OT Quizzer 6 Planning Answer Key

DE LA SALLE UNIVERSITY MANILA RVR – COB DEPARTMENT OF ACCOUNTANCY REVDEVT 1st Term AY 15 - 16

Auditing Theory AT – Quizzer 6

Prof. Francis H. Villamin

“Audit Planning” 1. Planning an audit involves I. Establishing the overall audit strategy for the engagement II. Developing an audit plan a. I only b. II only c. Both I and II d. Neither I nor II 2. Which of the following activities should be performed by the auditor at the beginning of the current audit engagement? I. Perform procedures regarding the continuance of the client relationship and the specific audit engagement. II. Evaluate compliance with the requirements of the Code of Ethics for Professional Accountants in the Philippines, including independence. III. Establish an understanding of the terms of the engagement. a. I and II only b. II and III only c. I and III only d. I, II, and III 3. Adequate planning helps to ensure that Appropriate attention is devoted to important areas of the audit Potential problems are identified and resolved on a timely basis The audit engagement is properly organized and managed

a.

b.

c.

d.

No

Yes

Yes

No

Yes

Yes

No

No

Yes

Yes

No

No

4. Which of the following statements concerning audit planning is incorrect? a. Planning is a discrete phase of an audit. b. Planning is a continual and iterative process. c. In a recurring audit, planning often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. d. In planning an audit, the auditor considers the timing of certain planning activities and audit procedures that are to be completed prior to the performance of further audit procedures. 5. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client’s business and industry to a. Develop an attitude of professional skepticism concerning management’s financial statement assertions. b. Make constructive suggestions concerning improvements to the client’s internal control. c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. d. Understand the events and transactions that may have an effect on the client’s financial statements.

AUT Quizzer 6

“Audit Planning”

2

6. Which of the following is the least likely procedure to be performed in planning a financial statement audit? a. Selecting a sample of sales invoices for comparison with shipping documents. b. Coordinating the assistance of entity personnel in data preparation. c. Reading the current year’s interim financial statements. d. Discussing matters that may affect the audit with firm personnel responsible for non audit services to the entity. 7. The establishment of an overall audit strategy or plan involves I. Determining the characteristics of the engagement that define its scope. II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. III. Considering the important factors that will determine the focus of the engagement team’s efforts. a. I and II only b. II and III only c. I and III only d. I, II and III 8. Which of the following should be included in the audit plan? I. The nature, timing and extent of planned risk assessment procedures, as determined under PSA 315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment) II. The nature, timing and extent of planned further audit procedures at the assertion level, as determined under PSA 330 (The Auditor’s Responses to Assessed Risks) a. I only b. II only c. Both I and II d. Neither I nor II 9. Which of the following matters would an auditor least likely to consider when setting the direction of the audit? a. The selection of the engagement team and the assignment of audit work to the team members. b. The engagement budget which includes consideration of the appropriate amount of time to allot for areas where there may be higher risks of material misstatement. c. The availability of client personnel and data. d. The manner in which the auditor emphasizes to engagement team members the need to maintain a questioning mind and to exercise professional skepticism in the gathering and evaluation of audit evidence. 10. Which of the following matters would an auditor most likely consider when establishing the scope of the audit? a. The expected audit coverage, including the number and locations of the entity’s components to be included. b. The entity’s timetable for reporting, such as at interim and final stages. c. The discussion with the entity’s management concerning the expected communications on the status of audit work throughout the engagement and the expected deliverables resulting from the audit procedures. d. Audit areas where there is a higher risk of material misstatement. 11. In the planning stage of an audit engagement, the auditor is required to perform audit procedures to obtain an understanding of the entity and its environment, including its internal control. These procedures are called a. Risk assessment procedures b. Substantive tests c. Tests of controls d. Dual-purpose tests 12. In planning the audit engagement, the auditor should consider each of the following except a. The kind of opinion (unqualified, qualified, or adverse) that is likely to be expressed. b. The entity’s accounting policies and procedures. c. Matters relating to the entity’s business and the industry in which it operates. d. Materiality level and audit risk.

AUT Quizzer 6

“Audit Planning”

