of a reasonable person who will rely on the financial

statements17) In developing the preliminary level of materiality in an audit, the auditor will

a) Look to audit standards for specific materiality guidelinesb) Increase the level of materiality if fraud is suspectedc) Rely primarily on professional judgment to determine the materiality leveld) Use the same materiality level as that used for different clients in the same industry

18) In making a preliminary judgment about materiality, the auditor initially determines the aggregate (overall) level of materiality for each statement. For planning purposes, the auditor should use thea) Levels separatelyb) Average of these levelsc) Largest aggregate leveld) Smallest aggregate level

19) In planning the audit, the auditor should assess materiality at two levelsa) The preliminary level and the final levelb) The company level and the divisional levelc) The account balance level and the detailed item leveld) The financial statement level and the account balance level

20) “Tolerable misstatement” is the term used to indicate materiality at thea) Balance sheet levelb) Account balance levelc) Income statement leveld) Company-wide level

21) All else being equal, as the level of materiality decreases, the amount of evidence required willa) Remain the sameb) Change in an unpredictable fashionc) Decreased) Increase

22) In considering materiality for planning purposes, an auditor believes that misstatements aggregating P 100,000 would have a material effect on an entity’s income statement, but those misstatements would have to aggregate P 200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregatea) P 100,000b) P 200,000c) P 150,000d) P 300,000

23) Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?a) The anticipated sample size of the planned substantive testsb) The entity annualized interim financial statementsc) The results of the internal control questionnaired) The contents of the management representation letter

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24) The concept of materiality with respect to the attest functiona) Applies only to publicly held firmsb) Has greater application to the standards of reporting than the other generally accepted auditing standardsc) Requires that relatively more effort be directed to those assertions that are more susceptible to misstatementsd) Requires the auditor to make judgment as to whether misstatements affect the fairness of the financial statements

25) The relationship between materiality and risk is ordinarilya) Directb) Parallelc) Inversed) None

26) When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expecta) The level of materiality to be always similarb) The level of materiality for planning purposes to be smallerc) The level of materiality for planning purposes to be higherd) The level of materiality for planning purposes to be based on total assets while the level materiality for evaluating purposes to be based on net income

27) When assessing materiality levels for audit purposes, the auditor should consider the Amount involved Nature of misstatementa) Yes Yesb) Yes Noc) No Nod) No Yes

Audit Risk28) The risk that the auditor may express an incorrect opinion on the financial statements is called

a) Inherent riskb) Detection riskc) Control riskd) Audit risk

29) The susceptibility of an account to misstatements assuming no internal control is referred to as thea) Inherent riskb) Detection riskc) Control riskd) Audit risk

30) Audit risk consists of all but the following componentsa) Inherent riskb) Substantive riskc) Detection riskd) Control risk

31) For a particular assertion, control risk is the risk thata) A material misstatement will occur in the accounting processb) Controls will not detect a material misstatement that occursc) Audit procedures will fail to detect a weak control systemd) The prescribed control procedures will not be applied

32) The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a combination of three separate risks at the account balance or class of transactions level. The first is inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is a) The auditor will reject a correct account balance as incorrectb) Material misstatements that occur will not be detected by the audit c) The auditor will apply an inappropriate audit procedured) The auditor will apply an inappropriate measure of audit materiality

33) When planning a financial statement audit, the auditor should assess inherent risk at theFinancial statement level Account balance or transaction class level

a) Yes Yesb) Yes Noc) No Nod) No Yes

34) Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor willa) Take any means available to reduce the risk to the lowest possible levelb) Set the risk level between 5% and 10%c) Perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the reportd) Recognize that risk exists and deal with them in an appropriate manner

35) The audit risk model is used primarilya) For planning purposes in determining how much evidence to accumulateb) While doing tests of controlsc) To determine the type of opinion to expressd) To evaluate the evidence which has been gathered

36) Inherent risk and control risk differ from detection risk in that inherent and control risksa) Arise from the misapplication of auditing proceduresb) May be assessed in either quantitative or non-quantitative termsc) Exist independently of the financial statement audit

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d) Can be changed at the auditor’s discretion37) Which of the following is incorrect statement?

a) Detection risk cannot be changed at the auditor’s discretionb) If individual audit risk remains the same, detection risk bears an inverse relationship to inherent & control risksc) The greater the inherent & control risks the auditor believes exist, the less detection risk that can be acceptedd) The auditor might make separate or combined assessments of inherent risk and control risk

38) The acceptable level of detection risk is inversely related to thea) Assurance provided by substantive testsb) Risk of misapplying auditing proceduresc) Preliminary judgment about materiality levelsd) Risk of failing to discover material misstatements

39) Relationship between control risk and detection risk is ordinarilya) Parallelb) Directc) Inversed) Equal