3

13. Audit programs are modified to suit the circumstances of particular engagements. A complete audit program usually should be developed a. When the engagement letter is prepared. b. After obtaining an understanding of the control environment and control activities components of the entity’s internal control. c. After the auditor has obtained an understanding of the entity and its environment, including its internal control and assessed the risks of material misstatement. d. Prior to beginning the actual audit work. 14. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the a. Selected audit techniques b. Cost-benefit or gathering audit evidence c. Timing of audit procedures d. Financial statement assertions 15. An audit program should be designed for each individual audit and should incorporate steps and procedures to a. Detect and eliminate fraud of any type. b. Gather sufficient amount of management information available. c. Provide assurances that the objectives of the audit are satisfied. d. Insure that only material items are audited. 16. Which of the following is an aspect of scheduling and controlling the audit engagement? a. Including in the engagement letter an estimate of the minimum and maximum audit fee. b. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditor’s report. c. Performing audit work only after the entity’s books have been closed for the period under audit. d. Including in the audit program a column for budgeted and actual time. 17. In connection with the planning phase of an audit engagement, which of the following statements is always correct? a. Final staffing decisions must be made prior to completion of the planning stage. b. Observation of inventory count should be performed at year-end. c. A portion of the audit of a continuing audit client can be performed at interim dates. d. An engagement should not be accepted after the client’s financial year-end. 18. In planning an audit of an new client, an auditor most likely would consider the methods used to process accounting information because such methods a. Influence the design of internal control b. Affect the auditor’s preliminary judgment about materiality level c. Assist in evaluating the planned audit objectives d. Determine the auditor’s acceptance level of audit risk 19. Which of the following statements is incorrect? a. The auditor should obtain an understanding of the entity and its environment, including its internal control , sufficient to identify and assess the risk of material misstatement of the financial statements, whether due to fraud or error, and sufficient to design and perform further audit procedures. b. The auditor uses professional judgment to determine the extent of the understanding required of the entity and its environment, including its internal control c. The depth of the overall understanding that is required by the auditor in performing the audit is more than that possessed by management in managing the entity d. The performance of risk assessment procedures is a continuous dynamic process of gathering, updating, and analyzing information throughout the audit 20. The following statements relate to business risk. Select the incorrect statement: a. Business risk is broader than the risk of material misstatement b. Most business risks do not have financial consequences, though they may have an effect on the financial statements of an entity c. Usually, management identifies business risks and develops approaches to address them d. Smaller entities often do not set their objectives and strategies, or manage the related business risks, through formal plans or processes

AUT Quizzer 6

“Audit Planning”

4

21. Which of the following procedures is not performed as part of planning an audit engagement? a. Reviewing the working papers of the prior year. b. Performing analytical procedures. c. Tests of control. d. Designing an audit program. 22. Which of the following procedures would an auditor least likely perform in planning a financial statement audit? a. Coordinating the assistance of entity personnel in data preparation. b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. c. Selecting a sample of vendors’ invoices for comparison to receiving reports. d. Reading the current year’s interim financial statements. 23.

Which of the following is an effective audit planning and control procedure that helps prevent misunderstanding and inefficient use of audit personnel? a. Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor. b. Arrange to provide the client with copies of the audit programs to be used during the audit. c. Arrange preliminary conference with the client to discuss audit objectives, fees, timing and other information. d. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

24.

Which of the following is the correct order of steps in the audit process? a. Perform tests of control b. Develop an overall strategy for the expected conduct and scope of the audit. c. Obtain client’s written representation. d. Prepare engagement letter. e. Perform substantive tests. f. Review and make preliminary evaluation of internal control. a. b. c. d.

D, F, A, B, E, C D, B, C, F, A, E D, B, F, A, E, C D, F, B, C, A, E

25. External auditors should develop and record a plan for each engagement. The planning process should include all the following except a. Establishing engagement objectives and scope of work b. Obtaining background information about he activities to be reviewed c. Identifying sufficient information to achieve engagement objectives d. Determining how, when and to whom the engagement results will be communicated 26. An outside consultant is developing methods for the management of a city’s capital facilities. An appropriate scope of an engagement to evaluate the consultant’s product is to a. Review the consultant’s contract to determine its propriety b. Establish the parameters of the value of the items being managed and controlled c. Determine the adequacy of the risk management and control systems for the management of capital facilities d. Review the handling of idle equipment 27. Documentation required to plan an internal auditing engagement should include information that a. Resources needed to complete the engagement were considered b. Planned engagement work will be completed on a timely basis c. Intended engagement observations have been clearly identified d. Internal audit activity resources are efficiently and effectively employed 28. Which of the following is least likely to be placed on the agenda for discussion at a pre-engagement meeting? a. Purpose and scope of the engagement b. Records and client personnel needed c. Sampling plan and key criteria d. Expected starting an completion dates

AUT Quizzer 6

“Audit Planning”