40) Which of the following conditions supports an increase in detection risk?a) Internal control over cash receipts is excellentb) Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of the fiscal yearc) Internal control over shipping, billing, and recording of sales revenue is weakd) Study of the business reveals that the client recently acquired a new company in an unrelated industry

41) An auditor uses the assessed level of control risk toa) Evaluate the effectiveness of the entity’s internal control policies and proceduresb) Identify transactions and account balances whether inherent risk is at high levelc) Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently highd) Determine the acceptable level of detection risk for financial statements

42) Which of the following would be considered the most conservative settings for inherent risk and control risk? Inherent risk Control riska) 1.0 1.0b) 1.0 0.0c) 0.0 0.0d) 0.5 0.5

43) What is the magnitude of audit risk if inherent risk is .50, control risk is .40 and detection risk .10?a) .20b) .04c) .10d) .02

44) An inherent risk (IR) of 40% and a control risk of (CR) 60% affect planned detection risk and planned evidences differently than an a) IR of 60% and CR of 40%b) IR of 80% and CR of 30%c) IR of 100% and 24%d) IR of 70% and CR of 30%

45) 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 numerous related party transactions during the year under auditb) Internal control over shipping, billing, and recoding of sales revenue is weakc) The client has lost a major customer accounting for approximately 30% of annual revenued) The board of directors approved a substantial bonus for the president and chief executive office and also approved an attractive stock option plan for

themselves46) According to auditing standards, the auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the acceptable

level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change thea) Nature of substantive tests to more effective proceduresb) Timing of substantive tests, such as using larger sample sizesc) Assurance provided by substantive tests to a lower level

47) As the acceptable level of detection risk decreases, an auditor may change thea) Timing of substantive tests by performing them at an interim date rather that at year-endb) Nature of substantive tests from a less effective to a more effective procedurec) Timing of tests of controls by performing them at several dates rather than at one timed) Assessed level of inherent risk to a higher level

48) As the acceptable level of detection risk decreases, an auditor may a) Reduce substantive testing by relying on the assessment of inherent risk and control riskb) Postpone the planned timing of substantive tests from interim dates to the year-endc) Eliminate the assessed level of inherent risk from considerations as a planning factord) Lower the assessed level of control risk

49) On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level is substantially the same as the planned audit risk level, the auditor woulda) Decrease substantive testingb) Increase inherent risk

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c) Decrease detection riskd) Increase materiality levels

50) Which of the following statement is not true about the auditor’s assessment of inherent risk when planning a financial statement audit?a) In developing the overall audit plan, the auditor should assess inherent risk at the financial statement levelb) In developing an audit program, the auditor should assess inherent risk at the account balance or transaction class levelc) The auditor can make a separate or combined assessment of inherent and control riskd) The auditor assessment of inherent risk is influenced by the condition of the client’s accounting and internal control system

51) The auditor should obtain sufficient understanding of the entity and its environment, including its internal control order toIdentify and assess the risk of material misstatement Design appropriate audit procedures

a) Yes Yesb) Yes Noc) No Nod) No Yes

52) According to PSA 315, “Risk assessment procedures” meansa) Identifying business risks relevant to financial reporting objectives and deciding about actions to address those risksb) Obtaining understanding of entity and its environment, including its internal controlc) Performing substantive tests and testing the operating effectiveness of the entity’s internal controld) Discussing with the members of the audit team the susceptibility the entity’s financial statements to material misstatements

53) Risk assessment procedures would include all of the following excepta) Inquiries of management and others within the entityb) Analytical procedures c) Observation and inspectiond) Reperformance of client’s procedures

54) Which of the following is incorrect about the auditor’s risk assessment procedures?a) Obtaining understanding control, is a continuous, dynamic process of gathering, updating and analyzing information throughout the auditb) In performing risk assessment procedures, the auditor may obtain disclosures and related assertions, and about the operating effectiveness of controls, even

though such procedures are not specifically planned as substantive tests or test of controlsc) The auditor should perform substantive procedures and tests of controls after the risk assessment procedures are performedd) Obtaining understanding of internal control is not normally sufficient to serve as testing the operating effectiveness of the control

Analytical procedures55) These consists of the analysis of significant ratios and trends including the resulting investigation of fluctuation and relationship that are inconsistent with other

relevant information or deviate from predictable amount a) Financial statement analysis b) Variance analysis c) Analytical proceduresd) Regression analysis

56) Analytical procedures used as of risk assessment procedures are performed primarily to assist the auditor ina) Identifying areas that may represent specific risksb) Obtaining knowledge about the design of internal controlc) Obtaining knowledge about the operating effectiveness of the client’s internal controld) Gathering corroborative evidence about the validity of an account balance

57) A basic premise underlying analytical procedure is thata) These procedures cannot replace tests of balances and transactionsb) Statistical tests of financial information may lead to the discovery of material misstatements in the financial statementsc) The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuationsd) Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary

58) One reason why an auditor makes an analytical review of the client’s operations is to identifya) Improper separation of accounting and other financial dutiesb) Weakness of material nature in the system of internal accounting controlc) Unusual transactionsd) Non-compliance with prescribed control procedures

59) Significant unexpected differences identified by analytical procedures will usually necessitate a (an)a) Consistency explanatory paragraph added to the audit reportb) Review of the internal control structurec) Explanation in the representation letterd) Auditor investigation

60) Which of the following statements about analytical procedures is incorrect?a) Analytical procedures are required to be performed in the planning phase of the auditb) Analytical procedures are required to be done during the testing phase of the auditc) Analytical procedures are required to be done during the completion phase of the auditd) Analytical procedures may be performed in the planning, testing and completion phases of the audit

61) Analytical procedures are used for the following purposes excepta) To assist the auditor in planning the nature, timing and extent of other auditing proceduresb) As a substantive test to obtain evidential matter about particular assertion related to account balances or classes of transactionsc) As an overall review of financial information in the final review stage of the auditd) To evaluate the effectiveness of the client’s internal control

62) For all audits of financial statements made in accordance with PSAs, the use of analytical procedures is required to some extent

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In the planning stage As substantive test In the review stagea) Yes No Yesb) Yes Yes Noc) Yes Yes Yesd) Yes No No

63) Analytical procedures used in planning an audit should focus on identifying:a) Material weaknesses in the internal control structureb) The predictability of financial data from individual transactionsc) The various assertions that are embodied in the financial statementsd) Areas that may represent specific risk relevant to the audit

64) To help plan the nature, timing and extent of substantive auditing procedures, preliminary analytical procedures should focusa) Enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit dateb) Developing plausible relationships that corroborate anticipated results with a measurable amount of precisionc) Applying ratio analysis to externally generated data such as published industry statistics or price indicesd) Comparing recorded financial information to the results of other tests of transactions and balances

65) Analytical procedures enable the auditor to predict the balance or quantity for an item under audit, information to develop this estimate can be obtained from all of the following excepta) Tracing transactions through the system to determine whether procedures are being applied or prescribedb) Comparison of financial data with data for comparable prior periods, anticipated results(e.g., budgets and forecasts), and similar data for the industry in

which the entity operatesc) Study of the relations of elements of financial data that would be expected to confirm to a predictable patter based upon the entity’s experienced) Study of the relationships of financial data with relevant non-financial data

66) An example of an analytical procedure is the comparison ofa) Financial information with similar information regarding the industry in which the entity operatesb) Recorded amounts of major disbursements with appropriate invoicesc) Results of statistical sample with the expected characteristics of the actual populationd) CIS generated data with similar data generated by a manual accounting system

67) Which of the following is not a typical analytical review procedure?a) Study of relationships of the financial information with relevant non-financial informationb) Comparison of the financial information with similar information regarding the industry in which the entity operatesc) Comparisons of recorded amounts of major disbursements with appropriate invoicesd) Comparison of the financial information with budgeted amounts

Planning documentation68) In developing the overall audit plan and audit program, the auditor should assess inherent risk at the:

Audit plan Audit programa) Financial statement level Account balance levelb) Account balance level Financial statement levelc) Account balance level Account balance leveld) Financial statement level Financial statement level

69) In developing written audit programs, an auditor should establish specific audit objectives that relate primarily to thea) Timing of audit proceduresb) Selected audit techniquesc) Cost-benefit of gathering evidence d) Financial statements assertions

70) An auditor should design the written audit program so thata) All material transactions will selected for substantive testingb) Substantive tests prior to the balance sheet data will be minimizedc) The audit procedures selected will achieve specific audit objectivesd) Each account balance will be tested under tests of controls or tests of transactions

71) An audit program should be designed for each individual audit and should include audit steps and procedures toa) Detect and eliminate all fraudb) Increase the amount of management information available c) Provide assurance that the objectives of the audit are metd) Insure that only material items are audited

72) Which of the following statement is incorrect about the planning documentation?a) The audit plan and related programs should no longer be changed once the audit is statedb) Although the precise form and consent of the audit plan may vary, it should be sufficiently detailed to guide the development of an audit programc) The audit program should set out the nature, timing and extent of planned audit procedures required to implement overall audit pland) In preparing an audit program, the auditor should consider the specific assessments of inherent and control risks and the required level of assurance to be

provided by substantive tests73) Which of the following matters would least likely appear in the audit program?

a) Specific procedures that will be performed b) Specific audit objectivesc) Estimated time that will be spent in performing certain proceduresd) Documentation of the accounting and internal control systems being reviewed

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Audit Planning

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