5

29. One of the primary roles of an engagement work program is to a. Serve as a tool for planning and conducting engagement work b. Document an internal auditor’s evaluation of controls c. Provide for a standardized approach to the engagement d. Assess the risk associated with the activity under review 30. Engagement work programs testing controls should a. Be tailored for each operation evaluated b. Be generalized to fit all situations without regard to departmental lines c. Be generalized so as to be usable at all locations of a particular department d. Reduce costly duplication of effort by ensuring that every aspect of an operation is examined 31. Which of the following is not considered among the benefits of audit planning? a. Audit planning helps coordinate the work to be done by auditors of components and other parties such as experts, specialists, etc. b. Audit planning helps ensure that the audit is properly organized, managed and performed in an effective and efficient manner c. Audit planning aids in ensuring the examination of financial statements can be performed without problems and difficulties d. Audit planning helps ensure that appropriate attention is devoted to important areas of the audit 32. Which of the following procedures is not undertaken by the auditor at the beginning of the current audit engagement? a. Determines whether ethical requirements including independence are complied with b. Establishes an understanding of the terms of engagement c. Determines whether relationship with client can be continued or not d. Determines the types of opinion that should be expressed on the financial statements 33. Which of the following is not considered by the auditor when establishing the scope of the audit engagement? a. The financial reporting framework on which the financial information to be audited has been prepared b. Industry-specific reporting requirements c. Expected audit coverage including the number and locations of components to be included d. Expected nature and timing of communications among engagement team members including the nature and timing of team meetings and timing of the review of work performed 34. Which of the following should be considered by the auditor when ascertaining the reporting objectives of the engagement, the timing of the audit and the nature of communications required? a. Availability of client personnel and data b. Effect of information technology on the audit procedures c. Audit areas where there is a higher risk of material misstatement d. The entity’s timetable of reporting such as at interim and final stages 35. The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and review of their work. Which of the following factors need not be considered by the auditor in preparing this plan? a. Size and complexity of the entity b. The reporting currency to be used, including any need for currency translation for the financial information audited c. The capabilities and competence of personnel performing the audit work d. The risks of material misstatement 36. For initial audits, additional matters the auditor may consider in the overall audit strategy and audit plan include the following except a. Confirmation of material accounts receivable balance at the end of the year b. Planned audit procedure to obtain sufficient appropriate audit evidence regarding opening balances c. Assignment of firm personnel with appropriate levels of capabilities and competence to respond to anticipated significant risks d. Major issues including the application of accounting principles or any auditing and reporting standards

AUT Quizzer 6

“Audit Planning”

6

37. In determining the number of people who will be assigned to an engagement, an auditor normally considers the following except a. Audit size and complexity b. The availability of the work of internal auditors and the extent of the auditor’s potential reliance on such work c. Availability and experience of personnel d. The necessity for special expertise 38. In considering the work to be performed by other auditors, the following should be taken into account except a. The involvement of experts b. The number of locations c. The involvement of other auditors in the audit of components such as subsidiaries, branches and divisions d. The expected use of audit evidence obtained in prior audits 39. A time budget is an estimate of the total hours an audit is expected to take. The following are among the factors to be considered in developing the budget, except a. Location of client facilities b. Client’s size as indicated by its gross assets, sales, number of employees c. The competence and experience of available staff d. Whether the audit is performed during the interim or at year-end 40. When planning an examination, an auditor should: a. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire b. Make preliminary judgments about materiality levels for audit purposes c. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them d. Prepare a preliminary draft of the management representation letter 41. With respect to the auditor’s planning of a year-end examination, which of the following statements is always true? a. An engagement should not be accepted after the fiscal year-end b. An inventory count must be observed at the balance sheet date c. The client’s audit committee should not be told of any specific audit procedures which will be performed d. It is an acceptable practice to carry out parts of the examination at interim dates 42. Franz requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Solis’ decision concerning the: a. Adequacy of the preplanned audit program b. Ability to establish consistency in application of accounting principles between years c. Apparent scope limitation d. Integrity of management 43. The auditor faces a risk that the examination will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: a. Substantive tests b. Tests of controls c. Internal control d. Statistical analysis 44. 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. An assessment of internal control c. Specialized audit programs d. Analytical procedures 45. As the acceptable level of detection risk decreases, the assurance directly provided from a. substantive tests should increase b. substantive tests should decrease c. tests of controls should increase d. tests of controls should decrease

AUT Quizzer 6

“Audit Planning”

7

46. As the acceptable level of detection risk decreases, an auditor may change a. timing of substantive tests by performing them at an interim date rather than at year-end b. nature of substantive tests from a less effective to a more effective procedure c. timing of tests of controls by performing them at several dates rather than at one time d. assessed level of inherent risk to a higher amount 47. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a. Internal control b. Corroborating evidence c. Quality control d. Materiality and relative risk 48. One of the first things that the auditor will do after accepting a new client is a. tour client’s facilities b. contact client’s attorney to discover legal obligations c. study client’s internal control structure d. communicate with predecessor auditor 49. Which of the following is not a document or record that should be examined early in the engagement? a. Corporate charter and bylaws b. Management letter c. Minutes of board of directors’ and stockholders’ meetings d. Contracts 50. Client acceptance and retention policies and procedures do not include a. Evaluating firm’s independence with potential client b. Obtaining and reviewing information about company c. Permission of the predecessor auditor d. Considering whether engagement requires special skills

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